Cities Decry Funding Loss, Special Breaks in Municipal Tax Bill

The Hannah Report (November 18, 2014)

Cities and villages fired back Tuesday in the municipal tax debate, arguing before a Senate committee that bill supporters' stated justifications of simplicity and uniformity obscure its blow to communities' bottom lines and the inclusion of generous special-interest carve outs. 

The Senate Ways and Means Committee heard from several local government finance officials and elected leaders including Cincinnati Mayor John Cranley, who brought a letter signed by dozens of Southwest Ohio leaders casting municipal tax reform measure HB5 as the latest iteration of state cuts to local communities.

The committee led off the meeting by accepting a substitute bill and two amendments that Sen. Bob Peterson (R-Sabina) characterized as technical and corrective changes.

Kent Scarrett, spokesman for the Ohio Municipal League, lamented his organization's opposition to the bill, saying member communities want a more streamlined tax administration system but can't swallow the "unsustainable revenue loss" that they estimate will result from the bill as written.

Scarrett said the $4 billion-plus in annual municipal tax collections provides about 70 percent of communities' general operations, and about 70 percent of that funding goes to basic safety services. That money is more important to local budgets than ever after repeal of the estate tax and cuts to the Local Government Fund enacted in Gov. John Kasich's first budget, he said.

Scarrett said the bill would give "undeserved" tax benefits to a select few, prompting Sen. John Eklund (R-Chardon) to remark, "The concept of 'undeserved' tax relief is foreign to me."

"What is it that makes the municipality deserving to take money from me," Eklund said, arguing that collecting revenue is a privilege granted to government by the people.

Cranley said the bill includes tax treatments that would benefit highly paid people, citing provisions on Supplemental Executive Retirement Plans, board of directors fees and "occasional entrants" like professional sports teams. 

"Should Pittsburg Steelers Coach Mike Tomlin -- who makes almost $6 million per year -- be given a special tax break not enjoyed by the person taking your order at Wendy's? There's something seriously wrong with this picture," he said. "Let's be clear -- this provision has nothing to do with making the tax code more uniform. Rather, it is yet another perk inserted to benefit a narrow special interest."

Officials submitting testimony represented communities as large as Columbus and Cincinnati as well as mid-size cities like Dayton and smaller communities like the city of Piqua and the Ashtabula County village of Orwell.

Mike Barhorst, mayor of Sidney, said proposed changes in HB5 to how far back cities can go to collect taxes from occasional entrants are estimated to cost about $86,000 a year, "roughly the cost of a firefighter including benefits." Tom Franzer, assistant city manager for Springfield, pegged the costs to his city at $650,000 "minimum." Cranley said Cincinnati would lose millions of dollars under HB5. 

Aside from revenue losses, the municipal officials complained some of the changes being sold under the banner of uniformity and simplicity might actually make compliance with and administration of the system more burdensome rather than less. 

Dana Pinkert, finance director for Ashtabula, said she's facing the prospect of needing additional staff to administer proposed changes to the occasional entrant rule, given how the city is surrounded by townships containing many small businesses with independent contractors. Toledo Tax Commissioner Clarence Coleman said his city is looking at $1.2 million in computer system costs to be able to administer municipal taxes under HB5. 

The committee also heard from an interested-party witness, Fred Nicely of the Council on State Taxation (COST), which supports making additional changes to the bill to seek greater uniformity. COST supports extending the net operating loss carry-forward all the way out to 20 years, the same as the federal tax code, with Nicely saying it's "axiomatic" that tax systems should accommodate the cyclical nature of business. According to Nicely's testimony, COST also supports raising the threshold on taxing certain nonresident workers to 30 days and a longer window for filing local returns, among other positions, according to Nicely's testimony.