Testimony

Testimony On the Next Step In Tax Reform
Before the House Ways & Means Committee
August 22, 2006 – Presented by:
George Schueller, Tax Manager, CBIZ Accounting, Tax & Advisory Services


Chairman Kilbane and Members of the Committee,

My name is George Schueller, a Tax Manager with CBIZ Accounting, Tax & Advisory Services in Akron, Ohio. I am here to speak on the impact of Ohio's tax reform on small business.

By way of background, I have been involved in Ohio state and local taxes for over 35 years. I spent 27 years of my career with the Ohio Department of Taxation. More recently, I have been providing state and local tax consulting services for a national business consulting firm. In addition, I have spent 7 years as an instructor for a course on state and local taxation in the Masters in Taxation program at the University of Akron. Throughout those years, I have been on a number of committees, including the Ohio Chamber’s Taxation and Public Expenditures Committee, and task forces dealing with Ohio’s state and local tax structure.

I would like to begin my testimony by commending this body for its recent enactment of tax reform in the State of Ohio. A very important part of this tax reform involved a 21% reduction in Ohio’s personal income tax rates via a 4.2% reduction per year each year over a five year period. On behalf of our clients, we believe a prudent next step in Ohio tax reform would be an accelerated phase-in of the scheduled Ohio personal property tax reductions and the scheduled Ohio individual income tax reductions and/or an additional reduction in individual income tax rates.

Since many small businesses are taxed as pass-through entities such as S corporations and limited liability companies, the high Ohio individual income tax rates continue to have a significant impact on small business owners. Even though Ohio has taken a major step toward tax reform, the tax burden for small business owners whose Ohio sales exceed the gross receipts ($1 million) threshold of the CAT continues to be high.

For example, a high volume, low margin business such as a closely-held metal stamping facility operating as an S corporation will be subject to a substantial CAT liability while still incurring substantial personal property tax and individual income tax liabilities during the phase-in period. Our office assists many of these small businesses which are struggling to keep their companies profitable so that they can stay in business. The relief provided by an accelerated phase-in of the tax reductions is needed to maintain profitability against fierce out-of-state and foreign competition so that these closely-held businesses can continue to operate and retain jobs in Ohio.

Our office has also been engaged by multi-state clients to provide tax comparisons for site location studies. Although tax reform will make Ohio more competitive in the future, we have found that companies considering multi-state locations are hesitant to base their decisions on uncertain phase-ins of tax reductions. An accelerated phase-in of the individual income tax reductions or an additional reduction in the Ohio tax rates will add stability and certainty to the Ohio tax structure and make Ohio more competitive in site location studies.

The reduction in Ohio’s personal income tax rates benefits all of Ohio’s residents as well as any non-resident earning income in the state. It reduces the tax bite impacting taxable wages, pensions, interest, dividends, capital gains, business income earned from proprietorships, pass-through entities, etc. In short, the reduction in Ohio’s personal income tax rates increases the disposable income of all individuals earning taxable income in our state.

The profile of a small business owner who receives a tax savings is generally that of a person who is more inclined to reinvest the additional funds in the company rather than spend them on personal items. Funds thus reinvested in turn tend to result in jobs for Ohioans and further stimulate the Ohio economy.

We can look at the reduction in Ohio’s personal income tax as the gift that keeps on giving. First of all, the income tax withholding taken out of wages, pensions, etc. are reduced, as well as estimated payments made by self-employed individuals and owners of various businesses. This means that throughout the year, Ohio taxpayers’ disposable incomes increase, which enhances their individual wellbeing and stimulates Ohio’s economy. The recent decision to expedite the reduction in Ohio’s withholding will expedite the realization of this real benefit. Then when Ohio personal income tax returns are filed, the final tax liability reflected on the return is likewise reduced. To quote a recent commercial seen on TV, it’s brilliant!

In addition to the broad based benefits offered to all individuals earning income in Ohio, reducing Ohio’s personal income tax rates is simple to explain and understand. One does not need to understand the mental gymnastics that some taxpayers feel are involved in completing any tax return. If the tax rates are reduced, the tax liability is reduced proportionately. If the withholding tax rates are reduced, the take home pay is increased proportionately.

Many have acknowledged that one of the good things about Ohio’s personal income tax is that it is simpler than the returns required to be filed at the Federal level or in many other states. Reducing tax rates is a simple and beneficial way to reduce Ohio’s taxes without complicating the return.

In the past, one of the major criticisms levied at Ohio’s personal income tax structure is that the combination of Ohio’s state income tax rates together with the city income tax rates (for over 550 cities in Ohio) takes a higher bite out of income earned in Ohio than the total personal income tax bite in a majority of other states. Cities in most states do not levy an income tax, so Ohio must couple the city and state rates.

To get a feel for Ohio’s relative personal income tax ranking in comparison with other key states, the following table is provided:

*Flat Rate

The 21% personal income tax rate reductions being phased in over the next 5 years will reduce Ohio’s top state income tax rate to 5.925%. This reduction will make Ohio’s top total combined personal income tax rate 6.925% (state and city, assuming the typical city income tax rate remains at approximately 1.0%). This will obviously make Ohio’s top total personal income tax rate much more competitive with other states. We believe that any further downward adjustments to Ohio’s personal income tax will only further enhance this worthwhile cause that helps all Ohioans and will make Ohio more competitive with other states in a very important area. To borrow a phrase from a formerly popular song, reductions to Ohio’s personal income tax are just “too legit to quit.” As a result, we endorse further action to enhance these reductions – preferably in the form of further reductions, or by expediting the rate reductions already enacted.

Finally, we believe that an accelerated phase-in and/or reduction in the individual income tax meets the guiding principles of sound tax policy in that it allows for simplicity, equity, and fairness in the Ohio tax structure, while adding stability to tax reform and making Ohio more competitive for attracting and retaining business in Ohio.

Thank you Chairman Kilbane and Members of the Committee for your kind attention. I would be glad to answer any questions you may have.