The CAT Purrs Along, but the FY0809 State Budget Stays Tight

1
The CAT Purrs Along, but the FY08-09 State Budget
Stays Tight
Frederick Church Deputy Tax Commissioner
Presentation to OASBO and OSBA December 07, 2007
2
Focus of Presentation

• Review of the CAT and TPP Tax Replacement
• What Was Expected in FY06-07 vs. What Happened
• Expectations for FY 08-11
• Overview of FY 08/FY09 state budget
• Context national and Ohio economic outlook
• U.S. and Ohio housing market implications of
  slow value growth on school financing
• Exceedingly tight GRF revenue constraints
• Estimated impacts of continued phase-in of tax
  reforms from previous budget

3
New Commercial Activity TaxTheory and Operation

• A new broad-based, low rate tax (0.26) on gross
  receipts from business activity in Ohio
• A business privilege tax, not a transactional tax
  (sales tax law and rules dont apply)
• A business privilege tax, not an income tax (PL
  86-272 does not apply)

4
New Commercial Activity TaxTheory and Operation

• Tax applies to Ohio-generated gross receipts
• Tax applies to imports of goods and services
  modest use tax or anti-sham tax on some
  business purchases brought into Ohio
• Tax does NOT apply to exports of goods and
  services
• Theory is that tax should be commensurate with
  economic presence, or degree to which a
  business utilizes the Ohio market as measured by
  in-state sales
• Tax is designed to benefit manufacturing,
  creating a favorable platform for production in
  Ohio

5
New Commercial Activity TaxTheory and Operation

• Tax is on gross receipts, but gross receipts are
  defined to exclude most portfolio income
• Dividends not taxed
• Interest not taxed (limited exceptions)
• Capital gains not taxed
• Hedging transaction receipts not taxed
• On the other hand, some income from intangible
  property is taxed, e.g. royalties

6
New Commercial Activity TaxTheory and Operation

• Legislature added exemption for motor fuel
  (temporary)
• Exemption was in effect for FY 2006-2007, and has
  now expired
• CAT revenues from gross receipts arising from
  motor fuel began to flow to the state in the
  Nov-07 payment
• Legislature added exemption for sales by
  suppliers to certain Ohio wholesaling operations
  qualified distribution centers
• Only two companies have qualified so far, but
  others may qualify in future

7
New Commercial Activity TaxTheory and Operation

• Legislature added credit for unused NOL
  deductions in excess of 50 million, to the
  extent they could actually be booked for
  accounting purposes
• Other deferred tax assets could also be allowed
  to claim credits, with limitations
• Claims not yet audited ODT has until Jun-30,
  2010 to audit
• 53 corporations filed reports claiming 952
  million in credits for NOLs and other deferred
  tax assets

8
Maintaining the CATs Broad Base A Tale of Two
Industries

• Temporary exemption for motor fuel industry and
  its recent expiration
• Exemption was in effect for FY 2006-2007, and has
  now expired
• CAT revenues from gross receipts arising from
  motor fuel began to flow to the state in the
  Nov-07 payment
• ODT estimate is that CAT on motor fuel will
  generate about 63 million in FY 08
• Constitutional challenge by grocery industry
• Plaintiffs contended CAT, when applied to gross
  receipts derived from sale of food off premises
  where sold, violates state constitution
• August 2007 decision by Franklin County Common
  Pleas Court

9
Common Pleas Court Finds CAT Constitutionally
Valid

• Court found CAT is excise tax on privilege of
  doing business in Ohio, and not an excise tax
  levied or collected upon the sale or purchase of
  food
• CAT is substantively different from a
  transactional or sales tax, and thus is not
  expressly or implicitly prohibited by the Ohio
  Constitution
• Grocers appealing to Tenth District Court of
  Appeals

10
Tax Commissioners Comments on CAT Ruling

• Decision protects integrity of CAT as
  broad-based, low-rate business tax
• CAT is critical to effort to phase out antiquated
  tangible property tax that has long discouraged
  investment in Ohio
• CAT also linchpin in effort to phase out
  corporate franchise tax

11
CAT - Other Possible Legal Challenges

• Will contractors sue the state over CAT derived
  from motor fuel gross receipts not being
  earmarked just for roadways?
• Will someone sue the state over the CATs
  economic nexus provisions?
• No lawsuit so far, after CAT has been in place
  more than two years
• Some think that a lawsuit is less likely after
  state courts ruled in favor of the states in
  Lanco (New Jersey) and MBNA (West Virginia)

