Ohio’s use of a gross receipts tax plunged its overall ranking in a recent nationwide analysis examining how states stack up against one another on their tax codes within the broader scope of the business climate.
The buckeye state ranked No. 38 in the Tax Foundation’s recently released report, 2020 State Business Tax Climate Index. The analysis delved into a number of factors impacting businesses, including corporate and individual tax rates, in addition to the amount levied in sales, property and unemployment insurance taxes.
In the report, researchers with the Washington, D.C.-based think tank weighted a variety aspects of a state’s tax laws differently before prescribing the specific ranking.
Individual income taxes, for instance, comprised 30.2 percent of the overall score, while unemployment insurance taxes made up 9.5 percent of the total.
Ohio fell near the bottom in two metrics – corporate taxes and individual taxes – where it scored No. 42 and No. 44, respectively.
A statement from the foundation on the rationale behind the overall ranking reads, “Ohio’s gross receipts tax drags it down on business tax climate rankings, where the state ranks an unenviable 38th.”
Jared Walczak, the foundation’s director of state tax policy, delved into the reasons Ohio was scored low in the two metrics within the report.
In the 75-page document, Walczak said the state’s business community lumbers over its tax code, in particular for its individual income tax base.
“States have different definitions of taxable income, and some create greater impediments of economic activity than others,” Walczak wrote. “States where the (individual income) tax base is found to cause an unnecessary drag on economic activity include New Jersey, California, Ohio, Minnesota, Maryland, Delaware and New York.”
Walczak in the report also said Ohio was among a small number of states scoring poorly for how its tax code is applied to entities created as limited liability corporations and S corporations.
“Every state with a full individual income tax recognizes LLCs to at least some degree … but those that require additional state election or make the entity file through the state’s gross receipts tax – as in Delaware, Ohio, Texas and Washington – score poorly in this variable,” Walczak wrote.
Ohio’s performance in other metrics fared better overall. The state ranked No. 32 for how its tax code is applied to sales tax. But the state was in the top of the pack in two metrics – property taxes and unemployment insurance taxes – where it ranked No. 9 and No. 7, respectively.
Walczak and others with the Tax Foundation explained the rationale for looking into state tax rates across the country.
“It is important to remember that even in our global economy, states’ stiffest competition often comes from other states,” Walczak wrote in an executive summary. “The Department of Labor reports that most mass job relocations are from one U.S. state to another, rather than to a foreign location.”
All five of Ohio’s neighboring states fared better in the foundation’s new report. Indiana ranked No. 10, followed by Michigan at No. 12, West Virginia at No. 23, Kentucky at No. 24 and Pennsylvania at No. 29.
The top performers overall in the Tax Foundation’s 2020 state business tax climate index were Wyoming, South Dakota, Alaska, Florida and Montana.
The bottom states in the foundation’s analysis were Connecticut, Washington, D.C., California, New York and New Jersey.