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No. 26
November
30, 2001
PLEASE CIRCULATE THIS BULLETIN TO YOUR COUNCIL, DEPARTMENT HEADS & STAFF Conferees Mull Budget Fix. House and Senate conferees heard three days of testimony on HB 405, the bill designed to fix the state's projected $1.5 billion budget gap. The League's testimony on this bill can be found on the League's website at www.omunileague.org. Most groups appearing before the conference committee either decried the additional cuts in funding, which are contained in the Senate version of the bill, or implored the conferees to not restore the closing of some "business tax loopholes," which were contained in the House and Governor's version of HB 405. As you can imagine, the closing of those business breaks were seen as and criticized as tax increases by those who oppose them. The League, along with libraries, townships and counties, continues to urge the General Assembly to reconsider the large cuts to local government funding that were proposed by the Senate version of HB 405.Those cuts ($160 million for the biennium), the League and other groups believe, do not recognize that local governments are feeling the impact of the recession just as much or more than the state and, in many cases, are feeling the security cost impacts of September 11 at a much higher level than the state. While $160 million is a relatively small sum for the state ($45 billion biennial budget, $855 million unobligated "rainy day funds"), the impact of such a cut will be very tough for many communities which are suffering the most from the recession and new security costs. The Speaker of the House, Larry Householder, Governor Bob Taft and the full House have shown they understand this problem through their versions of the budget fix. The Speaker's comments to the press defending local government and the clear need to keep local government aid uncut are very much appreciated. Any communication you can have this week with your legislators and the Governor would be very helpful. We think some progress can be made on this issue if the General Assembly and the Governor hear from you. Conferees will begin meeting again on Monday at 9:00 a.m. The scheduled hope is that the House can vote on a final report on Tuesday, with a Senate vote on Wednesday. Estate Tax Report Published. Attached is a copy of the Majority and Minority Report of a joint committee of the General Assembly on the Estate Tax. That tax currently generates $295 million per year for municipalities and townships and a smaller sum for the state. Any action stemming from this report will take legislation to implement. There is very little surprising in the report. Many in the General Assembly have hoped to convert the Ohio Estate Tax to a pure "sponge tax" based on federal tax policy, which would eventually lead to the tax's demise as the feds phase out their Estate Tax. In that hope, there has been some concern expressed about the impact that would have on local governments. That is pretty much what the majority report says. The League's primary concern is not to save the Estate Tax, but to impress upon the state that there is an obligation to find a way or help us find a way to diminish the negative impact on local government services that would occur with the elimination of the state's Estate Tax. Majority Report of the Joint Committee on Estate and Death Taxes Senate Bill 108 of the 123rd General Assembly exempted most estates from the estate tax, exempted up to $675,000 in family-owned business property, reduced the tax on most of the estates that remain subject to the tax, and created the Joint Committee on Estate and Death Taxes. The mandate of the Committee was to consider testimony presented to it by interested parties and issue a report on a proposal to eliminate or phase out Ohio's estate tax by 2006, taking into account any efforts by Congress to eliminate the federal estate tax. The objective of the proposal was to adopt an estate tax system featuring only a pick-up tax, whereby states are taxed only to the extent that the tax paid may be credited against the federal estate tax due, as allowed under federal law. The Committee held several meetings throughout 2001, at which it received testimony and information from representatives of the business and farming communities, local governments, public policy organizations, tax accounting firms, and the Ohio Department of Taxation. In May 2001, Congress enacted legislation phasing out the federal estate tax through 2010 and phasing out the federal credit for state estate taxes by the end of 2004. On the basis of the testimony and information presented, the Committee makes the following findings: -Ohio is one of only two states that continue to levy an estate tax in addition to a pick-up tax. -The reductions in Ohio's estate tax brought about by S.B. 108 are substantial, but the tax still represents a significant burden for many families. Especially burdened are family farms, which occasionally must be liquidated in whole or in part to satisfy the tax obligation. -The existing estate tax may be contributing to the migration of longtime Ohio residents to other states where the only estate tax levied is the pick-up tax. -In light of the scheduled repeal of the federal estate tax and the phase-out of the federal credit, the Ohio estate tax has become untenable. If Ohio were to retain its estate tax in the face of these federal changes, it likely would be one of only a few states to do so, and migration of Ohio residents to other states might therefore continue. -Townships and municipal corporations rely on estate tax revenue to widely varying degrees, with many treating it as a fortuitous windfall and others setting it aside for a particular class of expenditure. In consideration of these findings, the Committee recommends that the General Assembly take the following actions: -Repeal the basic estate tax on resident and nonresident estates by the end of 2002. -Repeal the pick-up tax upon the complete phase-out of the federal credit (currently scheduled to occur at the end of 2004) rather than preserving it in its current form. -Credit 100% of the taxes collected before the foregoing repeals take effect to townships and municipal corporations, monitor the revenue effects of the repeals on townships and municipal corporations, and consider ways to assist them in adapting to those revenue effects. Pursuant to S.B. 108, the Committee hereby submits its report to the Governor, the President and the Minority Leader of the Senate, and the Speaker and the Minority Leader of the House of Representatives, for their consideration. The report was signed by: Senator Robert F. Spada, Senator Jeffry Armbruster, Representative Robert Latta and Representative Sally Conway Kilbane. Minority Report Joint Committee on Estate and Death Taxes Overview - State and local governments receive substantial revenues from Ohio =s estate tax. In fiscal year 2000, for example, combined State and local revenues from this source were $435 million, with local governments receiving $295 million. Average annual revenues for selected cities have been: Cincinnati, $14.3 million; Cleveland, $4.5 million; Columbus, $7.5 million; Euclid, $1 million; Upper Arlington, $2.8 million; Lancaster, $686,000; Bexley, $1 million (one-seventh of its general fund revenues.) These funds help pay for police, fire and other local services.