Tangible Property Tax Phase Out: Background Material

1. Tangible Property Tax Phase Out:Background Material Ohio Department of Taxation Presentation to: Local Government Officials January 25, 2010

2. Overview of TPP Changes • HB 66, enacted in 2005, included the phased-out elimination of the tangible personal property tax. This includes: • All taxes on business tangible property • All taxes on public utility property of local and inter-exchange telephone companies • All taxes on public utility railroad property

3. Overview of TPP Changes • As of 2009 the four-year phase-out on business TPP and Railroad property was complete • From here out, the only local tax revenue from these kinds of property will be due to audit

4. Overview of TPP Changes • The telephone property phase-out over five years began in 2007 • In 2007, telephone companies switched from being public utilities to general business taxpayers • This Fall will be the last time current year revenue will be received from telephone companies

5. Overview of Reimbursements • Since property tax losses from the phase-out began in 2006, the phase-in of the reimbursements also began in 2006 • Other than needing to account for the final two years of the telephone phase-out, revenue received during 2009 represented the fully phased-in reimbursements

6. Overview of Reimbursements • The reimbursements were originally designed to hold jurisdictions harmless for five full years back to pre-HB 66 law (for 2006-2010) • HB 1, the current biennial budget, extended the full reimbursements by one payment (through May 2011) • There is a seven year phase-out of payments after May 2011 (contrary to some belief, payments do not just end completely after May 2011)

7. Overview of Reimbursements

8. Calculation of Losses and Reimbursements • The determination of valuation losses and reimbursements was a one-time calculation based on a look-back period. • The valuations used were for tax year 2004 (tax returns filed during CY 2004), as of August 31, 2005. • This allowed for late filers, amendments, some audits, assessments, and settlements

9. Calculation of Losses and Reimbursements • Tax levies being reimbursed are: • Those that were in effect in 2004 • Those passed during calendar year 2004 that did not take effect until 2005 • Those passed in 2005 prior to September 1 • Tax levies passed new in November 2005 and thereafter are not eligible for reimbursement

10. Calculation of Losses and Reimbursements • Qualifying levies renewed or replaced after September 1, 2005 continue to be eligible for reimbursement • Qualifying levies renewed or replaced with a decrease will have their reimbursements pro-rated after 2010 • Levies no longer in effect will not be reimbursed after 2010 (there is no phase-out)

11. Reimbursement Phase-out Period • Beginning with the August 2011 payment, the reimbursements for fixed-rate levies begin to phase-out • The phase-out rate is 3/17ths in tax years 2011 and 2012 and 2/17ths thereafter until all payments stop after calendar year 2017 • This means that in August 2011, the payment to local governments will be 14/17ths of the August 2010 payment (plus any additional amounts for the final year of the telephone phase-out)

12. Paying for the Reimbursements • The money to make the reimbursement payments comes from the Commercial Activity Tax (CAT) • Through fiscal year 2011, 100 percent of CAT collections go toward making these reimbursement payments

13. Paying for the Reimbursements • Of each CAT dollar collected, 70 percent is deposited in the fund to reimburse schools and 30 percent is deposited in the fund to reimburse non-schools • Beginning in FY 2012, 70 percent continues to be deposited in the school fund but the percentage to the non-school fund declines

14. Reimbursement Phase-out Period • As the phase-out of reimbursements progresses, the 30% allocation to local government replacement declines and the money reverts back to the state general revenue fund

15. About the CAT • The CAT is a privilege tax measured by the gross receipts of a business • It was adopted as a replacement for the tangible personal property tax and the corporate franchise tax • When fully phased in, the CAT was expected to raise roughly the same amount of money as the TPP before it was phased-out, thus yielding enough money to cover the reimbursements

16. CAT Shortfalls and GRF Subsidies • In FYs 2006 through 2008, CAT receipts exceeded original projections by significant amounts and provided more than enough money to make the required reimbursements • With the onset of the recession in FY 2009, CAT receipts have plummeted • Revenues from the CAT are not currently sufficient to cover all reimbursements

17. CAT Shortfalls and GRF Subsidies • One provision of HB 66 guarantees reimbursements to both schools and local governments • If CAT revenues are not sufficient to cover all the costs of reimbursement, the state general revenue fund (GRF) must make up the difference

18. CAT Shortfalls and GRF Subsidies • In FY 2009, $96 million was transferred from the state general revenue fund to cover the CAT shortfall in making reimbursements • In FYs 2010 and 2011, transfers from the GRF to cover CAT shortfalls are forecasted to grow to $223 million and $269 million, respectively

19. CAT Shortfalls and GRF Subsidies • FY 10-11 GRF subsidies are estimated to be almost $500 million

20. CAT Shortfalls and GRF Subsidies • Under current law, assuming reasonable annual growth rates in CAT revenue for FY12-13, GRF subsidies will continue in those years, and the subsidies will be hundreds of millions of dollars • Next slide has estimates of GRF subsidies under different CAT revenue growth assumptions

21. CAT Shortfalls and GRF Subsidies

22. CAT Shortfalls and GRF Subsidies • Only in FY 2014 does the CAT again produce enough revenue to make the TPP reimbursement payments without help from the GRF • This is true only if the school payments begin to phase down in FY 2014, as they do under HB 1 after the veto.