12
New Commercial Activity Tax Inside the Numbers

• CAT Taxpayers Number and Type
• Number of entities paying tax has been roughly
  what was expected (about 254,000 so far, compared
  to estimate of about 235,000) although revenue
  has been higher than forecasted
• Tables based on tax returns show about 170,000
  taxpayers, but consolidated and combined groups
  make the entity count about 1.5 times that number
  (registrations show 178,000 taxpayers)
• There are approximately an additional 62,000
  entities in consolidated groups, and about 14,000
  in combined groups (76,000 altogether)
• About 27,000 of these members of combined or
  consolidated groups are companies located outside
  Ohio

13
New Commercial Activity Tax Inside the Numbers

• FY 2006 revenues exceeded the original estimates
  by 59 million, or 27.5
• Actual revenues 273.4 million vs. estimate of
  214.4 million
• FY 2007 revenues exceeded the budget estimates by
  88.3 million, or 17.4
• Actual revenues 594.9 million vs. estimate of
  506.6 million

14
New Commercial Activity Tax Inside the Numbers

• Even with the FY 2006-2007 overages, CAT revenues
  did not hit the rate reduction trigger in
  5751.032
• Revenue target for FY06-07 combined was 815
  million
• The amount 10 above 815 million is 896.5
  million
• Actual CAT revenues were 868.3 million, or 28.2
  million below the trigger amount

15
New Commercial Activity Tax Inside the Numbers

• CAT overages were needed just to make the
  required reimbursements to schools and local
  governments for the TPP tax losses
• Despite 88.3 million overage, FY 07 CAT revenues
  were only 23.6 million above the TPP tax
  reimbursement amount
• Actual FY 07 CAT revenues 594.9 million, TPP tax
  reimbursements 571.3 million

16
New Commercial Activity Tax Inside the Numbers

• Despite no rate reduction in FY 2007, OBMs CAT
  forecast does yield a rate reduction in 2010
• Blue Book executive budget CAT forecast of 1,340
  million in FY 2009 revised upward to 1,367
  million
• FY 2009 revenue target is 1,190 million the
  amount 10 above the target is 1,309 million
• Rate reduction would begin Jan-2010

17
New Commercial Activity Tax Inside the Numbers

• CAT rate reduction in Jan-2010 pushes down
  revenues in FY 2011, to an amount below TPP
  reimbursement amount
• GRF subsidy of 78 million will be required in FY
  2011

18
New Commercial Activity Tax Inside the Numbers
19
Review of TPP Phase-Out
20
CAT and Local Govt TPP Reimbursement

• Beginning in tax year 2011 (FY 2012), the TPP
  reimbursements for local governments will be
  gradually phased out, ending in tax year 2017
  (2018 for telephone property)

21
CAT and TPP Reimbursement
22
Review of School District TPP Reimbursement

• Levies are split into two types
• Fixed-sum levies are voted bond and emergency
  levies
• Bond levies are reimbursed until the levies
  expire (subject to the 0.5 mill threshold)
• Emergency levies are reimbursed at least through
  2010, (subject to the 0.5 mill threshold), even
  if they expire, are reduced, or are not imposed.
  After 2010, the emergency levies are reimbursed
  as long as they are renewed, through 2017.
• Fixed-rate levies are everything that are not
  fixed-sum levies

23
Review of School District TPP Reimbursement

• Fixed-rate levies are reimbursed at least through
  FY 2011, even if they expire, are reduced, or are
  not imposed.
• After FY 2011, the direct payment portion of
  the reimbursements for qualifying fixed-rate
  levies are gradually phased out, until they are
  zero in FY 2019.
• If the levies expire, are reduced, or are not
  imposed, they are only reimbursed to the extent
  they are still being levied (renewals count as
  still being levied).
• School districts receive a percentage of the base
  year amount through the reimbursement payment.

