Dueling Analyses of Gov. Kasich’s Tax Reform Plan Emerge

Separate analyses of the overall benefits of Gov. Kasich’s latest tax reform plan have been publicly divulged and offer divergent views of the potential impact on Ohio’s tax structure. An Ernst & Young (E&Y) study, commissioned by the Ohio Business Roundtable (OBRT), concluded that “the combination of business and individual tax changes in the governor’s plan, including the 15% increase in the commercial activity tax (CAT) rate, will result in improved business tax competitiveness in Ohio.” On the other hand, the Tax Foundation determined that while income tax rate cuts are beneficial fiscal policy, the plan “has little in the way of tax base reform and relies on more opaque and politically expedient tax hikes to make the ledger add up.”

So, why does one study claim success and the another is more lukewarm? First, let’s review the six major components both studies examined. Specifics here.

·         8.5% personal income tax cut;

·         Expanded earned income tax credit (EITC);

·         Increased personal exemptions for up to $80,000 in income;

·         Increased cigarette excise taxes and a new tax on electronic cigarettes;

·         Increased severance tax on horizontally-drilled wells;

·         Increased CAT on gross receipts of most businesses;

With these components in mind, the E&Y study analyzed the plan’s impact on the Ohio effective tax rates (ETR) of seven major industries with the ETR of those same industries in six other states, including Indiana and Michigan. The analysis showed Ohio’s ETR in the seven industries after implementing the proposed plan was clearly competitive with the ETR in the other six states.

However, one noticeable gap in the E&Y analysis is that it only looked at C corporations with 5%-20% of their total sales in Ohio and thus subject to the CAT. This is not an unreasonable assumption for Fortune 500 or 1000 companies headquartered in Ohio, which largely comprise the membership of the OBRT. However, there are many other small- and medium-size businesses in Ohio which don’t fit the E&Y study profile but are more significantly affected by the plan since they have 70%-100% of their sales subject to Ohio’s CAT. It would have been even more helpful to know how the governor’s plan impacts those smaller companies that are not C corporations.

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