Ohio Tax Reform - Success or Not?

In 2005, Ohio made significant changes in its tax law. It added a gross receipts tax called the Commercial Activity Tax (CAT) and phased out its corporate income tax and personal property tax; reduced the individual income and sales tax; and increased the cigarette excise tax. The CAT used a factor presence nexus standard and sourcing rules designed to tax companies with sales into Ohio and not those located in Ohio that make sales out-of-state.

With the 5 year anniversary of the changes approaching, I've seen a few stories telling of the success of the changes. For example, today's (April 5) Akron Beacon Journal had an article - "Tax reform brings kudos to Ohio - Analysis finds burden improves in last 5 years; changes are positive draw for business, leaders say" by Paula Schleis. It refers to a Federation of Tax Administrators (FTA) survey ranking Ohio as having the 16th lowest tax burden. Per the author, that ranking is 9 places better than in 2005.

Meanwhile, the Tax Foundation notes that the poor tax climate in Ohio drives businesses out of the state. In its blog post of January 7, 2010 - "Ohio's Poor Tax Climate at the Heart of the State's Economic and Fiscal Woes," the Tax Foundation suggests Ohio undertake tax reform. Ohio tax problems noted by the Tax Foundation include the use of a gross receipts tax and its inherent pyramiding problem and imposition even when a business has a loss for the year (for more on pyramiding, see my report here and some articles on gross receipts taxes here). Additional problems noted are Ohio's complex personal income tax and imposition of an income tax by most cities and school districts, as well as a sales tax that applies to many business purchases.

So, why the discrepancy in the views on Ohio's tax reform? Some of the difference may be due to the 5-year phase-in/phase-out of the changes where two types of businesses taxes applied. Another cause is varying perspectives on gross receipts taxes. Some say they are good in that they have a broad base (very broad) and thus, a low rate. Also, they are not subject to Public Law 86-272 or the physical presence nexus standard of Quill. This gives states more leeway in stating who is subject to the tax (within Due Process and Commerce Clause restraints) and the ability to "export" the tax. Of course, that would change if Congress enacts an update to PL 86-272 that calls for some degree of physical presence for any "business activity tax" which includes a gross receipts tax.

So, different perspectives on the nature of taxes, ways to measure tax burdens among the states, and the effect of transition rules for tax changes complicates the picture as to whether the Ohio tax reform has been a success. I think it is impressive that something was actually done rather than only talked about for decades with no changes made (as happens in many states including California which has already had two tax reform commissions in the 21st century with no changes enacted). (I don't think a gross receipts tax with its inherent pyramiding is an effective way to tax.) In addition, differences in the meaning of "successful tax reform" can lead to differences in opinion as to whether tax reform in Ohio has been successful.

What is your take on whether the Ohio tax reform effort enacted in 2005 has been a success or not?