TAX LAW Schools fear loss of income sources
Sen. Marc Dann says the state's schools got 'punked' with the new Ohio law.
By ED RUNYAN
VINDICATOR TRUMBULL STAFF
Mahoning Valley officials are concerned about funding for local schools and governments in light of a major tax law change this year that affects businesses.
In Trumbull County, for example, loss of revenue countywide from the personal property tax on machinery, equipment, inventory, furniture and fixtures -- being phased out this year -- could be around $30 million in 2008, said Mark Zigmont of the Trumbull County Planning Commission staff. Most of that revenue goes to schools.
House Bill 66
The law change was effective July 1. For the first five years, the state has pledged to reimburse all of those losses, Zigmont noted, but after that, the issues become much more cloudy.
"The state was only promising to reimburse for five years. What about after that?" Zigmont asked.
Gov. Bob Taft signed House Bill 66 into law in June. It phased out personal property taxes charged to businesses from 2006 through 2009 to encourage Ohio businesses to expand and grow. It eliminated personal property taxes on new purchases immediately
The problem for local schools is that personal property taxes are a large source of revenue; they're a smaller source of revenue for local governments.
The bill fully replaces that revenue for the first five years by issuing checks three times per year in May, August and October as if the taxes were still being collected, the Ohio Department of Taxation said.
Commercial Activity Tax
In the seven years after that, from 2011 through 2017, those reimbursements are phased out. A new tax, the Commercial Activity Tax, will begin to be collected from businesses this year. Distributions of that tax will begin for schools in 2011, the taxation department said.
The CAT tax is on all types of businesses that have gross receipts of $150,000 per year or more. As an example, it will cost $75 for gross receipts on the first $500,000 this year.
The CAT tax affects businesses in Ohio in that if they have gross receipts of more than $150,000 for the year, they must register for the new CAT tax by Nov. 15, 2005, and begin paying the taxes for this year.
Zigmont specifically questions how schools and local governments will be compensated by the CAT tax starting in 2011.
Mike McKinney, a spokesman with the Ohio Department of Taxation, said that is a legitimate question, as the Ohio General Assembly has not yet decided.
In 2011, 44.2 percent of the CAT revenues will be going into the School Property Tax Replacement Fund, McKinney said, but a method for distributing that money is not in place yet.
Search for solutions
"Concerns are out there," he acknowledged.
McKinney noted other options are still available to schools, such as putting on additional levies, or seeking an income tax -- an option that is new with House Bill 66.
Salem schools received about $2.4 million in personal property tax last year, about 15 percent of the system's $18 million budget.
"I don't know if anybody really understands it yet," Alice Gunning, Salem Local Schools treasurer, said of the what's in store for replacing the revenue. "The state auditors are still checking into it,"
Milt Williams, Lakeview Local Schools treasurer, said the loss of the personal property taxes will cost his Cortland/Bazetta district around $1.3 million a year -- which is about 7 percent of the district's $15 million budget -- at whatever point it is no longer being reimbursed.
He said his district has tried five times to pass a levy to establish a long-term financial plan to help cope with the loss of this money and other issues, but the levies have all failed.
Williams said his understanding is that after the reimbursement period of five years, "That's it; don't expect any more" money.
State Sen. Marc Dann of Liberty, D-32nd, put the plight of schools more bluntly: "My message to the schools is 'you've been punked.' "
Dann said he wouldn't even count on that money being available the whole five years. The biennial budget sets forth spending for just two years, so "nobody can say for sure" what will happen after those two years, Dann said.
This is why Dann and fellow state Sen. Eric Fingerhut of Cleveland had proposed, unsuccessfully, a statewide sales tax to be used to replace the taxes that were eliminated. That would have been a permanent replacement, he said.
Ultimately, the decisions about what to do with school funding will have to be decided by the next administration, Dann said. Taft leaves office in less than two years because of term limits.
Dante J. Zambrini, Canfield superintendent, agreed with Dann about the unpredictability of revenue from the state, saying there "are no guarantees." Zambrini said his mostly residential school district received about $800,000 in personal property taxes last year, or about 3.5 percent of its $22.4 million budget.
Tom Krispinsky, Howland schools treasurer, said that because Howland receives nearly 15 percent of its income from personal property tax because of its large business tax base, the hit could be hard.
Krispinsky won't be surprised if the funds are cut off before five years. Promises of revenue have been made many times in the past and not been kept, he said.
Zigmont, meanwhile, has been dealing with the law change repeatedly in recent months because of its effect on tax abatements the county has inked with county businesses.
Because the new law eliminates personal property taxes, some abatements were no longer needed, Zigmont explained.
For example, Warren Fabricating in Hubbard Township is buying millions of dollars in new equipment, so it asked for an abatement early this year. But those purchases are no longer taxed under the new law, so abatement of those taxes wasn't needed, Zigmont said.
The revised abatement, which Zigmont said keeps Warren Fabricating taxes paid to Hubbard Local Schools about the same as they would have been under the original abatement, is still being considered by county commissioners.
Zigmont said he understands the new CAT tax may be a way to generate business growth in Ohio, and that business growth can add to school and government revenues. "But even if there's substantial growth in the state, it will be different from area to area. So what do you do in areas that don't grow?" he asked.