Study Finds Ohio Is Tax Friendly

Wednesday, April 27, 2011

COLUMBUS, Ohio -- Ohio ranks third in the nation for friendliest tax environment, a new Ernst & Young report has found. Coming in ahead of Ohio are Maine and Oregon.

Ohio has an effective tax rate on new investment of 4.4%, compared with 3% for Maine and 3.8% for Oregon. Rounding out the top five states are Wisconsin (4.5%) and Illinois (4.6%). The highest rates on new investment are found in New Mexico (16.6%), the District of Columbia (16.6%), Rhode Island (11.5%), Kansas (11.2%) and Louisiana (11.1%).

"Tax environment is a critical factor in site selection for new capital investments," said Thomas M. Zaino, former Ohio tax commissioner and now member in charge of the Columbus office of the McDonald Hopkins LLC law firm. "Ohio has phased in tax reforms over the last five years to become one of the most tax-friendly states, despite a national recession that caused several other states to raise taxes."

Ohio's goal, he said, is to provide a tax environment that allows businesses achieve maximum return on investment on a capital investment decision to invest in the state.

Tax environment is a very important factor CEOs and entrepreneurs consider when determining a location for capital investment. The more investment capital that actually makes it to product development and commercialization, the greater the probability of success, and the faster the return on investment. With that in mind, Ohio lawmakers dramatically revamped the state's tax structure to create the lowest tax rates in the Midwest and an extremely profit-friendly business climate for companies that locate in the state.

The most notable changes to Ohio's tax system include the elimination of two particularly burdensome business taxes -- the corporation franchise tax and the tangible personal property tax. These taxes were replaced by a new, 0.26% commercial activity tax, which applies only to in-state sales. "If a business were to ship 100% of its sales out of Ohio, it would pay zero CAT," Zaino said. "This increases Ohio's appeal to companies that export goods out of the state or country."

"Because the CAT applies to receipts rather than profits, a more profitable business does not incur higher taxes," said Howard Fleeter, a partner in the Columbus-based economic analysis and public policy research firm of Driscoll & Fleeter. Companies in states that tax profits incur a "success penalty" because efficiency and productivity gains trigger higher taxes, he added.

"Another important change is a 16.8% reduction in the personal income tax, which is scheduled to grow into a 21% reduction for 2011," Zaino said. This benefits individual wage earners, unincorporated businesses and entities such as S corporations and limited liability corporations, which are increasingly popular business structures for growing businesses.

In addition, Ohio's unique state tax structure encourages small business profitability and wealth creation. For example:

• Companies with sales between $150,000 and $1 million to Ohio customers pay only a $150 fee, while companies with the same income in surrounding states pay between $2,650 and $8,048 in taxes.
• A company that grows to achieve $5 million in sales, half to clients outside the state, would pay $4,050 in Ohio taxes. In other Midwest states, the same company would pay between $13,425 and $28,676. Ohio businesses also pay no tax on capital investments, which frees up funds for investment in plants, equipment, inventory and personnel. And, because only business activity that takes place in Ohio is taxed by the state, entrepreneurs have an incentive to serve customers across the country and around the world, Zaino said.

Published by The Business Journal, Youngstown, Ohio