The Hannah Report (November 19, 2014)
The municipal income tax reform debate continued Wednesday for a second day of hearings this week as the Senate Ways and Means Committee heard from a mix of supporters and critics on HB5 (Grossman-Henne).
Mark Engel of Bricker & Eckler, tax counsel for the Ohio Manufacturers' Association (OMA), said despite efforts to reform Ohio's tax climate in the past several years, the municipal income tax system keeps dragging down assessments of the state.
"To be competitive, a tax system needs to be transparent and simple. The existing municipal income tax provisions in Ohio are anything but," Engel said.
Engel said HB5's inclusion of a net operating loss carry-forward reflects the reality of businesses ups and downs.
"When income is earned, no matter how much, a tax is incurred. When a taxpayer operates at a loss, however, its tax bill is merely reduced to $0. It does not get money back. Recognition of some level of net operating loss carry-forward better reflects the operations of a business over time. Without this provision, business is faced with a 'heads you win, tails I lose' proposition," he said.
Sen. John Eklund (R-Chardon), noting municipal government arguments that HB5 will sap revenue they need to do economic development, asked Engel about the effect of such local incentives. Engel said the studies are mixed on what roles taxes and economic development incentives play in determining business site selection. But he said OMA has long advocated a simple tax system with a broad base, low rates and few exclusions, saying that would likely blunt the need for additional incentives.
Guy Kantak, owner of The K9 Guy, a dog training business, submitted testimony describing the difficulty of determining to which communities he actually owes taxes, given the overlap of mailing addresses for one city with the township or municipal boundaries of another. Calculating his liability involves a property search with the county auditor, he said.
"As they say, time is money. When looking at compliance costs for the paltry sum generally owed, it's hard not to get very upset over the absurdity of all this," Kantak wrote, estimating that he spends about 100 hours a year on tax compliance.
Tom Shreves, executive director of the Greater Cleveland National Electrical Contractors Association, submitted testimony saying electrical contractors are "disproportionately" affected by municipal tax complexities, with many of them filing returns in dozens of communities every year. "It is not uncommon for our members to file tax returns of less than $5 in multiple municipalities each year with the cost of preparing the returns outweighing the tax that is actually paid," he said.
Greg Lawson of the Buckeye Institute testified as an interested party, reviewing recommendations from a report he wrote on the tax system but noting that even with the "strongest imaginable uniformity legislation" Ohio will still stick out as one of only 10 states with municipal income taxes on individual and business income. He reviewed recommendations of his report, including standardization of reciprocal income tax credits, a bright-line residency test to tax non-residents based on their primary place of employment, and a higher profit threshold for filing a return to ensure compliance costs don't exceed the actual tax liability.
The Regional Income Tax Agency, which administers municipal taxes for 240 cities and villages, also submitted testimony as an interested party, saying while it welcomes uniformity, a handful of changes make the system "less uniform and more unsettled." Namely, those are the definition of qualifying wages; the administration of consolidated net profit returns; and the so-called "throwback" rule.
Following Tuesday's wave of critical testimony from more than a dozen mayors, managers and finance officials from various communities, a few more municipal leaders showed up Wednesday or submitted written remarks to continue to argue the benefits of uniformity provisions in the bill are outweighed by other parts that cut into cities' revenue base.
Government officials continued to focus on provisions they say are most harmful, including the requirement for the five-year net operating loss carry-forward and changes to the occasional entrant rule.
Tom Vanderhorst, finance director for the city of Hamilton, said even with a three-year carry forward already in place in his community, the switch to five years is estimated to cost $375,000.
He said threats to local revenue also hurt local economic development efforts, noting Hamilton is in pursuit of a project that could bring 1,200 jobs but would require the city to spend $1 million on infrastructure upgrades.
Local leaders also again linked HB5 to previous hits to local budgets, such as the Local Government Fund cuts in the FY12-13 biennial budget. Patrick Titterington, city director of Troy, pegged losses from the LGF, estate tax repeal and changes to the tangible personal property tax at $2 million in the past two years.
Testimony from Kevin Robison, assistant income tax administrator for Columbus, focused on criticism of proposed changes to filing of consolidated returns for affiliated corporations, as well as offsets of pass-through income.
"This proposed offset provision permits resident investors of pass-through entities to offset losses from those entities against their resident income taxes, even though the losses may have been incurred in other municipalities. This new method for determining income subject to municipal tax has allegedly been proposed to gain simplicity in preparation. But in effect [it] will generally benefit wealthier taxpayers that manage their assets through the use of pass-through entities such as partnerships and limited liability companies," Robison said.