Twelve Tax Loopholes Ohio Should Close To Generate $270 Million Additional Revenue Each Year

Policy Matters Ohio says that Ohio can generate over $270 million each year by closing twelve loopholes in its tax system.  Ohio’s budget is losing revenue and already Gov Strickland has reduced the budget by about $1.2 billion.  Revenue estimates for the next budget indicate that Ohio will either need to make big cuts in the budget, or find new revenue.

A recently published twenty page report, “Limiting Loopholes:  A Dozen Tax Breaks Ohio Can Do Without,” written by Zach Schiller for Policy Matters shows how revenue to the state of Ohio can be increased by changing Ohio’s tax code.  The following is taken from the report.  For full report, download PDF here.  (I guess Mr. Schiller has eleven loophole categories with 12 loopholes.)

1. Individual Income Tax Loophole: Loosened residency test, allowing more people to avoid the tax.  Foregone Revenue: $25 million to $30 million.  Approved:  2006.
2. Real property tax Loophole: Homestead exemption expansion allows even wealthy homeowners to qualify Foregone Revenue: At least $118 million.  “While the old homestead exemption was available only to senior homeowners with incomes of $27,000 or below, the new program expands eligibility to all senior homeowners. The new exemption also differs from the old one in providing an equal reduction in taxable value for all those participating; the old exemption was tiered so that those with the lowest incomes were eligible for the largest credits. …During the budget debate last year, House Speaker Jon Husted called for the homestead exemption to be means tested.44 That way, affluent Ohioans would not receive the tax benefit, saving funds that could be used for other purposes. An analysis by the Institute on Taxation and Economic Policy released by Policy Matters Ohio last year found that targeting the homestead exemption would save at least $118 million a year while directing the same or greater tax reductions to low and moderate income Ohioans.”  Approved in 2007.
3. Real property tax Loophole: Owners do not have to pay 10 percent of their tax; owners who occupy their properties receive an additional 2.5 percent rollback. The state reimburses schools and local governments for foregone revenue.  Foregone Revenue: At least $5.2 million.  “Based on 2003 estimate by the Taft Administration of revenue gained in FY2005 if tax relief were limited to the first $1 million in market value of each property. A lower limit would produce more revenue. The 10% rollback was approved in 1971; the 2.5% rollback was approved in 1979.”
4. Dealers in Intangibles Loophole: Tax Payday lenders, mortgage brokers and others pay lower tax than banks.   Foregone Revenue: More than $10 million — Based on an estimated $21 million in additional revenue if these companies were instead taxed under the corporate franchise tax, reduced by half based on possible exclusions they might claim.  Approved:  1931.
5. Commercial Activity Tax/Individual Income Tax Loophole: Trusts formed before 1972 can choose which tax to pay.   Foregone Revenue:  Up to $18 million.  Approved in 2006.
6. Commercial Activity Tax Loophole: Companies with previous big losses can write them off against the CAT.  Foregone Revenue:  Up to $45 million a year starting in 2010.  “This credit will allow companies that had more than $50 million in losses that they would have been able to deduct against the corporate franchise tax to write them off instead against the CAT, beginning in 2010.  …Given the $50 million threshold, only large companies are able to take advantage of this tax break; mom-and-pop companies are excluded.  … This is even more the case based on the huge business tax cut that came with the creation of the CAT. It replaced two other business taxes, reducing overall taxes on Ohio businesses by more than $1 billion a year. Ohio will be one of just a small minority of states without a corporate income tax when the phase-out of the corporate franchise tax is completed.”  Approved in 2005.
7. Commercial Activity Tax Loophole: Suppliers to certain distribution centers don’t pay the tax.  Foregone Revenue: $6 million.  “Such distribution centers must have at least $500 million in sales and more than half of those must be shipped outside of Ohio  The state is favoring huge companies over small ones. This tilts the advantage to large companies and violates a tenet of sound taxation:  That ‘businesses and persons with similar assets and income should be taxed alike.'” Approved in 2006.
8. Sales Tax Loophole: Machinery, equipment and software for a new Avon Products distribution center Foregone Revenue: At least $3.47 million.  “This is a one-time amount for the outfitting of the warehouse. However, the 2007 Tax Expenditure Report estimates the cost of the ongoing exemption for retailers’ warehouses at $6.4 million  2008
9. Sales Tax Loophole: Lobbying and public relations services are not covered.  Foregone Revenue:$11.6 million.  “Based on $10.5 million for lobbying and $19.5 million for debt collection shown in Taft proposal for FY2005; the sales tax has been increased from 5.0% to 5.5% since then. The exclusion of these services from taxation is a function of the general definition of the sales-tax base, not an explicit exemption. A 2004 survey by the Federation of Tax Administrators indicated that Pennsylvania covers lobbying and consulting with its sales tax, as do six other states, and that West Virginia, Pennsylvania and six others collect sales tax on check and debt collection.”  Approved: 1935
10. Sales Tax Loophole: Debt collection is not covered. Foregone Revenue: $21.5 million.  Approved: 1935
11. Corporate Franchise Tax Loophole: Goodwill, appreciation and abandoned property excluded from net worth tax on financial institutions Foregone Revenue: Not Known.  The current Tax Expenditure Report estimates these exclusions are worth $112 million in FY09.  While tightening this exemption could produce millions of dollars in additional revenue, the exact amount is not known. The state is favoring huge companies over small ones. This tilts the advantage tolarge companies and violates a tenet of sound taxation:  That ‘businesses and persons with similar assets and income should be taxed alike.’ ” Approved: 1933

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