What Are Major Threats to the Continued Success of the Reforms?

Almost from the moment HB 66 was approved in June 2005, legal and legislative efforts have been mounted by specialinterest groups to weaken certain elements of the reforms. Those efforts primarily have targeted the CAT, which is a signifi cant cause for concern because the CAT is critical to phasing out the anti-competitive tangible personal property tax and the inequitable and unproductive corporation franchise tax. Exemptions and Credits Efforts to avoid paying the CAT, whether via exemptions or credits, undermine the lowrate, broad-base philosophy that is key to the CAT's effectiveness. The more exemptions and credits there are, the narrower the tax base will become. Tax revenues decline, creating pressure on policymakers to increase the tax rate to recover the lost dollars, which exacerbates the problems of pyramiding and inability to pay the tax by companies with thin margins. Five challenges merit mention here: Motor Fuel Industry Exemption. As originally passed, HB 66 included a temporary CAT exemption for gross receipts from motor fuel sales through FY 2006-07. Despite efforts by the industry to extend the exemption, Governor Strickland and legislative leaders in the Senate and House allowed it to expire July 1, 2007. Grocery Industry Exemption. In 2006, Ohio's grocery industry fi led suit in the Franklin County Common Pleas Court, charging that the CAT is an unconstitutional excise tax on sales of food, food ingredients and food packaging. The suit sought to exempt all food-related businesses from having to pay the CAT. In August 2007, the Court rejected the suit, fi nding that the CAT is not a sales tax on food, food products and food packaging, or on individual transactions involving the sale of food or food products, but rather a tax on all businesses for the privilege of doing business in the state. The grocers, who also have pushed for legislation granting them an exemption from the CAT, have appealed the ruling. Qualifi ed Wholesale Distribution Center Exemption. The original tax reform legislation contained an exemption from the CAT for gross receipts from sales of goods shipped in or out of qualifi ed Foreign Trade Zones (FTZs). As that exemption neared expiration in January 2007, efforts were initiated to replace it with an expanded exemption. The General Assembly ultimately decided, however, to replace the FTZ exemption with a narrowly defi ned exemption for qualifi ed wholesale distribution centers.

To date, efforts to weaken the CAT have been largely unsuccessful; however, such efforts are being renewed with increased vigor and can be expected to surface during all future state budget deliberations.

Construction Contractors Challenge. In a 2007 case fi led by Mosser Construction Company against the City of Toledo, a trial court ruled that the because the CAT is calculated as a percentage of gross receipts, it is similar to a sales tax (rather than a business privilege tax), and that the contractor therefore may seek reimbursement from the City for additional charges under a construction contract that were related to the company's CAT liability. While this ruling does not directly threaten the CAT base, indirectly it has implications for the continuing legal challenges to the CAT from the grocery and motor fuel industries because those challenges are based on similar claims that the CAT is a sales tax. Net Operating Loss Credit. The original reform package (in HB 66) contained a Net Operating Loss (NOL) credit that could be applied against a company's CAT obligations. There was an effort to broaden the NOL credit in the corrective budget bill that immediately followed passage of HB 66, and there have been subsequent efforts as well, but to date all such efforts have failed. Earmarking As with exemptions and credits, earmarking of any category of tax receipts smacks of special treatment and creates winners and losers. It is through the give and take of the budgeting process that competing interests are presented and evaluated, and that priorities for state government spending are established. Earmarking substantial portions of the CAT revenues ties the hands of the General Assembly. Two efforts to earmark CAT revenues, one successful and the other initially rebuffed but recently revived, are noted here: Motor Fuel Industry Earmark. The House-approved version of Ohio's transportation and highway budget bill (HB 67, passed in March 2007) included a provision that would have earmarked nearly $150 million in CAT revenues sourced from motor fuel gross receipts into a fund for highway use instead of into the General Revenue Fund. Under that provision, the earmarked funds would not have been included in the calculation of total CAT revenues used to determine possible CAT rate adjustments. This provision ultimately was removed from the bill. However, in March 2008, a group representing the motor fuel industry fi led suit in Franklin County Common Pleas Court challenging the validity of the CAT. The plaintiffs argue that proceeds from the CAT, as an excise tax on motor fuel, must be earmarked for highway purposes only. That case is pending. 2007 Volume 5

retoolingohiowhat's the status of implementation? what are major threats to the continued success of the reforms?what's the bottom line?