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On May 31, 1994, Tax Executives Institute submitted the following comments to the Commission to St Economy and Tax Structure, an ad hoc commission created by the Ohio legislature to study and make pr the Ohio economy and its tax system. The comments, which took the form of a letter from TEI Presiden Frank E. Mosier, the chair of the commission, were prepared under the aegis of TEI's State and Local chair is James J. Coppola, Jr. of the New Jersey Chapter. The Institute's submission was based on a force of members of the Cleveland Chapter whose chair was Gerald Steltenkamp of The Sherwin-Williams contributing to the development of the comments, which were approved by the Executive Committee, wer of Keithley Instruments, Inc., 1993-1994 President of the Cleveland Chapter, and Kenneth E. Case of President of the Cincinnati Chapter.

On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to submit these comments to the Commission to Study the Ohio Economy and Tax Structure. TEI believes that the Commission's study is an important step in the development of comprehensive recommendations to the Ohio legislature for revision of the State's tax policy and administration.

Background

Tax Executives Institute is the principal association of business tax executives in North America. The Institute's approximately 5,000 members represent nearly 3,000 of the largest companies in the United States and Canada. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.

TEI members are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. TEI members are employed by companies with corporate headquarters within and without the State of Ohio and with interstate and wholly intrastate operations. And, while the views expressed here represent those of the Institute as a whole, the Institute's comments were developed with the assistance and advice of members from our Ohio-based Chapters in Cleveland and Cincinnati, which have an aggregate membership of approximately 250 persons. We believe that the diversity and training of our members enable us to bring an important, balanced, and practical perspective to the issues to be assessed by the Commission to Study the Ohio Economy and Tax Structure.

Guiding Principles

Given the diversity of its members--both within and outside of Ohio--TEI is often unable to take positions on specific proposals and, indeed, the Institute's specific recommendations in respect of Ohio's tax structure are modest in scope. Nonetheless, TEI believes that there are certain principles that should serve as beacons guiding the Commission's recommendations concerning the tax structure in Ohio.

First and foremost, a tax system based on voluntary self-assessment should be administrable. To be truly successful in its endeavor, the Commission should strive to eliminate anomalous or ambiguous provisions that taxpayers are unable to comply with and the State's Department of Revenue unable to administer. In addition, before recommending any new taxes, the Commission should assure itself that the Department of Revenue will be able to administer the proposals and provide meaningful guidance and forms to inform taxpayers of their compliance obligations.

Second, the cost of compliance with, and administration of, the tax system--including the transition cost to implement revisions to existing taxes or their wholesale replacements--should be minimized to the extent possible. One means of simplifying the income tax system in Ohio is to conform Ohio's tax provisions as closely as possible to comparable provisions of the Internal Revenue Code. Another means of increasing simplification is to recommend adoption of provisions that are consistent with, if not uniformly identical to, provisions adopted by surrounding States. Minimizing the number and scope of departures from federal taxable income determinations and uniform state provisions will promote compliance for all taxpayers, especially larger corporations with multistate businesses.

As an example of the excessive compliance costs engendered by the current Ohio tax structure, consider the State's dichotomous income tax system. In addition to the State, a plethora of Ohio municipalities impose separate income tax levies. For larger companies doing business in many municipalities throughout the State, the compliance cost associated with maintaining adequate separate records, computing separate tax liabilities, filing the separate municipal returns, and paying the taxes is burdensome, and in many jurisdictions likely exceeds the actual revenues garnered by the cities. The burden of determining the corporate income tax liability is exacerbated by the further obligation to withhold and remit employee tax liabilities. Concededly, many large cities outside of Ohio impose separate income tax liabilities. Nonetheless, among the States, Ohio is unparalleled in the level of administrative burden imposed by its separate State and municipal income tax systems. TEI believes that the compliance cost imposed by the profusion of municipal income tax obligations is a clear example where Ohio is "out of step" with other States. We urge the Commission to consider recommending elimination of the separate tax filing requirements, substituting some form of "piggyback" municipal income tax computation, with the revenue collected by the State for remittance to the municipalities.

The third principle undergirding the Ohio tax system should be a delicate balance between complexity and neutrality among taxpayers on one hand, and simplicity and ability of taxpayers to pay on the other. The tax and economic system must ultimately promote the growth and competitiveness of businesses with operations in Ohio while remaining neutral in its treatment of taxpayers and industries. To determine whether Ohio is competitive with other States' tax structures, the Commission should study the substantive provisions of surrounding jurisdictions. To this end, the Commission should consider whether to recommend, for example, repeal of Ohio's anachronistic personal property tax on inventory. While some States continue to impose ad valorem inventory taxes, most recognize that inventory is a poor proxy (or, at best, a highly selective and narrow tax base) for business activity within a state and have abandoned such schemes. TEI believes that the personal property tax on inventory operates as an impediment to the growth and development of businesses dealing in tangible goods and recommends alternatively that the tax be repealed or, at a minimum, be creditable against the regular franchise tax liability of the company.

Finally, the tax system should be fair in operation and, as important, should be perceived as fair. Consequently, the Commission must avoid making recommendations that raise the specter of retroactive tax increases. Furthermore, the system should promote, rather than retard, investments in new plant, equipment, and jobs within the State. In this regard, the Commission should consider whether the Corporation Franchise Tax should be modified to eliminate its regressive features. The annual Corporation Franchise Tax is computed on a net-income or a net-worth basis, with the tax liability being whichever of the two computations produces the higher tax. The net-worth basis of computing the franchise tax is highly regressive because it can impose a significant financial burden during years when net income declines substantially or operating losses are sustained. Furthermore, while the alternative computation may protect the State's revenues and tax base during recessionary periods, that protection is purchased at a high cost: the net-worth tax strains corporate cash flows when companies most need to marshall resources to invest in jobs, inventory, or capital equipment to weather the business downturn and improve their efficiency. Indeed, a company's viability may be threatened since the net-worth method disregards the ability of the company to generate cash from operations to pay its tax obligations. As a result, the length, depth, and breadth of a national recession is likely to be exacerbated in Ohio by the alternative net-worth method of taxation.

In view of the regressive nature of the net-worth method, TEI recommends that the alternative net-worth tax be repealed. This change will assist financially troubled companies return to profitability faster, enabling them to pay the net-income based tax. At a minimum, the net-worth tax should be replaced with a flat-rate tax containing a "cap" (similar to the Delaware Franchise Tax).

Administrative Provisions