Misleading Ad Campaign Touts Absence Of State Corporate Income Tax, Ignores More Harmful Business Levy
Massive billboards in New York City, Los Angeles, Boston, Seattle, Chicago, and San Francisco, along with nationally broadcasted television commercials, are beckoning CEOs, entrepreneurs, and investors to do business in Ohio. The campaign, which is run by the Columbus-based non-profit JobsOhio, boasts that “Ohio has a 0% state tax on corporate income, R&D investments, and goods & products sold out of state.” This ad campaign, however, is based on a lie. At least, it’s not grounded in the full truth.
Ohio may not assess a traditional corporate income tax on businesses, but the state instead imposes a tax on business income that economists across the ideological spectrum consider to be more harmful than a traditional corporate tax. Instead of a corporate income tax, the state of Ohio assesses what is referred to as the Commercial Activity Tax (CAT) on business.
Unlike a traditional corporate income tax, which applies to company profits, the CAT applies to business gross receipts. As such, an Ohio employer who fails to turn a profit and even loses money still faces a CAT liability.
“Gross receipts taxes impact firms with low profit margins and high production volumes, as the tax does not account for a business’ costs of production, as a corporate income tax would,” writes Janelle Cammenga, a policy analyst at the Tax Foundation. “These taxes can be particularly severe for start-ups and entrepreneurs, who typically post losses in early years while still owing gross receipts payments.”
Ohio and six other states — Texas, Washington, Oregon, Tennessee, Nevada, and Delaware — impose a state gross receipts tax. Oregon is the most recent state to enact a gross receipts tax, doing so in 2019. The rates and structures of these gross receipts taxes vary by state.
“Washington’s Business and Occupation Tax has the highest top rate of 3.3%, followed by Delaware’s Manufacturers’ and Merchants’ License Tax with a top rate of 1.9914%,” Cammenga explains. “Ohio and Oregon have flat rates of 0.26% and 0.57%, respectively.”
The JobsOhio ad campaign could lead many to believe that Ohio does not impose any tax on business income. Yet there are only two states in the U.S., Wyoming and South Dakota, that can tout such an advantage. A third state, North Carolina, may soon be able to join South Dakota and Wyoming in boasting the lack of either a corporate income or gross receipts tax.
North Carolina’s corporate income tax, at 2.5%, is the lowest corporate tax rate in the U.S. among the 41 states that impose the levy. The new budget approved by the North Carolina Senate on June 24 phases out the corporate income tax entirely by 2028.
North Carolina is already the only state in the southeastern U.S. that would still have a combined federal and state corporate income tax rate below 30%, even when factoring in the federal corporate tax increase proposed by President Joe Biden. The budget approved by the North Carolina Senate would increase this advantage. Proponents of corporate income tax hikes portray them as a way to make CEOs and investors pay more, but the North Carolina Senate budget recognizes that the burden of corporate income taxes is ultimately borne by ordinary people.
“A ‘corporation’ is simply a bundle of contracts among individuals — investors, lenders, executives, workers, vendors, and consumers,” writes John Hood, president of the John William Pope Foundation. “Only people pay taxes. Legal abstractions can’t.”
“North Carolina has been steadily reducing its corporate tax rate for nearly a decade now,” Hood adds. “Phasing it out entirely over the next few years will generate economic benefits far greater than the apparent fiscal cost. We’ll attract more investment, creating more jobs at higher wages. And, yes, consumers will pay lower prices.”
Ohio lawmakers will need to repeal or phaseout their CAT if they want the JobsOhio ad campaign to no longer be so misleading. While Ohio lawmakers cannot honestly market their state as having no tax on business income, there is much for Buckeye State officials to tout, namely the recent passage of the largest personal income tax cut in state history.
As part of the new biennial state budget approved on June 29, Ohio legislators cut the state income tax by $1.6 billion, which represents Ohio’s largest income tax cut ever. The new budget repeals the top two income tax brackets, resulting in a new top rate of 3.99%. That happens to be the same rate that North Carolina’s personal income tax would come down to under the Senate budget, which cuts the state’s flat personal income tax rate from 5.25% to 3.99%.
Like the North Carolina Senate’s budget, the new Ohio budget increases the standard deduction, also referred to as “the zero tax bracket.” The new Ohio budget raises the zero tax bracket to $25,000, up from $22,600.
This new budget builds upon the past two Ohio budgets, which have featured the elimination of multiple tax brackets. With this progress, legislators in Columbus are bringing Ohio gradually closer to a flat personal income tax. That progress is something that JobsOhio might consider touting. Unlike their campaign’s current claim, it’s an accolade that’s completely truthful and requires no caveats.