Businesses fight Kasich on plan for tax increase

For Messer Construction, Gov. John Kasich's proposed change to a tiny tax could be a big problem.

The company that's built Horseshoe Casino Cincinnati, the latest Children's Hospital research building and much of the streetcar construction frequently handles projects that reach into the hundreds of millions. So the state's 0.26 percent tax on all business activity in Ohio adds up.

And Kasich's proposal to increase that tax to 0.3 percent would mean adding hundreds of thousands of dollars onto Messer customers' bills.

"When you do a huge, $100 million project, that comes to pretty substantial dollars," said Matt Barney, Messer's director of cost accounting.

Kasich's proposal would raise taxes on a group of about 52,000 companies that have revenues of more than $1 million a year – about 30 percent of the businesses that pay the Ohio tax. Many of those companies, from groceries to car dealerships to construction companies like Messer, don't want the governor's corresponding 8.5 percent cut in the personal income tax rate if it means an increase in the business tax.

The businesses' opposition worries Kasich's fellow Republicans in the Legislature, who are already casting doubt on the possibility of passing the tax plan before the November election. Other portions of the tax package are in doubt, too: Lawmakers don't think the governor's proposed tax on fracking will raise as much money as the administration projected, and a projected $400 million in state savings from expanding Medicaid is no longer on the table for lawmakers to use.

'Pancake tax' adds up,layer upon layer

The commercial activity tax is hardest on businesses with skinny profit margins, big sales volumes and lots of layers of suppliers.

For instance, groceries book only 1.5 percent of their sales as profits, after they've paid for inventory, building costs, operations and employees, said Joe Ewig, spokesman for the Ohio Grocers Association. A construction firm like Messer books 1 percent of its project costs as profit, after paying for employees, subcontractors and construction materials.

Increasing the commercial activity tax even a fraction of a percentage point would whittle away those profits.

But a bigger problem for many companies comes in the way the tax is assessed: Every business operating in Ohio must pay the tax every time it makes a sale. The tax adds up as a product or service moves through layers of suppliers. For example, up to 85 percent of a Messer construction project is handled by subcontractors, from demolition to electrical to plumbing to carpentry.

Say Messer wants to put an air conditioning system in a building. If any of the components are built in Ohio, the companies that make them must each pay the tax. Then the subcontractor that installs the system must pay the tax when it gets paid for the work, and Messer must pay the tax when it gets full payment for managing the construction project.

Because the taxes stack and stack, construction companies call it the "pancake tax," Messer's Barney said.

Even a subcontractor or repair service like Groesbeck's Hermann Services must pay for all the layers of tax.

"Anybody that sells me stuff out of Ohio would raise their rates," said Jason Hermann, whose family owns the company, which repairs plumbing, electrical, heating and cooling systems. "We probably have 100 different vendors, so we would have price increases coming at us from 100 different vendors. I don't think the decrease in the income taxes for the owners would offset the increase in cost of materials."

Ohio companies would face difficult conversations with their customers after raising rates to make up for the tax, said Stephen Hightower, whose Hightowers Petroleum distributes fuel and provides fueling systems to corporate fleets.

"It's not lawful to actually show (the tax) on the invoice, so you have to absorb it, then put it on the price of your products," he said.

How will it affect the Pink Tulip Club?

The Kasich administration has said Ohio would be "updating" the commercial activity tax, which hasn't increased since it was introduced in 2005. It was originally part of a tax modernization package that phased out taxes on corporations and on business' inventory and equipment.

The increase would cover almost a third of the money needed to pay for the proposed 8.5 percent across-the-board income tax cut, which would fulfill Kasich's goal of getting Ohio's top bracket under 5 percent.

"When you get to keep more of your own money, you can use it to control your own future and to help your family and your community," Kasich said in last month's State of the State address. "Out of respect for the small businesses that are into job creation, we've got to keep cutting taxes."

Small businesses won't have to pay a higher tax. Companies pay the commercial activity tax, as Ohio's business tax is called, as a percentage of their total sales. Businesses with less than $150,000 in annual sales don't pay any tax, and companies with less than $1 million pay a flat $150 in taxes. So the tax increase would only affect medium and large businesses.

Plus, many small-business owners are set up to book any profits as personal income, so they'd see their income taxes drop under Kasich's plan.

"It's sort of a two-for-one," said Michael Jones, an economist at the University of Cincinnati. "Small businesses drive a lot of job growth, so I think that's the strategy here."

But many small business owners interviewed by The Enquirer said they hadn't yet made a profit on their business and therefore aren't paying any personal income tax. Those business owners wouldn't benefit from the personal income tax cut Kasich wants, although their customers would.

But multiple entrepreneurs said they remained wary of Kasich's past plans for expanding or increasing Ohio's sales tax as he works to decrease the state income tax

"It's a wash to me because they will increase the sales tax eventually. I don't want people going to Kentucky to shop," said Maria Versluis, who owns Pink Tulip Club boutiques in Montgomery and Hyde Park. "I'm going to have to open one up down there if the sales tax increases."

Little change expectedto Ohio's tax rankings

Even with the proposal to increase the commercial activity tax, many business leaders support Kasich's tax plan. The Ohio Business Roundtable, a group of CEOs of major corporations such as Procter & Gamble and Cincinnati Bell, endorsed the plan.

The group commissioned an analysis from business advisers at Ernst & Young that shows Kasich's overall tax package wouldn't change Ohio's ranking in business taxes compared with surrounding states.

For instance, Ohio would remain the best state in the area for taxes assessed on headquarters, drug companies and market research firms, Ernst & Young said. The state would still have higher taxes on car parts manufacturers than Michigan, Pennsylvania and Indiana. And shareholders of Ohio companies would save money on income taxes paid on dividends from company profits, the analysis said.

But the Cincinnati USA Regional Chamber expressed concern that an increase in the commercial activity tax could lead to similar tax hikes in the future. Several Republican lawmakers have said opposition from some businesses gives them pause.

In the end, Kasich's tax plan may have little hope of getting passed before the November gubernatorial election anyway. His plan also includes a proposal to increase taxes on cigarettes, cigars and tobacco products. And he'd levy a bigger tax on oil and gas produced through fracking than the one Republican lawmakers are pushing in the Ohio House.

Speaker Bill Batchelder, R-Medina, has repeatedly said he isn't in favor of the governor's fracking proposal, which would pay for about a third of the tax cut. On Wednesday, he suggested lawmakers might not act on the tax package until November.

Plus, state leaders disagree on how much money a fracking tax could yield for the state: Because of a disagreement on the possible yield of Ohio's fracking operations, the General Assembly's legislative services staff estimates that Kasich's proposed tax would fall several hundred million dollars short of the tax revenue his office has projected.

Finding extra money won't be easy. Some lawmakers had suggested using the $400 million the state was projected to save when it accepted federal money to expand Medicaid. But a combination of policy moves from the federal government, the Kasich administration and the General Assembly have made it unclear how much the state will save, state budget Director Tim Keen said Wednesday.

"We've got to get through some of this initial confusion," Keen said. "I believe we need to be cautious and just see how this plays out." ■