Nearing the end of 2016, the legislature passed a bill to force a review of all the tax expenditures in state finances. It was a multi-year effort finally come to fruition.
Tax expenditures are defined as “any tax provision in the [Ohio] Revised Code that exempts, either in whole or in part, certain persons, income, goods, services, or property from the effect of taxes levied by the state, including, but not limited to, tax deductions, exemptions, deferrals, exclusions, allowances, credits, reimbursements, and preferential rates.”
Most tax expenditures fall under one of the following categories or rationales:
- They are constitutionally required;
- They exclude a “necessity”, such as food, from taxation;
- They enhance Ohio’s incentives to invest in manufacturing equipment or locate businesses in targeted economic development areas; or,
- They limit double taxation and pyramiding.
Many businesses across Ohio benefit from one or more these tax expenditures.
The legislation established the Tax Expenditure Review Committee, made up of three members of the House, three members of the Senate, and the tax commissioner, and charged it with making recommendations to the General Assembly concerning the continuation, modification, or repeal of existing tax expenditures. It also requires any bill proposing a new or modified tax expenditure to include a statement of the expenditure’s objectives and intent.
When reviewing existing tax expenditures, the committee is supposed to consider 10 factors, including the following:
- The number and class of the recipients of the direct benefits or consequences;
- The fiscal impact on local taxing authorities;
- Public policy objectives that support the tax expenditure and whether or to what extent they are achieved;
- Whether the policy objectives could have been accomplished absent the tax expenditure, or through an appropriation instead;
- The extent to which the tax expenditure provides unintended benefits to or harms to taxpayers;
- The effect of terminating the expenditure; and
- The feasibility of modifying the expenditure if it is not satisfying its objectives.
The committee has now met twice, and this week began its review, focusing on several exemptions to the Ohio Sales Tax. As part of the Ohio Chamber’s ongoing efforts to keep Ohio businesses competitive, we testified on behalf of our members and their concerns.
The focus of our testimony was the largest tax expenditure in the entire Tax Expenditure Report, which is the sales tax exemption for the sale of tangible personal property (TPP) primarily used in manufacturing. The state estimates that it foregoes over $2.2 billion in revenue per year as a result of this provision, as reported in the most recent Tax Expenditure Report. Originally enacted in 1935 when Ohio was even more of a manufacturing powerhouse, this exemption was intended to protect Ohio manufacturers from having to pay a three percent sales tax (the rate now is six to eight percent) on items of TPP that are ultimately incorporated into the completed product being manufactured.
The main focus of our testimony was that this exemption has had the effect of preventing the pyramiding of that sales tax at each stage of the manufacturing process and is especially important, for obvious competitiveness reasons, to the state’s manufacturing sector and overall economy where many Ohio manufacturers are part of a multi-tier supply chain. The very act of preventing the pyramiding of the sales tax on Ohio manufactured goods is critically important to the continued health and competitiveness of jobs and our economy. The sales tax manufacturing exemption clearly provides critical support for an essential part of Ohio’s business health – and is undeniably worth the price. Our testimony underscored the necessity and value of this exemption and urged its continuation.
Future hearings are planned for later this spring, and the Ohio Chamber will continue our involvement in the process and our defense of the interests of our members and the business community.