Inventory Taxes Targeted

Signs with brightly colored,5-foot tall letters plastered across storefronts and crazed spokesmen on television who scream it out: "Inventory Reduction Sale, Buy Now." In Ohio, these sales are not m

Apr 29, 1999 at 2:06 pm

Signs with brightly colored,5-foot tall letters plastered across storefronts and crazed spokesmen on television who scream it out: "Inventory Reduction Sale, Buy Now." In Ohio, these sales are not merely shameless attempts to draw money out of you, they are a business necessity.

Ohio businesses pay local property taxes on 25 percent of the average inventory they hold throughout the year. Because this average is calculated using month-end stocks, many retailers unload as much as possible during the last week of the month.

But, if you have seen such sales in other states, they probably are gimmicks. Only a dozen states allow local governments to tax inventories and, of those, only Texas taxes them at a higher rate than Ohio.

Such a discrepancy seems detrimental to Ohio's ability to attract and retain businesses. Many manufacturers and retailers, because of the nature of their businesses, must carry stockpiles of raw materials, components and products in various states of completion. United Airlines recently relocated a large maintenance facility from San Francisco to Indianapolis in part because California, unlike Indiana, taxes spare part stocks.

Local governments often mitigate this inequity by reducing inventory taxes for companies that are relocating to or expanding in their areas.

But tax abatements often create an atmosphere of injustice and uncertainty. Loyal, established businesses do not get favorable tax treatments, and prospective newcomers, not certain that lengthy negotiations will result in tax abatements, might prefer to select a state where such taxes are not levied at all.

In an attempt to rectify these problems, three inventory tax reduction bills have been introduced into the General Assembly. Two of these bills call for the assessment rate — the percentage of inventories subject to local property taxes — to be lowered from 25 to 15 percent over five years.

But Rep. Charles Wilson, D-Bridgeport, thinks that, because schools get 70 percent of inventory tax revenues, these timelines are too aggressive.

"We need to make Ohio more attractive to businesses," Wilson said. "But we have to do it in such a way that schools aren't hurt."

Wilson's bill would reduce the assessment rate from 25 to 15 percent over 10 years, instead of five. To diminish the effects of these reductions, the annual one percent cuts would be implemented only if total statewide property tax collections for the preceding year had increased by a set amount.

"We believe that, by lowering the rate slowly and only in economic upturns, we can make Ohio competitive and make certain that schools don't experience a net revenue loss," Wilson said.

Tom Froehle, director of public policy for the Ohio Manufacturers' Association, the industry's lobbying group, agrees.

"From 1984 to 1993, the assessment rate was cut from 35 to 25 percent in one percent increments," Froehle said. "The taxable base of inventory actually grew, and there was no loss of revenue."

Although these reduced assessment rates might have drawn some commerce to Ohio, much of this growth in the inventory base probably was driven by the country's unprecedented economic expansion and much of it would have occurred even if the assessment rate had remained at 35 percent. Consequently, even though the losses were masked by the booming economy, public schools have been forced to sacrifice revenues.

Richard Gardner, treasurer of Cincinnati Public Schools, thinks that any future inventory tax reduction should be directly offset with an alternate source of revenue.

"The state has to make the call on keeping Ohio economically competitive, but it also has to be held responsible to its children," Gardner said. "In the long term, I would like to see the inventory tax reduction replaced by some other revenue. I don't care how they do it, as long as the schools are made whole."

Many in the business community agree that the schools should not lose out this time, but are adamant that the state reduce inventory taxes. Unlike sales and income taxes, inventory taxes rise in bad economic times as sales plummet and unsold stock accumulates on shelves.

"We are willing to look at any alternative tax that's reasonably progressive," Froehle said. "Inventory taxes just don't make sense. They hit businesses when they can least afford it."