24
CAT and School District TPP Tax Reimbursement

• In contrast to local governments, school
  districts continue to get 70 of the CAT forever
  for TPP reimbursement
• Change made in HB 119
• However, each individual district may not get
  back what it lost in TPP revenue. Direct
  payments to districts begin to phase down in FY
  2012, phased out all the way by FY 2019

25
CAT and School District TPP Tax Reimbursement

• Points to remember about school district phase
  down
• Only the direct payments are phased out, whereas
  the additional SF-3 aid provided because of lower
  chargeoff valuations continues
• The additional SF-3 aid is just beginning (FY 08)
• The General Assembly will choose some mechanism
  for distributing the remaining dollars in the
  replacement fund

26
National Economic Outlook

• The national outlook is still being dominated by
• the bursting of the housing bubble, and the
  impact on foreclosures, housing prices,
  construction sector employment and income,
  household wealth, and consumer spending
• the losses to banks and others in mortgage
  backed-securities, the change in investor
  attitudes to risk, the tightening of credit, and
  the impact on investment

27
National Economic Outlook

• But oil prices are receiving more and more
  attention
• Spot price rose by 83 from jan-26-2007 to
  nov-23-2007
• Predictions by analysts that risk premium would
  go away and that prices would come back down have
  not been realized

28
National Economic Outlook
29
National Economic Outlook

• Comments on economic bubbles
• Warren Buffet when the masses get greedy I get
  scared
• Warren Buffet People go crazy in economics
  periodically, in all kinds of ways. Residential
  housing has different behavioral characteristics
  But when you get prices increasing faster than
  the underlying costs, sometimes there can be
  pretty serious consequences."
• Edward Gramlich low interest rates "made it very
  easy" for lenders to offer subprime mortgages
  "that would be absolutely misunderstood by
  borrowers."
• Edward Gramlich Greenspan worried that "with
  rates that low there would be some pretty weird
  things going on out there that we couldn't
  predict but that would cause problems where it
  erupted was the subprime market"

30
National Economic Outlook

• Whats happening to house prices?
• Recently overheard comment from an economist at
  Global Insight pick your measure depending on
  what story you want to tell
• Nevertheless, most measures show prices
  declining, although by different magnitudes

31
National Economic Outlook

• Whats happening to house prices?
• For the third quarter of 2007, the
  SP/Case-Shiller Composite House-Price Index of
  20 cities was down 4.5 year-over-year.
• This was the third consecutive quarterly drop
• In contrast, the Census Bureau's quality-adjusted
  price index of new homes for 2007q3 (seasonally
  adjusted) fell by only 0.8 year-over-year.
• The National Association of Realtors' median
  existing home price for oct-2007 was down 5.1
  year-over-year
• Midwest region was down 1.6

32
National Economic Outlook

• More detail on house prices
• NAR metro area data on 2007q3 median price yr/yr
  change
• Akron 6.9
• Cleveland - 4.2
• Columbus 0.1
• Cincinnati 0.3
• Dayton - 0.8
• Toledo - 7.2
• Youngstown -5.1

33
National Economic Outlook

• More bad housing news
• National Association of Home Builders (NAHB)
  housing market index, which gauges builders'
  perceptions of conditions and expectations for
  home sales the next six months, came in at 19 in
  November, matching a revised reading for October.
• The number for both months was at the lowest
  level since the index began in January 1985
• The seasonally adjusted index has been below 50
  since May 2006 (index readings higher than 50
  indicate positive sentiment), and had declined
  for eight straight months this year before
  remaining unchanged in November.

34
National Economic Outlook

• More bad housing news - Existing home sales
  continue to fall
• Oct-07 annualized sales of total existing homes
  were 4.97 million units, the lowest
  seasonally-adjusted annualized sales figure since
  August 1998
• Eighth straight month that existing home sales
  have declined
• Existing home sales have recorded a
  year-over-year decline in every month since
  February 2006
• Sales of existing homes are down 20.7 percent
  from the 6.27 million in October 2006.
• Regional patterns in existing home sales
• West region fell 33.1 from October of last year
• Midwest region fell 16.9 from October of last
  year
• Northeast region fell by 12.6
• South region fell by 19.4 from October of last
  year

35
National Economic Outlook

• Projected housing starts in 2007-2008
• Starts were 2.07 million in 2005 and 1.81 million
  in 2006
• Global Insight forecast 1.35 million units in
  2007, and 1.02 million units in 2008
• Moodys economy.com forecast 1.35 million units
  in 2007, 0.99 million units in 2008

36
National Economic Outlook

• Final caution on housing
• Many adjustable rate mortgages (ARMS) are
  resetting or will reset soon
• Many subprime ARMS will see their first resets in
  2008
• Higher interest rates for borrowers who are just
  managing to pay their mortgages now may drive
  them to default
• It is to everyones interest to avoid
  foreclosure, but lenders have been slow to
  renegotiate mortgage terms

