Testimony

Testimony On the Next Step In Tax Reform
Before the House Ways & Means Committee
August 22, 2006 – Presented by:
Kathleen Hughes, Partner, Taylor Applegate Hughes & Associates LTD


Chairman Kilbane and Members of the Committee,

Thank you for the opportunity to address this committee today. My name is Kathleen Hughes and I am a partner in the certified public accounting firm of Taylor Applegate Hughes & Associates LTD in Springfield, Ohio.

Our clients are primarily medium to small companies in south-western Ohio. They are privately owned companies. Many are in the manufacturing and construction industry as well. Most of these companies are not C corporations. They are pass- through entities such as S corporations, partnerships and self-employed individuals. The majority of these companies’ income is taxed on the owners’ income tax return. The reason for this pass-through taxation is to avoid double taxation on the federal level of income which would occur if the companies were regular or “C” corporations. The owners pay personal income tax rather than the company as an entity paying corporate franchise tax.

Most of our clients, therefore, receive no relief from repeal of the franchise tax. Unlike C Corporations, the companies’ owners will still pay income tax, albeit at decreasing tax rate, on their individual income tax return. Also, their business real estate tax is higher this year than last year.

However, even with these differences, many of our clients, primarily in the manufacturing and construction industries, are paying less tax or will be paying less total tax under the new taxation system than the previous taxation system. Even considering that they now pay the CAT tax and the personal property tax with the phase-in and phase-out, these clients either pay a similar total tax or a lesser total tax. Thank you for addressing this antiquated and economically disincentivizing personal property tax. We will be extremely happy when the personal property tax is removed totally.

Every tax change has winners and losers. In our practice, to the surprise of some, the losers are both new and used car dealers. The factors that make the efficient car dealer a loser are:

• A quick turnover of inventory – our efficient dealers turn their inventory quickly. This has allowed them to minimize and manage their personal property tax liability as they keep a relatively small inventory. This was not an effect that we originally anticipated. Therefore, the decrease in personal property tax did not benefit them as greatly as anticipated.

• The high dollar sales price of the vehicle – this yields a large current CAT liability
Overall, our car dealer clients are currently paying between 5 and 31 percent more in total tax to the State of Ohio.

The personal property tax is scheduled to phase-out by 2009. This is a fast phase-out. We appreciate that this onerous tax will be eliminated in two budget cycles. Thank you. Now, if a faster phase-out was possible, it would help small businesses.

Our clients are adapting to the change in the method of taxation under the CAT. Through our client education and the State’s notices, most are aware of the need to file new forms. The smaller companies that are “Mom and Pop” type companies that are required to file tax returns quarterly still need prodding. Those filing as consolidated elected taxpayers are still learning to gather the correct information from their affiliates.

One point of confusion is the timing of the rate change for each of the CAT phase-in. We had several calls regarding the increase in the CAT tax rate from the first quarter 2006 to the second quarter 2006 filing. When the entire phase-in is completed, this problem should be eliminated.
Overall, the change has gone smoothly. Our firm has in place a tickler system and we have eliminated a large number of our clients from the system as they are comfortable with the new filing requirements.

That completes my testimony and I will turn it over to George Schueller.