Bumpy road for tax fix

The Columbus Dispatch (November 9, 2013)

Ohio has a problem that bedevils businesses and therefore counts against the business-friendliness of the state: The lack of uniformity in how cities levy income taxes forces companies doing business in multiple cities to deal with mountains of paperwork as they try to comply with those different systems.

State lawmakers have been working at a solution for more than two years, but they can’t seem to come up with a proposed law that’s acceptable to cities and to the businesses that pay the taxes.

The difficulty is understandable. Requiring cities to change the way they tax businesses no doubt will cost some of them revenue, and no city official is going to be happy about that. But this short-term pain would be outweighed by the long-term improvement in the overall business climate.

Substitute House Bill 5, approved by a House committee on Wednesday, includes a number of provisions that have cities up in arms. Municipal officials say an earlier version of the bill was more favorable to them.

As the bill moves through the full House and on to the Senate, lawmakers should renew efforts to compromise.

The underlying problem is serious; no other state in the nation has anywhere near the Byzantine mess of Ohio’s income-tax non-system, primarily because few states allow municipalities to levy income taxes. In Ohio, income tax is the primary source of revenue for most cities. In Columbus in 2011, income tax brought in $508 million for the general fund, or 72 percent of the total, and $169 million for paying off debt.

That’s why cities have lobbied hard against proposed statewide tax rules that they say would lower their tax revenues.

For example, the bill in its current form allows businesses that lose money in one year to count that loss again, to offset profits earned in subsequent years (“net operating loss carry-forward,” in accountant-speak). Many cities don’t allow it currently, for the obvious reason that reducing business’ profits on paper reduces the amount of income tax cities can collect on those profits.

Cities also object to a provision that would allow employers to avoid withholding income taxes from employees who work in a given city 20 days or fewer in a given year. Most cities currently have a shorter threshold.

The bill would not create a centralized, state-run tax-collection system. Although that has been suggested in the past by Ohio Tax Commissioner Joe Testa, lawmakers have heeded cities’ concerns about the loss of autonomy that would entail, and haven’t included that idea in a bill.

Authors of the bill want to create as friendly a business climate as possible, to strengthen businesses and create jobs. That should be a goal of any tax-related legislation. But the mere fact of a single, statewide set of rules for filing municipal income taxes would, by itself, be an enormous improvement in Ohio’s business climate.

In the current mess, nearly 600 Ohio taxing jurisdictions employ nearly 300 different forms. For companies, especially small ones, doing business in multiple jurisdictions, complying with income-tax rules is extremely expensive and time-consuming.

It’s not uncommon for the cost of compliance to exceed the amount of tax owed.

This is a needless burden on businesses that can and should be rectified. But doing so need not include granting certain businesses tax advantages that don’t currently exist.