Updating LWVO State Finance and Taxation Policies

Transcription

1 Updating LWVO State Finance and Taxation Policies By J. Donald Mottley Study Committee Chair 1 (DRAFT, Updated December 8, 2008) With Concurrence of Committee Current LWVO Policy Statements. At present, LWVO has 6 position statements on state finance and taxation issues other than school funding: 1) Criteria (for evaluating individual taxes and the tax mix) 2) Corporate Franchise Tax 3) Income Tax 4) Real Property Tax 5) Sales Tax 6) Tax Mix The following shows the language that we recommend be added to or deleted from these existing policies, along with the rationale for proposed changes. Language proposed to be added is underlined, while language proposed for deletion is stricken through. Because of changes to the Ohio tax code that were adopted in 2005, we propose changing the Corporate Franchise Tax policy to a Business Taxes policy, as discussed below. 1 In addition to being a long-time LWVO member, Mr. Mottley is a tax attorney with the firm of Taft Stettinius & Hollister LLP and is both a former State Representative ( ) and former Chair of the Ohio House Ways & Means Committee ( ). He also is a member of the taxation committees of the Ohio State Bar Association, the Ohio Chamber of Commerce, and the Ohio Manufacturers Association.

2 Criteria (Adopted July 1989) (With Proposed Additions December, 2008) LWVO supports the following tax principles as criteria to be used in evaluating individual taxes and the tax mix in Ohio. Taxes should: 1. be fair and equitable; 2. provide adequate resources for government programs while allowing flexibility for financing future program changes; 3. be understandable to the taxpayer and encourage compliance; 4. be easy to administer; 5. be consistent with Ohio s economic competitiveness. The first two criteria are more important to LWVO than the last three, and will be given greater weight in evaluating the current tax system and alternatives. LWVO is concerned that focusing too much on competing with other state s tax rates could lead to a race to the bottom, making state tax systems less fair and leading to inadequate state funding of needed public services. Further, LWVO believes that economic competiveness requires adequate funding for and investment in public services, and not simply competing with other states with regard to tax types and tax rates. [End of text of proposed new policy] Rationale for proposed changes in Criteria policy: Economic competitiveness was the driving force behind the 2005 Ohio tax reform and is often included by other organizations as a criterion for evaluating a tax system (as, for example, in the Zaino Committee report which led to the 2003 and 2005 tax changes). Yet, it was not an explicit criterion in the current LWVO policy

3 Historically, LWVO has given some weight to economic competitiveness arguments in reviewing tax proposals, but has been more concerned about adequacy and fairness. This is partly because of the concern, addressed in the proposed policy, about the race to the bottom, and also because of the concern, also addressed in the proposed policy, that LWVO recognizes that adequate funding of public services is at least as important to the state s economic competitiveness as competitive tax rates. The proposed policy adds economic competitiveness as a criterion, but emphasizes that this new criterion, as well as the existing criteria of understandability/ease of compliance and ease of administration are less important to LWVO than adequacy and fairness. Income Tax (Adopted July 1989) (with additions proposed December, 2008) As a source of state revenue LWVO supports a personal income tax because it meets the tax principles particularly in that it is fair and equitable. The state income tax rates should be graduated. As a source of municipal and school district revenue, LWVO supports a local income tax option as an alternative to higher property taxes. For ease of administration, local taxes may be flat rate rather than graduated, since even flat rate income taxes are more equitable than property taxes. The local income tax base should be reviewed and possibly expanded to insure that that it is fair and equitable. LWVO also recognizes that income taxes are important to provide adequate resources over time for both the state and for local governments. The repeal of or any

4 significant reduction in state or local income taxes would result in a tax system that is less adequate or less equitable, and perhaps both. [End of proposed Income Tax policy]. Rationale for proposed changes in Criteria policy: The proposed policy would continue to support a graduated, progressive state income tax because it is fair and equitable. Although many of our neighboring states have flat income rates, LWVO should continue to support a progressive state income tax because the proposed Criteria policy gives more weight to fairness, equity, and adequacy than to economic competitiveness. The existing policy did not address municipal or school district income taxes. The proposed policy supports these local option income taxes as alternatives to higher property taxes, which are less equitable. The proposed policy recognizes that, for administrative ease, these local taxes have been flat rate rather than progressive. But even a flat rate income tax is fairer and more equitable than a property tax as a source of local revenue. There are concerns, however, about whether some of the definitions of taxable income under existing school district and municipal income taxes treat all taxpayers equally, and whether some provisions may unduly benefit higher income taxpayers; thus, we recommend a sentence emphasizing that the local income tax base (definition of taxable income) should be reviewed and possibly expanded to insure that it is fair and equitable.

