November 14, 2005

This CAT Should Be Killed (Ohio Commercial Activities Tax)

Filed under: Economy,Taxes & Government — Tom @ 12:01 am

The State of Ohio enacted a Commerical Activities Tax (CAT) of 0.26% on gross annual revenues (NOT profits) above $150,000 that is set to take effect starting January 1 July 1, 2005. It is a brand-new category of tax in the state that is meant to make up for reductions in other business taxes.

The CAT’s bite is much more painful to businesses with high revenues and low profit margins, such as retailers (especially food chains) and distributors, than it is on high-margin and service businesses. As you might expect, the lobbying for exemptions has begun (link is from my Ohio Society of Certifited Co-Opted Public Accountants weekly e-mail):

Bill Would Exclude Food Sales From Commercial Activity Tax

A bipartisan bill with 49 co-sponsors is designed to exclude food sales from the commercial activity tax (CAT), and could threaten the viability of the low-rate, broad-based tax.

Rep. Michael Skindell, D-Lakewood, has introduced legislation (HB 399) that would exempt sales of take-out food, wholesale sales of food, items purchased by resellers of food for use in business or retail sales of packaging containing food from the CAT. Despite the breadth of support by House members, passage of the bill remains in question due to concerns by key House leaders.

Lawmakers have also tried to exempt all foreign-trade-zone activity from the CAT, which can maintain its low .26 percent rate only if the base remains very broad. The Ohio Society of CPAs supported the CAT with the caveat that credits and exemptions should be strictly limited.

The Ohio Society will continue to monitor the legislation and will fight to maintain the integrity of the CAT.

So The Ohio Society of Co-Opted Public Accountants’ concern is that the exemptions will gut the CAT (“integrity”?). I’ve got a better idea: Don’t just gut The CAT–Kill The CAT. Why? The state doesn’t need the money.

The lastest available report (Warning: PDF-go to near the bottom of Page 13) from the state’s Office of Budget and Management indicates that receipts are running $319 million, or 5.6%, ahead of last year, in just the first three months of the fiscal year. That projects to a nearly $1.3 billion increase over the entire year, and could likely be even more as Ohio’s economy, which has trailed the rest of the nation in the recovery process, continues to pick up belated steam.

That is enough money to justify killing The CAT, which as best I can tell may generate a bit more than $1 billion in its first year (the only info I could find was at this link, which states near the bottom of Page 2 that when “fully implemented,” The CAT will generate $1.61 billion in fiscal 2011). Not having The CAT hanging around will free businesses from an onerous tax and compliance burden, save the state all the auditors who would be needed to argue about whether sales took place inside or outside the state, keep consumer prices low, enable businesses to concentrate more on growing, and in the long run give members of The Ohio Society of Co-Opted CPAs more prosperous companies to work with.

This is a CAT killing even PETA won’t object to.

UPDATE: I corrected the effective date in the first sentence above. Taxpayers had until today to register for the tax. The fact that it doesn’t kick in until July means that there is more time to attempt to kill it, and more time for the states surplus situation to become clearer, and more embarrassing. The only downside is that if CAT is killed, a lot of $15-$20 registration fees will have to be refunded. Too bad, so sad.


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