Lawmakers announce revised bill to reform Ohio's municipal income tax system

The Plain Dealer (October 23, 2013)

By Jeremy Pelzer

COLUMBUS, Ohio — State lawmakers on Wednesday unveiled revised legislation that supporters said would make the most significant changes to Ohio’s municipal income tax system in state history.

The changes to the bill, which is being considered in the House Ways and Means Committee, mark a compromise between local governments and business groups, though some issues are still unresolved.

The revisions to House Bill 5 include an eventual statewide five-year period for businesses to carry forward operating losses, only charging small businesses municipal income tax in the area they’re located in, and other provisions to streamline and standardize how more than 600 municipalities collect income taxes.

The reforms are designed to address criticisms of Ohio’s convoluted municipal tax system. Business groups say the current patchwork system is overly complex and forces some businesses to file dozens of separate tax forms every year. Municipalities, on the other hand, worry that the reform efforts will strip away revenue at a time when local government funding from the state has already been slashed.

Under the changes made to the bill, companies in Ohio would be able to carry forward net operating losses for five years in order to offset taxes on future profits.

That provision wouldn’t take effect until 2017, and for the following five years businesses could only deduct 50 percent of their loss, according to the new language of the bill. A review committee would also be created to study the issue.

Right now, 170 Ohio municipalities don’t have any carry-forward for such losses, and 65 allow the practice for less than five years, according to Kent Scarrett of the Ohio Municipal League.

The substitute bill also states that employers with less than $500,000 of gross revenue per year would only pay municipal income tax in the area where they are located.

The bill keeps language that would increase the amount of time someone must work in a community before becoming liable for any income tax there to 21 days, up from 13 days under current law.

Other provisions include a list of factors to determine a person’s residency for tax purposes and a Taxpayer Bill of Rights for local income taxes.

State Rep. Peter Beck, a Republican from Mason, said in a Statehouse news conference that the changes would mark the largest changes to Ohio’s municipal tax system in state history.

“This substitute bill will improve Ohio’s economic competitiveness, create jobs for the middle class, is pro-taxpayer and pro-small businessowner, and it attempts to protect the rights of Ohio citizens and municipalities as well,” Beck said.

Beck said the House Ways and Means Committee, which he chairs, will hold hearings on the revised legislation for several weeks.

Municipalities and business groups have been negotiating for months about the issues. Each side said Wednesday that they needed to read the substitute bill before taking a official position on it.

Scarrett said the five-year net-operating loss provision is "definitely a problem" for municipalities, though he said his group has reached agreement on most other issues under debate. He also indicated concern that, under the bill, workers who become liable to pay income tax after working in an area for 20 days would only be assessed taxes starting on their 21st day on the job.

The Ohio Society of CPAs, the National Federation of Independent Business' Ohio chapter and the Ohio Chamber of Commerce, some of the 30 members of the Municipal Tax Reform Coalition, praised the substitute bill and urged lawmakers to swiftly pass it.

In a release, the groups said that by establishing uniform rules and regulations, taxpayers would have an easier time understanding where, how and when to file local taxes.

Scott Wiley, president of the Ohio Society of CPAs, said in an interview that he was "cautiously optimistic" about the revisions.

"This goes one step further in making sure Ohio is competitive," Wiley said.