5 The recent tax reform reduced state income tax rates by 21%. There are existing proposals to phase out the remainder of Ohio s income tax. It remains to be seen whether the state can adequately fund public services while phasing in this 21% cut. Since the state income tax represented, as of fiscal year 2007, 47% of Ohio General Fund tax revenues, the repeal of the Ohio income tax would be a severe blow to adequacy of funding for state services. Most state tax and local tax sources are regressive (take more tax as a % of income from lower income taxpayers) or at best proportional (take the same tax as a % of income for lower and higher income taxpayers). A progressive state income tax is necessary to make the tax system as a whole more fair and equitable. Reducing or repealing our progressive state income tax would thus make the overall Ohio state and local tax system less equitable. Business Taxes Because the 2005 tax reform is phasing out the Corporate Franchise Tax and the Tangible Personal Property Tax, and replacing the latter tax with a new Commercial Activity ( CAT ) Tax, we recommend modifying the LWVO current Corporate Franchise Tax to make it a policy on Business Taxes. The recommended changes to the Corporate Franchise Tax policy are as follows: Corporate Franchise Tax (Adopted July 1989) Business Taxes (recommended December, 2008) As a source of state revenue LWVO supports the a state corporate franchise income tax especially because businesses should help pay for services received.

6 LWVO supports the Commercial Activity (CAT) Tax as a replacement for the tangible personal property tax, as long as school districts and other local governments continue to get adequate and fair replacement revenue for the repealed personal property tax. The CAT Tax might be an adequate and equitable replacement for the personal property tax, but it is not an adequate or equitable replacement for a corporate income tax. LWVO supports a Corporate Income Tax as a replacement for the Corporate Franchise Tax that is being phased out. [End of proposed Business Tax Policy] Rationale for changes from the former Corporate Franchise Tax policy: LWVO s existing policy addresses only the Corporate Franchise Tax which, under the 2005 tax reform, is being phased out. It does not address the new Commercial Activity ( CAT ) Tax or the tangible personal property tax. According to Tax Commissioner Richard Levin, the CAT tax has effectively replaced the tangible personal property tax, because 100% of the CAT tax revenues now go to reimburse school districts and other local governments for their revenue loss from the repeal of the tangible personal property tax. On the other hand, the phase out and eventual repeal of the corporate franchise tax has, combined with income tax reductions enacted in 2005, led to significant cuts in state-funded programs beginning in fiscal year By repealing the Corporate Franchise Tax, Ohio will become the only state that taxes individual income but that does not tax corporate income, and will become one of only 6 states that has no corporate income tax (the others being South Dakota, Washington, Nevada, Wyoming, and Texas). Thus, repeal of the

7 corporate franchise (income) tax was not necessary from the standpoint of economic competitiveness, and is making state funding less adequate and equitable. A Corporate Franchise Tax is not necessarily a corporate income tax. A franchise tax based on factors other than income would be less equitable. To clarify that LWVO supports a tax on corporate income, we suggest that LWVO support a corporate income tax rather than a corporate franchise tax. Based on the proposed new Criteria, we recommend the LWVO support the replacement of the personal property tax with the CAT tax, provided that the tax continues to provide adequate revenues to school districts and to other local governments to replace revenues lost from repeal of the tangible personal property tax. If this is done, the CAT tax will be at least as adequate as the personal property tax. There is no evidence that the CAT is less equitable, and it may prove to be better from the standpoint of economic competitiveness and ease of administration. However, the repeal of the corporate franchise tax is making Ohio s tax system both less adequate and less equitable. Thus, LWVO should support the replacement of this tax with a Corporate Income Tax, both in this proposed policy and in the proposed Tax Mix policy discussed below. Property Tax (Adopted March 1983) (with additions and changes proposed December, 2008). 1. LWVO supports real property tax relief, financed by the state, in the form of the Homestead Exemption based on age, income, and disability income.

