On Wednesday, Buckeye Institute Statehouse Liaison and Policy Analyst Greg R. Lawson offered testimony to the Ohio House Ways and Means Committee on one of the hottest topics in Columbus: municipal income tax reform. This is a key issue for Ohio's future economic competitiveness for several reasons.
First, Ohio's tax burden is too high to keep us competitive in the global economy, but it's not just our state taxes that are a problem. Local taxes are just as bad or worse. According to the Ohio Department of Taxation, Ohio ranks 13th in local tax burden as a percentage of income. According to the non-partisan Tax Foundation, our business tax climate ranks a poor 39th while our overall state and local tax burden still puts us in the top half at 20th place.
To reform our tax system in the long run, we must address not only the rates we pay but also how we tax. In the shorter term, there is something Ohio can do to alleviate serious burdens on Ohio businesses, particularly small companies: municipal income tax reform.
Ohio is one of only a few states that even allow municipalities to levy income taxes. Of the states that allow municipal income taxes, the majority of these only see taxes assessed by major cities. By contrast, with 593 municipalities levying this tax, Ohio trails only Pennsylvania, with 2,492, in the number of taxing municipalities nationwide.
Unfortunately, Ohio is unique in the nation as the only state allowing each municipality to draft its own rules for withholding and the calculation of penalties. This leads to absurd situations where contractors may have to file income tax returns for each jurisdiction in which they do business (there was testimony from small businesses that had to file over a dozen returns) no matter the size of the liability. Often, the cost of complying with the labyrinth of paperwork exceeds the actual tax! Remember, small and especially entrepreneurial businesses are the typical net job creators in America today. Many of them are unable to afford the legion of accountants and lawyers necessary to assure compliance with these local taxes.
This raises the question of why Ohio would want to raise significant barriers to entry for these new companies. The answer is that it doesn't, but until it can simplify its uniquely complex and burdensome municipal income tax structure, Ohio will in effect be doing just that. And until then, The Buckeye Institute will continue work to reduce barriers to business entry, and to create a simpler, flatter, more transparent tax system for Ohio.