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Impact of Ohio's Tax Reform

Tax and business professionals recognize the advantages of Ohio's tax reform.

Two years into the implementation phase of tax reform, Tom Zaino, Member in Charge of the Columbus office of McDonald Hopkins and former Tax Commissioner of the State of Ohio, asked two corporate tax directors and a small business owner to provide their thoughts and assess progress. The respondents are: Tom Kemen, Associate Director, Economic Development & Tangible Taxes, Tax Division, The Procter & Gamble Company; Vince Magnacca, Manager, State & Local Tax, Goodyear Tire & Rubber Company; and Michael Bass, President & CEO, Hy-Ko Products Company.

Zaino: One key goal of the tax reform was to provide Ohio-based companies an advantage when competing in the global economy. What has the 2005 Ohio tax reform meant for your business?

Kemen:The new tax act phased out two tax structures that severely penalized in-state businesses... the corporate income/franchise tax and the business personal property tax. Both of these tax structures placed a larger tax burden on in-state businesses that had already made significant commitments to Ohio through capital investment and job creation within Ohio. There should be no question the tax reform will achieve its purposeful goal, which is to enhance Ohio's ability to attract new business and encourage existing businesses to expand.

Our company continues to invest capital in our existing Ohio locations. P&G's manufacturing plant in Lima, OH is a good example. This plant competes internally versus several other North American sites to be the low cost provider of P&G's liquid detergent business. Within the last three years, P&G has invested over $150 million in capital at the Lima plant to expand its production capacity, provide additional warehouse capacity, and lower operating costs. The expansion is expected to create about 70 additional jobs.

Bass: As a manufacturing and distribution company based in Ohio for over 50 years, the elimination of the personal property tax on equipment and inventory provides a distinct competitive advantage by lowering our cost of maintaining our core operations in Ohio. In addition, the significant reduction of income taxes with the replacement of the CAT tax also is a benefit, because a significant amount of our sales occurs outside of Ohio. Realizing these savings gives us additional capital to redeploy and reinvest into our equipment and new inventories. These are exciting opportunities for us to expand our core business.

Magnacca:The phasing out/elimination of the personal property tax will spur economic investment of both inventory/distribution center type businesses and increase manufacturing and related jobs in Ohio. Eventual elimination of Ohio Corporate Income/Franchise taxes also provides similar incentive for businesses to locate here or stay here. Our recent announcement to build a new Akron Corporate Headquarter Campus and, thus, stay in Akron was based in part on the 2005 reform. For Goodyear, our total Ohio tax liability has stayed about the same after the 2005 Ohio tax reform, but we now believe that our tax payments will be more stable in the future. Stability and predictability are important to Goodyear, and the Ohio reforms helped solidify the tax burden.

Zaino: How would you assess the impact of the reforms on new capital investment in Ohio? Do you think the new tax structure encourages a closer look at Ohio as a viable location option?

Kemen: Ohio's tax structure would certainly encourage a closer look because it no longer penalizes businesses with a large in-state physical presence.

Bass: Our company is building sales in certain product lines where we act as a distributor of products made in Asia. With the tax reforms that are now operating in Ohio, we are building strategic alliances with foreign entities to set up manufacturing closer to our Ohio operations. This should diminish our costs by cutting down the amount of logistical time to fill our supply chain, thereby reducing our levels of inventory, increasing turns and improving our ROI.

Magnacca: Ohio-based companies should benefit from Ohio tax reform since, for the most part, Ohio investment and Ohio taxable income are now made or earned "tax-free" for Ohio purposes. Only Ohio sales/gross receipts are taxable under the CAT tax.

Zaino: The new tax structure is expected to help encourage increased exports from Ohio-based companies. If you were CEO of a company with non-U.S. customers, does the new tax structure offer you an advantage to profitably increase your business?

Bass: During the last three years, our company has begun exporting to Mexico. With the elimination of the personal property tax and restructuring of the corporate income taxes, we can manufacture in Ohio and move product down to Mexico quicker and with no duties (NAFTA). With modern logistics, getting product from Ohio to anywhere in North America is quite easy and allows us to keep our executives and management teams centrally located, while being able to support sales activities virtually anywhere. The costs of doing business in Ohio are lower, which discourages us from looking elsewhere because of tax overhead decision-making.

Magnacca: Goodyear is a major exporter, of course, and with our thousands of non-U.S. customers, these reforms are helping to increase our business.

Zaino: In addition to helping to grow Ohio's economy, among the guiding principles of the tax reform initiative were fairness, equity and simplicity. How would you assess the results of tax reform from those three perspectives?

Kemen: Ohio's tax reform has clearly helped most in-state businesses, as it has shifted the tax burden to companies that earn income from their sales within Ohio but may not have a large physical presence in the state. Clearly, the tax reform has drastically reduced our company's Ohio tax compliance efforts. We spent almost four months of a full-time tax manager's time in the tax compliance effort to complete our Ohio multi-county property tax return and corporate franchise tax return. The new CAT requires minimal effort each month to extract the data and submit our return, and the work is now being done by administrative resources versus tax technical experts.

Bass: Now that the state is closing in on the four- or five-year phase-in cycle, manufacturers are seeing the "daylight" to the administrative burdens which we're all worried about. We are trusting our legislators to maintain the simplicity of CAT and not add additionals just when the "eureka" is achieved.

Magnacca: There can be no doubt that the Ohio tax reforms have leveled the playing field on fairness, equity and simplicity. Everyone (in particular former companies outside of Ohio that may be paying little or no Ohio tax) should be paying the CAT. As it is currently set up, there is no hiding from it, and with the low tax rate; the CAT alone should not be a hindrance for companies to do business in or with Ohio companies. As long as the rate stays low, equity and fairness will be possible.

Zaino: Some policymakers and business people are advocating a "wait and see" attitude before proposing any more changes to the state tax code. How important is it that the assumptions underpinning the new tax structure are playing out as valid two years into implementation of the new tax structure? Is tax reform working, in your view?

Kemen: Businesses require a stable tax environment. Therefore, it is very critical that we adopt a "wait and see" mentality before considering any further changes. Revenues raised by the CAT tax since its inception have met or exceeded initial projections, which indicates the assumptions made at the time of the tax reform were valid. The fact that revenues have exceeded initial estimates may be an indication that the tax reform is, in fact, accomplishing its objective of increasing Ohio's business opportunities. A good gauge of the tax reform's success will be measured by the ability to sustain a relatively low CAT tax rate over an extended period.

Bass: As a business manager in the United States, everyone expects us to be credible, honorable and trustworthy in our agreements and projections. Financial institutions, governmental agencies and customers are all pressuring us to adhere to their strict policies and regulations. From our perspective, all of these constrictions are roadblocks to doing business and managing costs downward. In the tax and fiscal area of a company's budgetary process, we've been duped too often at the federal, state and local levels where legislation is passed and never given enough operational cycle to stabilize a businessman's planning process. We've become suspicious of how legislators change the rules of the game too quickly and too often. Instead of the "wait and see" attitude, we need a "prove it to me" mindset before passing judgment. My hope is that Ohio implemented its CAT tax reform for all of the right reasons, and it will let the process function for a considerable length of time to show everyone how effective it truly is in helping Ohio compete.