- In its most recent budget, the State of Ohio significantly reduced funding for local governments. All three proposals to deal with the projected $1.5 billion budget deficit include further reductions in local government funding. - One of the reasons the State faces the $1.5 billion deficit is that it has been too quick to grant tax breaks without solid analysis of the value of such breaks and their impact on the State =s ability to provide essential services.- Ohio =s estate tax should not be repealed, and the revenues it generates lost, absent a solid analysis establishing that a repeal is justified and that the net effect, on revenues, of retaining the tax will be negative.The Majority =s Findings- The Majority states that, while S.B. 108 made substantial reductions in Ohio =s estate tax, Athe tax still represents a significant burden for many families.@ Yet, under S.B. 108, 75% of Ohio estates will be exempt from the tax as of 2002 and the tax will affect only estates valued at $338,000 or more. Moreover, in contrast the federal estate tax rate, which ranges from 37% to 55%, Ohio=s estate tax rate ranges only from 2% to 7%, with the 7% rate applied only to estates valued over $500,000.- The Majority states that, AEspecially burdened are family farms, which occasionally must be liquidated in whole or part to satisfy the tax obligation.@ Yet, consider the following:The United States Department of Agriculture reported that, in 1998, only 4% of farm estates settled nationwide owed anything under the federal estate tax. With proper estate planning, as much as $2.6 million of a farm =s value can be exempt from the federal tax. (In 1999, the average value of settled farm estates was $440,000.)Under federal law, a farm couple can pass $4.1 million untaxed, so long as their heirs continue farming for 10 years. When the federal tax is owed, special provisions allow heirs to stretch the payment out over nearly 15 years. Neil Harl, an Iowa State University economist whose tax advice has made him a household name among Midwest farmers, said he had searched far and wide but never found a farm lost because of estate taxes. AIt=s a myth,@ he said.Almost no working farmers pay the federal estate tax. Of the farm properties taxed, a significant portion belong to absentee owners, such as a Wall Street businessman with an Idaho ranch. The overwhelming majority of beneficiaries paying the estate tax are the heirs of people who made their fortunes through their business and investments in securities and real estate. - The Majority states, AThe existing estate tax may be contributing to the migration of long-time Ohio residents to other states where the only tax levied is the pick-up tax.@ Yet, the Committee received no statistics verifying that any such migration occurs or quantifying it, if it does.- The Majority states that, AThe Ohio estate tax has become untenable.@ Yet, the only bases offered for this conclusory statement are the unsupported and questionable assertions about farms and the migration of Ohio residents.The Majority =s Recommendations- The Majority recommends that Ohio Arepeal the basic estate tax . . . by the end of 2002.@ This recommendation is not justified by any compelling findings.-The Majority recommends that Ohio Amonitor the revenue effects@ on local governments and Aconsider ways toassist them in adapting to those revenue effects. @ The revenue effects are already predictable. Given the budget crisis - and the State=s repeated reductions in funding for local governments - the promise of Aassistance@ is an empty one.The Minority =s Findings- Ohio =s estate tax provides critical revenues for State and local governments.- The suggestion that retention of the estate tax will lead to an out-migration of Ohioans is unsubstantiated. Moreover, even if an out-migration occurred, the revenues gained from an estate tax on those who did not leave could offset income/sales tax revenues lost from those who did. - The suggestion that the estate tax leads to the loss of family farms is unsubstantiated and apparently a myth. - While the estate tax is often called Aunfair,@ early Republican proponents, such as Theodore Roosevelt and William Howard Taft, argued that the tax is one of the most progressive and fair because it places its burden on those Americans who can best afford to pay it.- The estate tax is not a tax on the dead, but like the gift tax, a tax on a Agratuitous transfer@ of wealth. Like the rule against perpetuities, which limits the perpetual holding of real property, the estate tax fosters economic growth by encouraging Americans to rise based on merit, not inheritance.- The repeal of Ohio =s estate tax would primarily benefit the very wealthy few.-The repeal of Ohio =s estate tax would have a significant negative impact on the revenues of local governments throughout the State.The Minority =s Recommendations- Ohio should retain its estate tax until there is compelling evidence justifying its repeal. - Ohio should monitor the impact of that retention on revenues, farm families, and the out-migration of Ohio residents. - Ohio should consider raising the exemption on estate taxes from $338,000 to the current $675,000 federal level or to some other appropriate level. - To the extent not already done, Ohio should adopt those special provisions in current federal law that mitigate the impact of the estate tax on farm families and enable family farms to be passed intact to heirs. -The Ohio Department of Taxation should undertake an analysis of the net impact on revenues of any projected out-migration of Ohio residents, comparing the loss of income, sales and other tax revenues caused by such out-migration with the revenues gained from retention of the estate tax. The report was signed by Rep. Edward Jerse. |
