Friday, March 14, 2003

Taft wants firms to pay fair share

Big corporations, big bucks - but six companies paid $50 in state income taxes

By Spencer Hunt
Enquirer Columbus Bureau

COLUMBUS - They make big bucks selling everything from toys to patio furniture. But when it comes to state income taxes, some of the largest corporations in Ohio pay less than you.

Six of the top 100 corporations that do business in the Buckeye State paid just $50 each in income taxes in 2001, state tax records analyzed by The Cincinnati Enquirer show. The amounts are the product of complex accounting schemes that let businesses shift millions to tax-haven states such as Delaware and Michigan.

What are their names? Ohio law keeps corporations' identities and tax returns secret to protect privacy rights. Officials refuse to even hint about which companies duck their taxes.

Other states have taken some big names like Toys "R" Us, Kmart and Kohl's to court for playing the tax shelter games. Columbus-based fashion retailer Limited Brands Inc. and Cleveland paint company Sherwin-Williams also have faced legal challenges.

Here is a look at how much the 100 biggest corporations that do business in Ohio paid in state taxes in 2001. None of these businesses reported less than $5 billion each in U.S. sales in 2000:
Six corporations paid $50.
45 paid $155,000 or less.
24 paid between $155,000 to $1 million.
24 paid more than $1 million.
One corporation paid $10.5 million.
Source: Ohio Dept. of Taxation
The result is clear: Corporate taxes supplied 16 percent of state general funds in 1972, but made up only 5.8 percent in 2001. That means Ohio residents and families have to pick up more of the tab, said Richard Pomp a University of Connecticut professor of tax law and outspoken critic of corporate tax strategies.

"Any number of corporations that pay the minimum tax is a scandal," Pomp said. "Everyone's got to chip in their fair share."

Ohio Gov. Bob Taft agrees, thanks to a $4 billion budget deficit confronting the state over the next two years. He and state Tax Commissioner Tom Zaino point to the unidentified $50 companies as the six biggest reasons to change tax laws.

"Every taxpayer has the absolute right to pay the right amount of tax that the law provides," Zaino said. "The tax plans we're talking about are not illegal in any way. The question becomes `Is this fair?'"

Business leaders and advocates say if it's legal, it's fair. They also point out that politicians have in the past helped pass the state laws and exemptions that cut their tax bills.

"There is no obligation to pay the most amount of tax that you can," said Amy Nogid, an attorney who represents corporations in tax disputes. "I think a lot of states view this as evil."

Taft to legislators: Change law

Taft, a Republican who won his second term in 2002 with substantial help from business donors, doesn't go that far. In the politically uncomfortable position of telling his supporters they should pay more, Taft says his plan will lower corporate tax rates and erase their "tax avoidance opportunities."

His plan also faces an uphill battle in the General Assembly where Republican lawmakers have shot down a proposal to raise alcohol and cigarettes taxes.

Corporate taxes have rarely been an issue for state officials, except when states compete to offer generous incentives meant to attract new businesses or keep them from leaving. However, as state governments - including Ohio - wrestle with their worst fiscal crisis since World War II, corporate taxes are becoming a hot topic among officials desperate for money to balance deficit-riddled budgets.

New Jersey lawmakers, for example, changed their laws last year after learning that 30 of the top 50 companies paid just $200 each. The change will net nearly $1 billion in new taxes.

Corporations can lower their taxes by using an accounting practice in which they set up branch corporations in states like Delaware, which don't tax corporate income. Businesses can also find tax shelters in Michigan and Nevada.

These branch corporations often hold the rights to company trademarks. One of the most commonly cited examples involves Geoffrey Inc. a company that holds the giraffe Toys "R" Us uses in its ads.

The businesses send their state income to the Delaware corporations, listing the transfers as royalty fees for using the trademarks. While the corporations' bottom lines do not change, their taxable income drops.

In Ohio, tax officials say corporations use similar methods to lower their incomes to a point at which they would qualify for a lower tax based on their net worth. In 1997, lawmakers passed a law that capped net worth taxes at $155,000.

