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Tangible Property Tax Phase Out:Background Material

Ohio Department of TaxationPresentation to:

Local Government OfficialsJanuary 25, 2010

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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

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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

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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

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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

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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)

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Overview of Reimbursements

Tax Year 2010 TPP Reimbursements

Counties $267,827,377

Municipalities $90,420,367

Townships $69,280,633

Special Districts $54,710,317

Total $482,238,694

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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

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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

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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)

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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)

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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

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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

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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

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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

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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

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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

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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

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CAT Shortfalls and GRF Subsidies FY 10-11 GRF subsidies are estimated to

be almost $500 million

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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

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CAT Shortfalls and GRF Subsidies

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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.