37
National Economic Outlook

• Bad news in housing spills over into the credit
  markets
• Banks and other financial companies holding large
  amounts of mortgage-backed securities loaded with
  subprime mortgages have taken big losses
• Merrill Lynch lost 8.4 billion
• Citigroup lost 5.9 billion and may lose another
  11 billion Citigroup controls
  structured-investment vehicles (SIVs) with 80
  billion in assets, much of it in mortgage-backed
  securities
• Bank of America lost at least 3 billion

38
National Economic Outlook

• Credit markets in turmoil
• Commercial paper market almost ground to a halt
  in August, and is still very weak
• Tightening of bank loan standards goes well
  beyond mortgage loans
• Corporate default rates are actually at historic
  lows, but banks are still tightening their
  lending standards on commercial and industrial
  loans
• Credit still generally very tight, banks
  unwilling to make loans and get caught short on
  paying their own debts

39
National Economic Outlook

• What is the impact of the housing bust?
• More foreclosures
• Lower consumer spending
• Estimates of how housing wealth affects consumer
  spending are imprecise
• Approximately 20 trillion of household wealth
  held in housing, so if housing prices drop by
  10, wealth would decrease by 2 trillion
• Assuming a marginal propensity to consume out of
  wealth of 5 cents per dollar, the level of
  consumer spending would drop by 100 billion, but
  there are studies that say that the MPC is higher
  than 0.05, so consumer spending could drop more
• But over what period would the 2 trillion drop
  in wealth and 100 billion or more drop in
  spending occur? Several quarters? Several years?

40
National Economic Outlook

• Consumers have run into headwinds
• 3-plus/gallon gasoline prices
• negative wealth effects of the housing downturn
• Gasoline hurting disposable income
• Gasoline prices through the first 8 months of
  2007 were close to what they were in 2006, but
  they have shot up beginning in September

41
National Economic Outlook
42
National Economic Outlook

• Gasoline hurting disposable income
• U.S. will consume about 35.5 billion gallons of
  motor gasoline in 2007q4 (mostly household use)
• An average price increase of 0.75 per gallon
  from a year ago means that about 27 billion more
  will be spent on gasoline than last year
• This is 0.25 of disposable income not available
  for spending on other items

43
National Economic Outlook

• Crude oil prices and economic impact
• So far the spike in crude oil prices has not
  resulted in equal increases in gasoline prices
• However, if crude oil continue to trade at
  95/bbl to 100/bbl, analysts expect gasoline
  prices to rise to 4/gal
• This will reduce consumer spending even further
• Four quarters of 4/gal gasoline would reduce
  consumer spending by about 1.4 of disposable
  income

44
National Economic Outlook

• Real GDP growth forecasts
• Governors Council FY 2009
• 3.1 growth - used for Ohio budget forecast
• 2.4 growth latest estimate
• Global Insight FY 2009 2.2
• ISI Group second half of CY 2007 1.5
• Implies growth of only 1.9 for all CY 2007
• Economy.Com CY 2008 2.3
• All forecasters calling for slower growth in
  2007q4 through 2008q3

45
National Economic Outlook

• Whither employment growth?
• Average monthly growth Jun-Sep was only 88,000
  jobs, but October growth was 166,000 jobs
  (preliminary)
• Average monthly growth 2004-2006 was 189,000
• Many revisions to the data
• Jun-2007 69,000 (revised downward from
  126,000)
• Jul-2007 93,000 (revised downward from 92,000
  to 68,000, then revised back upward)
• Aug-2007 93,000 (revised upward from -4,000)

46
National Economic Outlook

• Recession probabilities going up
• Moodys Economy.com puts risk at about 50 in
  next 6-12 months
• Up very sharply, from only 12 this Summer
• Global Insight puts risk at about 35 in next 12
  months

47
Housing Bust Impact on Ohio School Finance

• Overview
• What Is Expected for Residential Real Property in
  2008
• Will values be flat or decline in some places?
• What are the Implications of Flat or Declining
  Values?
• Impact on inside millage revenue
• Impact on 20-mill floor districts
• Impact on charge-off values and state and local
  shares of SF-3 funding
• Other impacts

48
Housing Bust Impact on Ohio School Finance

• Forecasts for Residential Real Property in 2008
• 23 counties were reappraised or updated in 2007
  (no really large counties were in that group)
• 41 counties are being reappraised or updated in
  2008 includes Franklin, Hamilton, Montgomery,
  Summit
• ODT has complete sales ratio data for 2005 and
  2006 transactions, and partial data for 2007
  transactions