A total 51 of the biggest businesses paid this much or lower in 2001, state records show. In six cases, corporate tax credits helped lower tax bills to the state minimum - $50.

Zaino and Taft say lawmakers could stop this if they extend tax laws to cover holding companies. Taft's plan would soften the blow by gradually lowering the state's top corporate tax rate from 8.5 percent to 7 percent by 2007.

Requiring corporations to pay taxes on the money they send out of Ohio, along with the elimination of about 20 tax exemptions, would bring in a whopping $777 million over the next two years.

That would go a long way toward balancing Taft's proposed $49.2 billion budget, a spending plan that requires more than $3 billion in new tax revenues.

Other states sue for money

While Taft pushes lawmakers to change Ohio's laws, other states have taken businesses to court.

In 1998, North Carolina's tax department complained that Limited Brands, which owns popular clothing chains such as The Limited, Structure and Victoria's Secret, owed about $1 million in 1994.

Public documents filed in the case show Limited Brands shifted money from its North Carolina stores to its Delaware companies and then loaned the money back at interest. The effect of both transfers was a lower state tax.

Last year, the North Carolina Tax Review Board ruled the company did owe the disputed amount, plus interest. Limited Brands is appealing in a state court. Limited Brands officials declined comment.

Cleveland-based Sherwin-Williams faced a similar challenge - and won.

An October ruling from the Massachusetts Supreme Judicial Court found the country's largest paint manufacturer did nothing wrong when it transferred $47 million in 1991 royalty payments to its Delaware corporations.

The high court ruled the holding companies served a legitimate purpose.

"I feel that Massachusetts had a very narrow view of why these companies existed in Delaware," said Bob Wells, vice president of corporate planning and communications for Sherwin-Williams. "The court found that they were, in fact, legitimate businesses."

Wells could not say how much the company paid in Ohio taxes.

"We paid considerably more than $50," he said.

Companies oppose Taft

It doesn't appear that Ohio will take companies to court. Zaino said his agency doesn't have the time or manpower to spend on such legal challenges, especially with no guarantee the state would win.

He said it's more effective to pass a law that would treat every Ohio corporation the same.

But that may not happen, either. Business leaders already are lining up to oppose Taft's plan as unfair and harmful to corporations.

Ohio is a high tax state for business now, said Dan Navin, lobbyist for the state Chamber of Commerce.

Navin said the low amounts some businesses pay in corporate franchise taxes don't include the other taxes they pay on their property, inventory or the corporate income taxes cities charge.

"Just because a company makes a large amount of sales in a state doesn't mean they make a lot of profit," he added.

Roger Geiger, director of the National Federation of Independent Business of Ohio, which represents 36,000 business owners, said smaller companies will be hit hard.

Taft is "holding out six corporations, but its 47,000 (businesses) that will be affected," he said.

When asked about corporate taxes Taft's fellow Republican leaders in the General Assembly echo the business lobby line.

Senate President Doug White, R-Manchester, said government tax deductions for farmers are commonly accepted as necessary to help support Ohio agriculture.

"Do we carry that concept one step forward and say that same taxation of removing cash from a corporate pocket is harmful to their taking risks, expanding, adding jobs?" White said.

House Speaker Larry Householder, R-Glenford, said he thinks corporations' total tax burden in Ohio should be considered before lawmakers look at raising their state income taxes.

"What do the pay in (city) income taxes and real estate taxes?" He said. "All of those things have to come into play."

The only real vocal support of Taft's business tax plan in the Legislature comes from Democrats. The minority party in the House and Senate appears able to offer little more than verbal support.

"I think you ought to start listening to the tax commissioner," Sen. Leigh Herrington, D-Ravenna, told Republicans during a recent Senate debate over the current budget.

"This isn't a tax increase," Herrington said of Taft's plan. "This is the fair share that they were paying, that they should be paying and they've gotten out of it because they've beat the system."

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