Brian Sigritz (Graduate Student, Public Administration, George Washington University) has published Examining Ohio’s Commercial Activity Tax, 39 State Tax Notes 567 (Feb. 20, 2006), also available on the Tax Analysts web site as Doc 2006-529, 2006 STT 34-2.  Here is the Introduction:

On June 30, 2005, Ohio Gov. Bob Taft (R) signed into law amended substitute HB 66. This bill, the biennial budget, included a major overhaul of Ohio’s tax code. It marked the culmination of a two-year effort by the governor to reform the tax system.  Taft said, "The call for tax reform has resonated in every corner of the state. . . . Tax reform is now a reality."  The legislation included a phaseout of the tangible personal property tax, a reduction in the individual income tax, a cut in the state sales tax rate, and an increase of the cigarette excise tax.  Perhaps most significantly, a new commercial activity tax replaced the corporate franchise tax.  The now-defunct corporate franchise tax was based on either a company’s net worth or net income, depending on which one was higher.  The commercial activity tax (CAT) is designed to be a tax on gross receipts generated from commercial activities. When the tax is fully imposed, it will be set at a rate of 2.6 mills (0.0026).

The establishment of the CAT came with controversy.  Critics contend that the tax is regressive, is unconstitutional, and does not address the state’s long-term revenue demands, and that businesses will be highly taxed even if they are not making a profit.  Supporters counter that it will broaden the tax base, tax consumption rather than investment, and encourage capital investment and job creation. This report explores the reasons why many felt a change in Ohio’s tax system was needed, addresses arguments for and against the CAT, looks at whether the tax is constitutional, and offers alternatives to the CAT.