Why Ohio needs Municipal Tax Reform
Centralized filing and collection will simplify the burdens of municipal net profit filings for thousands of businesses. The state estimates centralized filing will save businesses billions annually in municipal filing administration headaches.
Additionally, the Tax Foundation regards Ohio’s municipal-income-tax structure as the worst in all 50 states. The Foundation's State Business Tax Climate Index, a measure of a state’s tax structure, reflects this complexity and ranks Ohio’s tax system 45th in the country. Read more about it here.
Registration to opt-in for centralized filing has been open since Oct. 20, 2017, more than two months prior to the Jan. 1, 2018 effective date. Although businesses won the right through H.B. 49 to file and pay municipal net profits taxes centrally beginning with 2018 estimated quarterly payments, it is optional, not a mandated requirement. The registration is binding for one year and renews automatically unless the taxpayer changes the election.
An abundance of misinformation has been circulating around the state, so this page seeks to clarify a number of these mistaken claims.
Claim: There is an injunction right now that prevents cities from implementing centralized collection.
Reality: Despite reports by cities, there is no injunction delaying centralized filing. In fact, Franklin County Common Pleas Court Judge David Cain ruled against the cities on Feb. 21, throwing out a lawsuit that claimed the municipal income tax reforms passed into law last year as part of Am. Sub. House Bill 49 were unconstitutional and denied an injunction that would have halted registration. The cities have appealed the ruling and Cain on March 5 denied a motion by cities to “stay” his decision on centralized collection while the appeal is pending. The Ohio Department of Taxation is still accepting opt-in registrations on their website. The election is binding for one year and renews automatically. Check the deadlines for registration here.
Claim: The centralized filing law violates cities' home rule authority.
Reality: The constitutional issues are best left to the courts to decide, but the Municipal Tax Reform Coalition is confident the state of Ohio will prevail in moving ahead with centralized filing. Additionally, Art. XVIII, § 13 of the Ohio Constitution provides that the General Assembly may “limit the power of municipalities to levy taxes and incur debts,” and Art. XIII, § 6, states that the General Assembly “shall provide for the organization of cities, and incorporated villages, by general laws, and restrict their power of taxation… so as to prevent the abuse of such power.”
Claim: Cities will lose tax revenue through centralized filing.
Reality: Businesses will not pay less in tax if they opt to file centrally. But, they will spend less time and money in the process of paying taxes. A simplified process that reduces time and money means better compliance, which would help local tax bases.
Claim: The state's fee for centralized collection is too high.
Reality: It's true the state will keep a 0.5% administrative fee, but this fee is lower than fees ODT charges for collecting other local government taxes, including county sales tax (1%), school district income taxes (1.5%), and municipal electric, light and telephone companies (1.5%). Even the Regional Income Tax Agency (RITA) charged an average net 1.68% fee for all its services in 2016.
Claim: The state won't send payments to the cities on a timely basis, which creates local cash flow problems.
Reality: Businesses will make estimated payments to the state through the Ohio Business Gateway quarterly, but ODT will remit monthly payments to cities. Cities also will receive a pro-rata share of interest that accrues to the municipal tax fund from previous monthly payments.
Claim: The state plans to take over collection of all income tax, including employer withholding and individual resident returns.
Reality: Today, on average, the business net profits tax makes up just 14% of a city's total income tax revenue. Cities retain direct control over the remaining 86% of revenues collected. It's important to remember that this system is optional and each business will make its own decision whether filing centrally makes sense.
Claim: The Ohio Business Gateway (OBG) is not ready to handle the centralized filing and collection.
Reality: Overall in 2016, OBG processed over 5 million transactions reporting nearly $18 billion in taxes and fees. In addition to comprehensive OBG improvements that already were being completed, ODT is currently working with commercial software vendors so that tax practitioners will be able to upload files directly into the OBG. Businesses opting in also may choose to use the IRS’ Modernized e-File portal (MeF), the Ohio Department of Taxation announced Feb. 5. Tax practitioners whose commercial software already integrates with MeF will welcome the new filing option.
Claim: Cities cannot see the municipal returns that businesses are filing through OBG.
Reality: ODT plans to provide a portal for municipalities to view all returns and payments filed by businesses operating in their jurisdictions, providing the transparency needed to hold businesses accountable for the taxes they owe. create a portal for municipal tax officials to access tax documents filed.