When it comes to business taxes, maybe Ohio isn’t “one of the worst” after all
How does Ohio stack up against its peers when it comes to business taxes?
It’s a highly variable question, one that, like the tax law itself, is not easily answered. But if you ask the Tax Foundation, an independent nonprofit, the results aren’t great. Per the group’s 2018 “State Business Tax Climate Index,” Ohio ranked near the bottom—45 out of 50 states—with “one of the worst business tax climates in the country.”
That’s significantly lower than any of its peer states, which include Indiana (9) and Kentucky (33), but also Michigan (12), Texas (13) and Pennsylvania (26).
Those findings, however, should be taken with a grain of salt. Not all tax law in Ohio is bad, for small businesses at least, says Scott Grosser, founder of Scott Grosser PSC CPAs, based in Ft. Thomas, Kentucky. Grosser’s clients hail mostly from Ohio, Kentucky and Indiana, although his firm represents others in states like Texas, Michigan, Colorado and Tennessee.
“From a taxing standpoint, frankly, Ohio is a nice state to be in,” Grosser says
Others agree, including Crystal Faulkner, partner and Cincinnati market leader for MCM CPAs, and Mike Grim, partner and leader of the firm’s state and local tax services team. Faulkner, for example, sits on an advisory council for the Common Sense Initiative, and says over the last six years the group has worked to help make Ohio more business friendly.
“One thing CSI does and has done, since it was enacted, we’ve looked at 27,000 rules that stand in the way of business success—and we’ve revoked or rescinded 62 percent,” Faulkner says. “A rep from the Small Business Administration said, from his point of view, Ohio is absolutely the best state to do business in from a regulatory standpoint.”
1. For an S Corporation, or other flow-through entity, sole proprietorship, partnership or LLC, Ohio exempts the first $250,000 in business income earned.
This deduction is unique, Grosser says, and was the centerpiece of a major tax reform package proposed by Ohio Gov. John Kasich. A flat 3 percent tax rate applies to business income above the $250,000 mark.
“I don’t know of any other state that does this right off the top,” Grosser says. “So if you’re a small business owner in Ohio, your first $250,000 [earned] is basically free.”
For comparison, the Indiana rate is basically a flat 3.3 percent. Kentucky is 6 percent for income above $75,000.
2. Kentucky also has a business tangible property tax.
“That means businesses with inventory or equipment—like machinery, even computers or desks—have to pay a property tax every year,” Grosser says.
Such taxes, per the Tax Foundation, “violate sound tax policy,” while companies with larger quantities of inventory, like retailers and manufacturers, bear a higher cost compared to other firms.
Ohio, for its part, eliminated its tangible personal property tax after the 2008 tax year. It had “long been a source of irritation for business owners.”
“Every major study of Ohio’s tax system has criticized this tax for hurting the state’s ability to compete, particularly when it comes to manufacturing,” former Ohio Tax Commissioner Richard A. Levin says.
3. Ohio leaders—years ago—also did away with a corporate franchise tax.
In its place, they introduced a gross receipts tax, called the commercial activities tax, or CAT. Businesses with Ohio taxable gross receipts of $150,000 or more per calendar year must register for the CAT, but Grosser says it’s minimal. For gross receipts under $1 million, the CAT is $150 a year.
The Ohio Society of CPAs, a group that represents roughly 85,000 accounting professionals, says Ohio’s CAT “is one of the simplest business tax structures of any state.” That means a majority of businesses can comply with its filing requirements “without incurring added costs of a tax professional.”
But the Tax Foundation disapproves. Only four other states—Delaware, Nevada, Texas and Washington—levy a gross receipts tax like Ohio’s CAT, and “by their very design, gross receipts taxes lead to tax pyramiding (when an item is taxed at each strep of the production process), a lack of transparency, and economic inefficiency.” Other states, including Kentucky and Indiana, have, at some point, repealed their gross receipts tax laws, although, in 2017, states like Louisiana, Oklahoma, West Virginia and Oregon were considering adding them on. Gross receipts taxes, the Foundation says, lead to higher consumer prices, lower wages and fewer job opportunities.
4. Ohio also loses major points, the Foundation says, for its municipal income tax system, which “can harm businesses,” Grosser says, “especially those with locations in multiple places.”
Ohio taxpayers must pay local income taxes where they live and work—but there’s little uniformity. Today, 614 of Ohio’s 900-plus municipalities levy a local income tax, with an average rate of 1.4 percent. The city of Parma Heights levies the highest rate at 3 percent, while large cities like Cleveland and Columbus levy a 2.5 percent rate.
“This can lead to combined state and local marginal tax rates around 9 percent, comparable to high-tax states like New York and New Jersey,” the Foundation says.
Only 63 percent of Ohio municipalities offer a full credit against taxes paid to the municipality where the taxpayer works. This introduces extreme complexity to the tax code.
In fact, the Tax Foundation called the state’s municipal income tax system “a mess,” and “one of the worst in the country.” Managing such a complicated withholding system puts extra compliance costs on businesses.
“It’s part of what could make Ohio such a crappy state to do business in,” Faulkner says. Particularly for a service company, like a pest control or heating and air conditioning outfit.
“They very may well have to file in 50 cities. That’s burdensome,” she adds.
But, Grosser says, “it’s no different in Kentucky or Indiana.” Local taxes are very unique, in fact, to this part of the country, he says, so states out West, in the South and up North have the edge here.
So, overall, which state proves best?
If Grosser was starting over, he says he would “definitely” locate his business in Ohio. He’s held court in Kentucky since 1991. Faulkner, too, would argue that Ohio’s cheaper.
But it’s an “apples to oranges comparison,” for lack of better words, Grim says, that come with many nuances. Bottom line: It’s a good idea to get the best possible professional advice.
But Ohio definitely holds its own.