49
Housing Bust Impact on Ohio School Finance

• Forecasts for Residential Real Property in 2008
• Importance of Residential Real Property (RRP)
• RRP was 65.5 of total taxable property in tax
  year 2006 this percentage will increase as the
  general tangible personal property tax is phased
  out (by 2009 TPP is untaxed except for some
  telephone property)
• RRP was 74.0 of total real property taxable
  value for tax year 2006
• History, 1994-2006
• Annual increases in residential real property
  value anywhere from 3.4 to 9.8 (includes all
  value, including new construction)
• Grouping data into 3-year blocks that include
  each reappraisal/update group of counties yields
  annual increases of 6.5 to 7.6

50
Housing Bust Impact on Ohio School Finance

• Forecasts for Residential Real Property in 2008
• Sales Price Data from ODT
• 2006-2 average sales price declined 0.1 from
  2005-2
• 2007-1 average sales price data increased 2.0
  from 2006-1
• Results differ by county

51
Housing Bust Impact on Ohio School Finance
52
Housing Bust Impact on Ohio School Finance

• Forecasts for Residential Real Property in 2008
• Preliminary Analysis from ODT
• For the 41 reappraisal or update counties in
  2008, using complete sales data for 2005 and
  2006, and limited sales data for 2007, overall
  taxable values (before 35 ratio applied) are
  approximately 90 of sales prices
• This implies that the increase in values that ODT
  is likely to order in general will be quite low,
  since ODT targets a (taxable value/price) ratio
  in the range of 92-94, although there will be
  some variation from county to county

53
Housing Bust Impact on Ohio School Finance
54
Housing Bust Impact on Ohio School Finance

• Forecasts for Residential Real Property in 2008
• Preliminary Analysis from ODT
• Consequently, in most of the 41 counties, ODT is
  likely to order percentage valuation increases
  ranging from zero up to the upper single digits
• County valuation changes may be zero or a small
  positive number, but county auditors might still
  order decreases in some areas/school districts

55
Housing Bust Impact on Ohio School Finance

• Implications of Small or Zero Increases in
  Residential Property Values
• Little or no growth in revenue from inside
  millage (or actual declines)
• For tax year 2006, general fund inside millage
  was 16 of Class I effective millage, on average
• Emergency levy tax rates will remain the same or
  drop only slightly (or increase)
• For tax year 2006, emergency mills were 8 of
  Class I effective millage, on average
• Looking at only those districts with emergency
  levies, the average was 21

56
Housing Bust Impact on Ohio School Finance

• Implications of Small or Zero Increases in
  Residential Property Values
• Homeowner resistance to additional levies likely
  to increase
• The fact that emergency and bond levy rates will
  not decline or decline only slightly exacerbates
  this
• Some school districts could have actual declines
  in value, which would take them off the 20-mill
  floor
• Likely to cause taxpayer complaints about
  unvoted tax rate increases

57
Housing Bust Impact on Ohio School Finance

• Implications of Small or Zero Increases in
  Residential Property Values
• The state is also at risk from low valuation
  growth
• Very low growth in the chargeoff will mean that
  the state will have to pay almost all of the
  increase in the value-dependent components of
  SF-3 aid

58
Ohio Economic Outlook

• Ohios economy is struggling to turn around.
• Total employment has trended lower since the
  beginning of last year (2006) see following
  graph
• Ohios unemployment rate is more than a
  percentage point above the national average
• Ohio 5.9 in Oct-07
• U.S. 4.7 in Oct-07

59
Ohio Economic Outlook Recent Employment Trends
60
Ohio Economic Outlook

• Akron and Columbus continue to be the
  best-performing Ohio MSAs in job growth, whereas
  Youngstown and Dayton are the lowest-performing

61
Ohio Economic Outlook Employment by MSA
62
Ohio Economic Outlook

• The worst-performing industry sectors in Ohio are
  manufacturing and financial services.
• The manufacturing sector has lost 12,600 jobs
  (declining 1.6) over the last year because of
  the struggles of the domestic automakers.
• The financial services sector has been hurt by
  the mortgage crisis, and is losing jobs at an
  accelerating pace.

