In 2005, Ohio's former Governor Bob Taft signed sweeping tax legislation that phased out the state's Corporate Franchise Tax, the state's corporate income tax, and the Tangible Personal Property Tax, a local tax on things like machinery and equipment, and replaced all these important revenue generators with the Commercial Activity Tax (CAT). Four years later, the CAT is one of the reasons why Ohio is facing an enormous budget deficit and the tax itself has come to resemble swiss cheese.
Proponents of the CAT, a gross receipts tax, said that it would make Ohio's business climate less burdensome and remove pesky exemptions and deductions that benefit select Ohio companies with access to legislators and lobbyists. But a report released this week by Policy Matters Ohio explains that the CAT is one reason why the state faces an enormous budget shortfall and that the low-rate, broad-based tax that its advocates promised has not come to fruition. Instead, the CAT has become a victim of lawmakers eager to insert special provisions and deductions, just as happened with the taxes that it replaced. The paper offers specific recommendations for how Ohio's business taxes could be improved. Let Ohio's experience be a lesson to other states interested in business tax reform.