2011 income tax cut marks final step in Ohio's historic tax reform plan

Ohio is now one of just 10 states that no longer taxes machinery and equipment.

Ohio’s individual income tax rates will fall by more than 4% across the board next year, meaning additional savings for Ohio taxpayers.

But there is a larger historical significance to next year’s rate reductions. They also mark the finish line in one of the most ambitious packages of state tax cuts ever undertaken in Ohio, a multiyear plan that has reduced income tax rates four other times and phased out Ohio’s two largest business taxes.

With next year’s rate change, state income tax rates will be a full 21% lower across the board in 2011 than they were in 2004, the year before the Ohio General Assembly launched the tax reform plan as part of House Bill 66.

The plan, launched during the Taft administration, was embraced by Governor Ted Strickland and has reduced taxes throughout his term as governor. The reforms also included a gradual phase out of local property taxes on business machinery and equipment and a phase out of the state’s corporation franchise tax on profits. These taxes, which ended for nearly all taxpayers after 2008 and 2009, respectively, were replaced with the commercial activity tax, which imposes a much smaller burden on businesses and generates far less revenue.

Overall, the reforms mean a net annual savings for Ohio taxpayers of about $2.1 billion each year. Next year’s income tax cut will add an additional $400 million per year to that total. Overall, the reforms are thought to be Ohio’s single largest package of tax cuts in at least 70 years.

Ohio Tax Commissioner Richard A. Levin said the changes helped improve Ohio’s business climate. In particular, he praised the elimination of taxes on business personal property.

“For decades, experts said these taxes on machinery and equipment discouraged business owners from making investments that create jobs in Ohio. And they were right,” Levin said. “Ohio is now one of just ten states that no longer taxes machinery and equipment. That’s a big competitive advantage – one that I think will grow in importance as business owners learn about what we’ve accomplished during the past five years.”

Others share Levin’s view that the reforms have improved Ohio’s business environment. Last January, Eric Burkland, president of the Ohio Manufacturers Association, told the Columbus Dispatch that Ohio has a “a tax structure right now that beats anybody.” Jay Foran, senior vice president of Team NEO,  told the Akron Beacon Journal that Ohio’s new tax structure has made the difference in some companies deciding to locate in Ohio.

Also, Abercrombie & Fitch recently informed shareholders that it would save $180,000 each year in state taxes if it reincorporated in Ohio instead of Delaware.

“That was a striking announcement,” Levin said of the Abercrombie notice. “Delaware’s reputation is that of a state tax haven. For a corporation to conclude that Ohio’s taxes would impose less of a burden than those of Delaware – that speaks volumes about just how competitive Ohio has become.”

The 2005 tax reform plan was implemented on schedule except for one piece: Next year’s income tax cut. The cut was originally scheduled for 2009, but state leaders, with the support of major business organizations, opted to postpone it for two years in order to close a budget hole created by an unexpected Ohio Supreme Court decision concerning the placement of video lottery terminals at horse racing tracks.

The savings associated with next year’s income tax cut will vary according to the income of the taxpayer. But, for a family of four earning $60,000, it means $77 less tax per year. Such a family was already paying about $309 less income tax per year because of four previous rate reductions.

Ohio taxpayers will realize the savings from next year’s rate reductions when they file the 2011 income tax returns due in April, 2012. At that point, the 2011 rate change will mean either a larger refund or a smaller amount due. No change is planned in the amount of money that Ohio employers withhold from paychecks.

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