63
Ohio Economic Outlook

• The growing sectors education and health
  services, professional and business services
  are not growing quite fast enough to offset the
  losses in manufacturing and financial services
• Total jobs are down slightly when measured on a
  Sep-06 to Sep-07 or Oct-06 to Oct-07 basis

64
Ohio Economic Outlook Employment by Sector
65
Ohio Manufacturing Continues to Struggle
Average hourly earnings
Employment
Manufacturing, change year ago, 3 mo. MA
66
Ohio Economic Outlook

• Auto manufacturing will continue to weigh on
  statewide growth.
• Ford plans to close Cleveland Casting Plant in
  2009 and idle Cleveland Engine Plant 1 for 12
  months or longer
• Ford plans to close Maumee stamping plant and
  Batavia transmission plant in 2008
• In addition, auto parts manufacturer Delphi will
  close or sell all of its OH plants
• Even with much of the restructuring over, the
  risks remain weighted to the downside

67
Ohio Economic Outlook
Forecast from Economy.Com
68
Ohio Economic Outlook Economy.Com

• Ohio consumer spending is likely to remain weak.
• Weakness in its key manufacturing industry
• Slow population growth
• An aging population
• High residential foreclosures

69
Relatively High Share of Foreclosures Undermines
Consumer Spending in Ohio
Foreclosure rate, of mortgage amountsSource
CreditForecast.com
70
Economic Outlook - Conclusion

• National growth is likely to be somewhat slower
  than it has been, and recession is a distinct
  possibility
• Ohio is expected to continue to underperform the
  nation
• It is unrealistic to assume that natural revenue
  growth from a growing economy will offset the
  continuing impacts of the tax reform cuts, at
  least through FY 2010

71
Ohios Budget

• Balanced budget requirement spending must equal
  revenues
• Simplest way to begin to understand Ohios
  General Revenue Fund budget
• pie charts on spending and revenues

72
GRF Spending Shares, FY 2007
73
GRF Revenue Shares, FY 2007
74
New State Budget (HB 119)

• Guiding philosophy Live Within Our Means and
  Invest in What Matters
• No tax or fee increases
• Continues phase-in of previous budgets tax
  reforms
• 25,000 homestead exemption
• Property tax cut for 1 in 4 Ohio homeowners

75
New State Budget (HB 119)

• GRF tax revenue growth severely constrained
• FY 07 tax revenue growth was negative - 0.5
• Budget forecast 1.0 in FY08 and - 0.5 in FY09
• Forecasted GRF tax revenues in FY09 are roughly
  same as FY06 essentially no growth for three
  years

76
State GRF Tax Revenues Declined in FY 2007
(Amounts in Millions of Dollars)
77
Almost No Growth in GRF Tax Revenues
78
New State Budget (HB 119)

• Key reason for slow growth phased-in tax reforms
  of previous budget
• 21 cut in income tax
• repeal of corporate franchise tax
• new CAT goes to pay for repeal of local tangible
  property tax on business

79
Why Were Long-Term Business Tax Cuts Needed?

• Ohios weak economy and outdated tax code
• Tangible property tax disincentive to investment
  
• Corporate franchise tax high rate, narrow base
  (exact reverse of sound tax policy)

80
Five-Year Business Tax Reduction

• Significant tax cuts for both businesses and
  individuals shift taxes from investment
  encourage job creation
• Lower tax rates, broaden the base, resist
  base-narrowing exceptions to keep focus on lower
  rates
• Create a tax structure that, once fully phased
  in, grows as the economy grows

81
Weak Economic Growth in Ohio Prior to Reform
Gross State Product
82
Weak Economic Growth in Ohio Prior to Reform
Per-Capita Income
83
Weak Economic Growth in Ohio Prior to Reform
Employment
84
Personal Income Tax

• 21 cut for all brackets
• Phased in over 5 years at 4.2 per year,
  beginning in 2005
• Low-income credit for taxpayers with Ohio Taxable
  Income (OTI) of 10,000 or less

85
Personal Income Tax
86
What do income tax changes mean?

• All 5.3 million taxpayers receive income tax cut
• Annual savings reach 2.3 billion by FY 2010
• Average family of four income tax and sales tax
  burden reduced annually by 555
• 550,000 low-income Ohioans will have income tax
  burden eliminated
• 300,000 flow-through businesses (S-corporations,
  LLCs, partnerships, etc.) will see tax rates cut