8 2. LWVO supports the elimination of the real property tax rollbacks on commercial and industrial property, both across-the-board and for owner-occupied homes. 3. LWVO is not opposed to real property tax rollbacks on residential property, financed by the state, as long as the taxes that provide the state reimbursement are more equitable than the property tax and as long as the state can afford to fund both property tax relief and essential public services. 4. LWVO supports means-testing for property tax rollbacks and other real property tax relief as a means to make property tax relief more affordable and more equitable. [End of proposed Property Tax Policy] Rationale for changes from the former Property Tax policy: Property taxes are regressive taxes, but account for so much money to school and other local governments that they are difficult to replace entirely. Thus, our policy should continue to support property tax relief programs that provide replacement revenue to the local governments (mostly school districts) that rely on property tax revenues. Homestead exemption programs help to compensate for the inequity of the property tax by reducing the property tax burden on low-income elderly and disabled taxpayers. Thus, we recommend no change in the current language on residential rollback. The existing policy supported the repeal of the property tax rollbacks on all property, including the 10% across the board rollback and the additional 2 ½% rollback on owner-occupied homes. The proposed policy would support the

9 2005 repeal of the rollbacks on commercial and industrial property, in part as a way to offset some of the loss to Ohio general fund from other business tax cuts. But for reasons discussed below, the proposed new policy would not oppose the continuation of existing rollbacks on residential property if certain conditions are met. The 10 ½% and 2 ½% rollbacks on residential property are not necessarily contrary to existing and proposed LWVO criteria, provided that the taxes that the state uses to generate the replacement revenue are more equitable than the property tax and as long as the state can afford to fund both property tax relief and essential public services. Hence, the proposed new language regarding rollbacks on residential property. Under current law (including the recent expansion in Homestead Exemption), neither homestead exemption nor the 10% and 2 ½% rollback is means tested. In other words, higher income taxpayers receive these benefits as well as lower income taxpayers. Since these programs cost several hundreds of million of dollars per year, providing the same tax relief to both lower and higher income taxpayers may not be affordable, especially in difficult economic times. Thus, we recommend the new language emphasizing the LWVO supports means testing of all property tax relief programs to make the programs both more equitable and more affordable. Agricultural property is not addressed in the proposed policy, because it involves complex issues such as Current Agricultural Use Valuation and the impact of taxation on farmland preservation that require further study and discussion.

10 LWVO would consult its Criteria policy and other policies in deciding what position, if any, to take with regard to property tax issues involving agricultural land. Sales Tax (Adopted March 1983; revised June 1989; proposed revisions December, 2008) 1. LWVO supports a change in the base rather than a change in the rate of the state sales tax. We favor broadening the base by reducing the number of exemptions and by making additional services subject to sales tax. 2. LWVO supports application of the sales tax to nonessential services, tickets for professional athletic and entertainment events, food purchased for on-premise consumption, and prepared food purchased for on- or off-premise consumption. 3. LWVO supports exemptions for food, (other than prepared food), sold for off-premise consumption, prescription drugs, prosthetic and surgical devices, and items for direct use (components in manufacturing and agricultural use). 4. LWVO supports Ohio s participation in efforts such as the Streamlined Sales Tax Project that will make sales taxes easier to administer and to comply with and that may make it easier to collect tax on remote sellers that deliver products into Ohio. 5. LWVO supports local option sales taxes for county governments and regional transit authorities in lieu of higher local property taxes. 6. LWVO can support higher sales tax rates or special excise taxes on luxury items, as long as these taxes are consistent with LWVO Criteria and do not violate Ohio s Streamlines Sales Tax obligations.

