The Ohio House of Representatives has passed H.B. 510 which overhauls the taxation of financial institutions by the State of Ohio. The legislation is expected to move through the Ohio Senate committee process immediately. The governor and others are touting the bill as shifting the relative tax burden from smaller banks to larger banks while lowering rates overall.

The bill is designed to do four things:  (1) close “loopholes” that some think are being used by larger, multi-state institutions (for example, shifting funds among affiliates and exempting goodwill), (2) replace two alternative taxes (the corporate franchise tax and the intangibles tax) with a single tax, (3) reduce tax rates, and (4) change the “apportionment” formulas that financial institutions use to apportion what is taxable capital inside Ohio versus their entire capital.

The new law would tax all of a bank’s Ohio-sourced capital without deductions, although different tax rates would apply to different tiers of capital. As amended and passed by the Ohio House, the bill could cause the first $200 million of Ohio capital to be taxed at 0.8%, capital between $200 million and $1.3 billion would be taxed at 0.4%, and capital above $1.3 billion would be taxed at 0.25%. There have been efforts by Democrats to increase these rates through amendments to the bill, although those efforts failed in the Ohio House.

Under the current law, the corporate franchise tax rate is 1.3% and the intangibles tax rate is 0.8%. All financial institutions would benefit from the lower overall rates although the elimination of deductions and exemptions broadens the overall tax base.

Under current law, appointment is based on a three-factor formula that includes property, payroll, and sales within Ohio.  The new tax would use a single formula based on how much of the bank’s gross receipts are in Ohio. The change in the apportionment formula probably doesn’t affect smaller banks that operate solely or primarily in Ohio very much – under both the current apportionment formula and the new one, most of their capital would likely be apportioned to Ohio. The apportionment change would likely affect larger financial institutions more.