87
Tangible Personal Property Tax (TPP)

• All components of the tax inventory, machinery
  equipment, and furniture fixtures phased
  out over 4 years
• Telephone company property will be exempt by tax
  year 2011 (5 year phase-out)
• Phase-out does not apply to TPP owned or used by
  public utilities

88
Tangible Personal Property Tax (TPP)

• All new manufacturing machinery and equipment
  installed on or after January 1, 2005 is
  immediately exempt
• State is reimbursing schools and local
  governments for loss in TPP revenue
• For tax years 2006-2010, there is full
  reimbursement to schools and local governments
  relative to prior law
• Beginning in FY 2012, the GRF begins to get some
  CAT revenue as the 30 share for local
  governments is gradually phased out.
• School districts get 70 of CAT revenue forever
  (HB 119 amendment)

89
What do TPP changes mean?

• 60,000 Ohio businesses will no longer pay TPP tax
• Taxpayer savings reach 1.7 billion by tax year
  2011
• Ohio becomes one of only 7 states that do not tax
  general business tangible property (machinery,
  inventories, etc.)

90
Corporate Franchise Tax

• Tax eliminated over 5 years, except for limited
  class of corporations
• Financial institutions continue to pay on net
  worth
• Various holding companies, including bank holding
  companies, SL holding companies, etc. will
  continue to pay franchise tax
• Corporations owned by insurance companies
  continue to pay franchise tax

91
Corporate Franchise Tax

• Phase-out accomplished by multiplying tax by
  declining percentage each year (80, 60, etc.)
• As with income tax, some credits migrate to the
  new CAT
• Job retention credit
• Qualified research expenses credit
• Qualified RD loan payment credit
• Job creation credit (refundable)

92
What do corporate franchise changes mean?

• Taxpayer savings reach 1.6 billion by FY 2010
• Corporate profits have been so strong for the
  last two years that corporate tax receipts have
  remained at 1.05 - 1.08 billion, despite
  phase-down of 20 and 40
• This will not continue
• Ohio becomes one of only 4 states with no
  corporate income tax (others are Nevada,
  Washington, and Wyoming)

93
Adding It All Up Net Long-Term Tax Reductions

• Cumulative Tax Relief
• (FY 2006 to FY 2010 Phase-In) 10.6 Billion
• Annual Tax Relief (FY 2010) 3.9 Billion

94
3.9 Billion Annual Tax Relief fromLong-Term
Reforms
95
Overall Taxes Where Does Ohio Stand in the
Latest Figures?

• Total taxes per capita
• Rank among all states
• Changes over time

96
Ohio Overall Taxes Are Almost Exactly at the U.S.
Average
State and Local Taxes Per Capita, FY 2005
Ohio U.S. Average
97
Ohios Comparative State Local Tax Levels
Likely To Trend Lower

• Ranked 21st overall in FY 2004 (highest is 1st,
  lowest is 51st)
• Ranked 23rd in FY 2005 (latest figures)
• As long-term tax cuts are phased-in, Ohios
  comparative tax levels likely to fall further

98
Overall Impact of Tax Reform

• Is tax reform working?
• Overall, too soon to tell. No clear-cut
  improvement in Ohio economy yet. On the other
  hand, conditions might have been worse without
  reform.
• Governor Strickland has repeatedly endorsed tax
  reform and embraced it in his budget, with the
  idea that it needs time to work.

99
New Tax Cut Enacted in 2007 Homestead Property
Tax Relief

• Largest expansion of homestead property tax
  relief in states history (1 in 4 homeowners)
• No revenue loss to schools or localities
• Funded by state interest savings
  (securitization of tobacco settlement)

100
New Tax Cut Enacted in 2007 Homestead Property
Tax Relief

• Assists those most affected by property tax
  burdens
• Exempts 25,000 of homes market value from all
  property taxes for all senior citizens disabled
• Average tax cut about 400 (24 of tax bill)

101
Tax Relief Had Been Shrinking

• of Senior Homeowners Qualifying

1980 2004
102
Tax Relief Will Greatly Expand

• Number of Senior Homeowners Receiving Tax Relief

Currently Approved Budget
103
Summing Up

• CAT has fortunately outperformed expectations,
  but it has had to do so in order to make the
  required TPP reimbursements
• State budget exceedingly tight due to slow
  economic growth and phased-in tax cuts from
  previous budget
• Nevertheless, H.B. 119 continues the
  implementation of all the tax reductions from the
  previous budget
• New property tax relief for senior citizens
  provided without further constraining state
  budget