11 [End of proposed Sales Tax policy] Rationale for proposed changes to Sales Tax policy: As we move to a service economy, there is greater potential for adding sales tax revenue by adding additional services than there is from repeal of existing exemptions. Hence, the new language adds reference to adding additional services in item 1. Both existing and proposed item 2 support extending the sales tax to nonessential services. The existing policy addresses only the state sales tax rate and the sales tax base, but does not address local option sales taxes. Proposed new language would support the county and transit authority local option sales taxes as a more equitable alternative to property taxes. The existing policy does not address one of the most important sales tax policy issues: the Streamlined Sales Tax Project, and the ability of many remote sellers to avoid sales tax collection under current law. Allowing remote sellers (such as Internet or mail order vendors) to make shipments into Ohio without collecting sales tax is both inequitable (disadvantaging sellers with business locations in the state) and a growing drain on state revenues. The Streamlined Sales Tax project is a multi-state effort designed to make it easier for remote sellers to collect and pay sales tax in multiple states. The project encourages voluntary sales tax collection by remote sellers, and may encourage Congress or the Supreme Court to change existing law that allows many remote sellers to avoid collecting sales tax. The proposed new policy supports the SSTP and

12 collection of tax by remote sellers, pursuant to our Criteria, because it enhances adequacy, equity, and ease of compliance and administration. The policy says that LWVO may support luxury taxes (higher or additional sales or excise taxes on luxury items) as long as these are otherwise consistent with LWVO criteria (such as fairness, ease of administration, and impact on economic competitiveness) and are consistent with Ohio s obligations under the Streamlined Sales Tax Project. There is some question regarding whether luxury taxes may violate the Streamlined Sales Tax agreement, and Ohio s potential revenue gain from enforcement of that Agreement is greatly in excess of the revenue potential from luxury taxes. Luxury taxes are generally more equitable because they target purchases of less essential items by higher income taxpayers. The wording of the existing policy regarding food for on- and off-premise consumption is changed to make its meaning clearer. The intent remains the same as that of the current policy: the LWVO supports applying the sales tax on food sold for on-premise consumption, and for prepared food ( to go food) that is for off-premise consumption. T a x M i x (Adopted July 1989; proposed additions December, 2008) LWVO supports the state taxes that are currently in effect. If an increase in state taxes is needed, LWVO prefers the replacement of the Corporate franchise tax with a Corporate income tax and, if necessary, an increase in the income tax as a source of revenue because it these taxes tends to be progressive rather than regressive. Applying means testing to state property tax relief programs would reduce the cost of these

13 programs and make the property tax system more equitable. Taxes on alcohol and cigarettes tobacco are another revenue source if needed. An increase in expansion of the sales tax base, or (although less desirable) an increase in the sales tax rate, is another possible revenue source. If a decrease in state taxes is called for, LWVO supports reducing the sales tax because it is regressive and less equitable. Tax Relief for those at the lower end of the income scale should be considered if there is a decrease in state taxes. [End of proposed Tax Mix policy] Rationale for proposed changes to Tax Mix policy: The proposed Tax Mix policy reflects changes in the other proposed policies above. Since the proposed Business Tax policy supports a Corporate income tax to replace the Corporate franchise tax which is being phased out under current law, the proposed Tax Mix policy calls for its reinstatement as the first step if the state needs new tax revenues. (In fact, given the state s current budget problems, the enactment of a Corporate income tax may be essential to provide adequate funding for state services). The rationale for this is discussed under the Business Taxes policy. An individual income tax increase would become the preferred source of additional revenue if additional funds are needed after reinstating a tax on business income, since equity and fairness are particularly important under LWVO s proposed Criteria policy.

14 As discussed under the proposed Property Tax policy, the failure to means test property tax relief programs adds additional expense to the state for the benefit of higher income taxpayers. Adding means testing to these programs would thus generate more money for the state (by reducing its reimbursement cost) while retaining property tax relief for lower income taxpayers (thus improving the equity of the tax system). Since this change would increase equity as well as adequacy, it would be next in line after the business and personal income taxes if additional revenue is needed. Since the Sales Tax policy prefers expansions of the sales tax base to increases in the sales tax rate, the proposed Tax Mix policy expresses this same preference.