COLUMBUS, Ohio – Taking money collected on gasoline sales by the state’s updated business tax and spending it on anything but highway-related programs is unconstitutional, the Ohio Supreme Court ruled Friday as it accepted arguments that the tax is wrongly diverting $140 million annually from fuel sales to non-roadwork accounts for schools and cities.
Builders, contractors, construction companies and engineers had sued over the tax, claiming that Ohio voters have repeatedly rejected the notion of diverting taxes raised from fuel sales to non-road work.
The court said in a 6-1 decision that the Commercial Activity Tax can still be applied to companies that make money selling fuel, but it can’t be diverted into the state fund that pays for everything from schools to prisons to health care for the poor. The court came to a similar conclusion three years ago in a lawsuit brought by grocers over the tax’s application to grocery store food sales. However, that decision didn’t deal with how the tax proceeds could be spent.
The Ohio Constitution “explicitly prohibits the expenditure of revenue derived from excises on motor-vehicle fuel for any purpose other than highway purposes,” Justice Robert Cupp wrote for the majority.
The state can still collect the money but can’t spend it until the General Assembly passes a law adjusting what it can be constitutionally used for, Cupp added.
The office of Gov. John Kasich, which must produce a balanced two-year budget early next year, is reviewing the decision, said spokesman Rob Nichols.
Groups opposed to the tax argued the Ohio constitution bars money raised from the sale of fuel from being used on anything but highway upkeep.
“The diversion of any of these excise taxes undermines the will of the people to preserve the Motor-Vehicle-Fuel-related excise tax base for public road repair and construction,” Anthony Ehler, an attorney representing both construction companies and county engineers whose budgets rely on fuel taxes, said in a March 20 court filing.
Ehler said Friday the decision won’t raise or lower taxes that people pay for fuel but will improve driving in Ohio.
“Ultimately, it will mean better funding for roads and bridges and safe driving,” Ehler said.
The decision will likely reduce how much money Ohio can add to its rainy day fund at the end of this budget year, but won’t require the state to dip into the current fund of about $482 million, said state budget director Tim Keen.
The $140 million collected yearly from the tax, though less than 1 percent of Ohio’s budget, still puts extra financial pressures on the state as it builds the two-year budget taking effect next July, Keen added.
At issue is a 2005 rewrite of Ohio’s tax code that taxes a wide variety of business activity, not just a company’s revenue.
Lawmakers approved the tax as an alternative to the state’s former business tax, which was criticized as having high rates but numerous loopholes — it was sometimes dubbed a “Swiss cheese” approach – that reduced its ability to raise revenue.
The new tax is low – 0.26 percent – but is applied to as many businesses as possible with fewer exemptions.
The debate doesn’t involve the 28-cent state gasoline tax, whose revenues are distributed automatically to the state, counties and local governments for road work.
The state argued that the CAT is not on gasoline itself, but on companies that make money selling fuel. It also said opponents of the tax are disguising their objections to paying it “as a crusade to save highway spending.”
“The CAT relates to doing business, and it does not ‘relate to’ motor fuels any more than it relates to selling food, widgets, or anything else,” Stephen Carney, an assistant Ohio attorney general, said in a May 9 filing with the court.
In 2009, the court ruled the state could continue to collect the same tax when it’s applied to grocery store food sales. In a 6-1 decision, the court upheld the collection of the CAT on food sold by grocery stores and others for off-site consumption. The Ohio Grocers Association unsuccessfully argued that applying the tax to food sales violated the state constitution, which prohibits sales tax on the sale of food that’s taken off store premises to eat.