- Ohio: Gov. Kasich Signs Law Requiring Periodic Review of Tax Loopholes
- January 20, 2017 | Authors: David D. Ebersole; David M. Kall; Susan Millradt McGlone
- Law Firms: McDonald Hopkins LLC - Columbus Office; McDonald Hopkins LLC - Cleveland Office
Last month, we described House Bill 9 (HB9), introduced by state representative Terry Boose, that addressed the periodic review of tax expenditures. At the time, there was a hitch when the House rejected the Senate’s version of the legislation, nearly unanimously.
The crux of the problem with the Senate’s version was the provision that precluded the Director of Administrative Services from making any purchases without prior approval of the controlling board. In fiscal year 2016, the revenue reduction from tax expenditures was $8.49 billion, and in fiscal 2017, $8.86 billion. Lawmakers resolved their disagreement, and Gov. John Kasich signed the bill just before Christmas, along with 16 others.
The new measures signed into law cover a wide variety of unrelated matters, such as the establishment of a safe passing distance of three feet or more when a vehicle passes a bicycle, by way of HB 154; the loosening of certain gun restrictions under SB 199; and regulating the sale of dogs from pet stores and dog retailers, among other things, via SB 331.
In reporting on HB-9’s passage, the Sandusky Register pointed out that the more than $8 billion stems from about 135 specific tax exemptions and breaks, known to some as loopholes, which must now be reviewed at least every eight years.
Rep. Boose told the paper that “he's a believer in the general principle, often supported by economists, that the best taxation policy is to make everybody pay but keep taxes as low as possible. ‘That way, everybody pays just a little bit.’ But if somebody gets a big tax break that costs the state money, ‘other people have to make up for that.’”
The lawmaker cited the commercial activity tax (CAT) as an example of one that he approves of, but that still needs to be periodically reviewed: "It's pretty much everybody pays it. There's very few exceptions...Because everybody pays it, it's a very low tax rate, less than one percent."
The Ohio Supreme Court recently addressed the imposition of the CAT on Internet retailers, in the case Crutchfield Corp. v. Testa. As we detailed when court released its opinion in November, the decision held that no physical presence is required for Ohio to impose the CAT on businesses. Instead, the court’s “bright-line presence standard” requires $500,000 in gross receipts from Ohio sales.
VETO OF NEW OIL AND GAS EXEMPTIONS
As we reported earlier this week, with his partial veto of Senate Bill 235, Gov. Kasich eliminated a provision that would have expanded the scope of the existing exemption for tangible personal property used in producing oil and natural gas.
In his Statement of Reasons for the veto, the governor explained that currently, oil and gas production companies “already enjoy an exemption from the sales and use tax for tangible personal property they purchase that is ‘directly used in production’ of oil and gas.” By expanding the definition of what is “directly used in production,” SB 235 would have gone “well beyond the direct use exemption, and created a situation in which nearly all oil and gas companies’ purchases would be exempt. Because the exemption was designed to be retroactive to 2010, the combined lost revenues and refunds could have cost $264 million.
Gov. Kasich opined that an immediate “triaging of priorities” would have been necessary to preserve the most essential functions. According to the Governor, the oil and gas industry is flourishing now, without the exemption expansion, under the state’s favorable tax treatment.
Finally, the governor reasoned that the expansion would have given the oil and gas industry a better deal than others, opening the door to other major Ohio industries, like agriculture and manufacturing, to pursue the same kinds of arrangements.