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Cash-hungry states eye business tax
2007-02-17
A handful of states are taking a new look at an old, often-criticized business tax to thwart what they say are too many companies avoiding their fair share of taxes. The states also hope to increase revenue to improve schools, create jobs, provide health care for the poor and pay for other essentials of government spending. Kentucky, Texas and Ohio are the latest to adopt versions of the tax on companies' sales or profits, levied at a very low rate meant to apply to as broad a swath of corporate earnings as possible. Michigan Gov. Jennifer Granholm has also proposed a version as part of a tax system overhaul. "There were far too many companies doing profitable business here but not paying their fair share of taxes," said Brad Cowgill, Kentucky state budget director. The states' economic situations drove each to look more closely at the decline in corporate tax revenue brought on by the post-2000 recession. State tax directors believed the drops in corporate taxes had been out of proportion in poor economic times. Texas was under a court order to fix the way it pays for schools. Ohio, with the country's seventh-largest economy, is facing low revenues as it tries to keep Medicaid spending under control and deal with its own school problems. Kentucky and Michigan are both dealing with weak economies, and Michigan also needs another source of revenue as it phases out a universally despised single business tax. However, some Kentucky lawmakers are pushing to repeal their flat tax, and states including Indiana dropped similar taxes out of concern they hurt businesses with low profits. "It seemed to be an excessive burden on those companies that were not making money," said Stephanie McFarland, a spokeswoman for the Indiana Department of Revenue. The tax is appealing to states because of the way businesses tend to outmaneuver more traditional corporate taxes -- "tax planning," as economists politely dub the practice. The result: Ohio's old 8.5 percent corporate rate was known as a Swiss cheese tax because of numerous loopholes -- such as tax credits -- that decreased what it brought in. "Between the tax planning and all the credits and everything the states have done to stimulate economic development, even though profits are running high, the effective corporate rate is declining," said Harley Duncan, executive director of the National Federation of Tax Administrators. That's what happened in Texas, where lawmakers were alarmed that while state taxes on the insurance industry and on oil and gas production were growing at a healthy rate, the growth on the regular business tax was just 52 percent. "You had a significant amount of your business activity in the state that was going untaxed by a dedicated business tax," said Karey Barton, an Austin, Texas, tax consultant who helped lead the state's 2006 Tax Reform Commission. The biggest knock on the tax is its potential for taxing a single product multiple times. The tax can cascade across sales of gasoline, for example, when the fuel is sold and resold from suppliers to distributors to customers at the pump, who then could face higher prices to cover the extra costs. Situations like that make some economists cringe at the idea of states adopting such taxes. "No sensible case can be made for imposing gross receipts taxes in the modern economic environment," said John Mikesell, an Indiana University public finance professor. A national business group that opposes such taxes says that while the corporate income tax may be declining as a portion of state revenue, total taxes paid by businesses continue to grow. Companies paid a combined $550 billion last year in corporate, sales, property and other taxes, up 11 percent from the year before, according to the Washington, D.C.-based Council on State Taxation. "Corporate income tax is not the main business tax and never has been," said Joseph Crosby, the group's legislative director. "Business taxes are going up faster than individual taxes and no amount of planning is going to change that." The flat tax on a business' gross receipts has been in and out of vogue for decades. West Virginia had a version it finally phased out in the 1980s, while Indiana dumped its equivalent five years ago. The state of Washington's business and operations tax is considered the granddaddy of such taxes, while Delaware has had a version of gross receipts taxes for about a century. Like Ohio, Delaware has a very low rate paid by almost all businesses -- the equivalent of about 31 cents for every $100 in groceries, for example. "A hundred dollars worth of food and it's only 31 cents -- personally, I don't think that's outrageous," said Patrick Carter, director of the state's Revenue Division. In Ohio, the tax was part of an update of the state's Depression-era tax code. That update included elimination of a tax on equipment and inventory that raised substantial amounts of money for schools and cities, and a 21 percent reduction in the state's personal income tax. A year and a half later, the state is still struggling to overcome an anemic economy. The unemployment rate continues to hover almost a full percentage point above the national average, and job growth last year was 0.4 percent. The rate of Ohio's new tax is just 0.26 percent, and lawmakers are determined to keep that as low and as free of corporate giveaways as possible. Holding the line on the rate is key to making such taxes work, say economists who believe the taxes can be positive. "If the rates stay low, I don't see them as detrimental," said Bill Fox, an economist at the University of Tennessee at Knoxville. For now, the state is helping local governments make up the revenue lost from the equipment taxes. Schools say they will face serious shortfalls once that aid ends. State leaders predict that an economy improved by the tax changes will mean more money later for governments, including schools. But Zach Schiller, a public policy consultant at Policy Matters Ohio, a liberal think tank in Cleveland and a critic of some of the tax changes, said the new tax won't come close to replacing the equipment tax money for schools. "If we're getting much of a positive effect from this, it sure isn't very evident," Schiller said. "Things could be worse, I suppose." ___ On the Net: National Federation of Tax Administrators: http://www.taxadmin.org/ Texas Tax Reform Commission: http://www.governor.state.tx.us/priorities/ta x_reform/TTRC_report
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