Sweeping municipal income tax reforms win final legislative approval

Cleveland.com (December 9, 2014)

COLUMBUS, Ohio — Major changes to Ohio's convoluted municipal income tax system are headed to Gov. John Kasich after passing the state House of Representatives on Tuesday.

The result of years of debate, House Bill 5 will help Ohio businesses by standardizing and streamlining the state's patchwork system of 300 or so different local tax forms, supporters say.

But opponents say the bill, in the name of promoting uniformity, offers a number of tax breaks paid for by slashing revenue to local governments already hurting from funding cuts.

HB5, if signed into law, would set up a number of statewide standards that local governments would have to follow, including that:

  • Businesses with an annual income of $500,000 or less would be charged municipal income tax only in the area where they're located;
  • Workers on a job in a different city wouldn't have to start paying income tax in that municipality during their first 20 days there. Under current law, the threshold is 12 days, after which employees are charged for every day they did work in the city;
  • Under a phase-in plan starting in 2016, companies would also be able to carry forward net operating losses for five years to offset taxes on future profits – a policy that most Northeast Ohio municipalities already have but is less common elsewhere in the state. The bill would also allow individual taxpayers to carry forward net operating losses; and
  • Local governments would no longer be able to tax supplemental retirement benefits given to company executives.

The legislation received final approval from the Ohio House by a 57-31, largely party-line, vote. The measure passed the state Senate last week.

Legislative supporters of HB5 have called the legislation a balanced compromise that will particularly help small-business owners who work in multiple cities to comply with all the different income tax forms, deadlines and rules.

But opponents said the changes will significantly reduce local governments' income tax revenue at a time when they're already reeling from state funding cuts, the end of the tangible personal property tax, and the abolition of the estate tax.