The Senate Ways and Means Committee Wednesday began what Chairman Sen. Bob Peterson (R-Sabina) characterized as a “deep dive” over the next several weeks into the issue of tax expenditures here in Ohio as they prepare to take up the FY16-17 budget in the near future.
Tax Expenditures include such things as Historic Renovation Tax Credits and tax exemptions provided to non-profit entities like AIA Ohio.
Questions he said they want to address are how did the tax expenditure “get there”? What does it do? What does it cost? Who are the constituencies?
Next week, the committee will be focusing on tax expenditures in the sales tax. Peterson said he welcomes testimony in support of any of those exemptions, etc. or testimony questioning any of them, such as the one raised by Sen. Sandra Williams (D-Cleveland) in Wednesday’s hearing regarding sales tax exemptions for nonprofits including for the Cleveland Clinic.
Former Tax Commissioner and now chair-elect of the Ohio Society of CPAs (OSCPA) Tom Zaino provided the committee with the following considerations to keep in mind as it proceeds:
– “Recognize the definition of tax expenditure: a deviation from the normal tax base.
– “Consider establishing measurable goals and purposes for each tax expenditure, which can be used in the future to evaluate their effectiveness.
– “Avoid picking winners and losers. For example, don’t create a tax benefit for one part of industry that puts it at a financial advantage over another.
– “Explore what surrounding states and other key economic competitors are doing tax-wise with a given industry; learn from their mistakes and successes.
– “Remember that Ohio businesses, both big and small, are no longer competing with just businesses in neighboring states, but with businesses around the globe.
– “Ohio shouldn’t ‘give away the store.’ If the desired activity will take place in our state without a tax expenditure, don’t create one.”
Opening the committee discussion of tax expenditures was Deputy Tax Commissioner for Tax Policy and Budget Nick Cipiti, who defined a tax expenditure as “a legislated variation from — more commonly, a reduction to — a standardized tax base.” He said tax expenditures include but are not limited to “tax deductions, exemptions, deferrals, exclusions, allowances, credits, reimbursements and preferential tax rates.”
Cipiti said Ohio currently has 128 different tax expenditures and they are “rarely, if ever, re-examined.”
He said the tax expenditure report, which is produced every two years as an appendix to the biennial budget, includes a description of each tax expenditure, Revised Code citations where the expenditure is codified, the date of original enactment and any revisions, an estimate of the dollars unavailable (“revenue foregone”) to the General Revenue Fund (GRF) and the amount of revenues that were unavailable in the immediately preceding biennium.
Joining him was Ernest Massie, who puts the report together. Massie told Sen. Chris Widener (R-Springfield) that he will provide an amended summary table indicating which figures are actual and which are estimated, describing that putting the report together requires a whole range calculations — all of which are documented by the department.
Zaino told the committee the OSCPA believes that “all existing deductions, credits and exemptions should be evaluated … to ensure they are achieving their goals and purposes.” Suggesting that a performance audit is one way to do that, he said that means that each tax expenditure must first have measurable goals.
Another way to ensure review is to attach a “sunset clause” to each tax expenditure.
Pointing to the proliferation of tax expenditures in the state’s income tax, Zaino asked the committee to consider the following question: “Is it better to have a large number of tax expenditures, which reduce the revenue raised by the income tax, increases rates for all and impacts a limited-time event or limited number of people, or is it better to have a much smaller number of expenditures, which lowers the tax rate and cost of compliance for all Ohioans?”
Zaino also provided the committee with “Best Practices” regarding tax expenditure budgets and reports compiled by the National Conference of State Legislatures (NCSL).