Municipal tax system is punishing for Ohio’s businesses

The Columbus Dispatch (April 17, 2014)

Greg R. Lawson commentary

After a Great Recession that cost Ohio more private-sector jobs than any state except Michigan, Gov. John Kasich and state lawmakers understandably want Ohio “open for business.”

But is a state really open for business when its local governments require some businesses to file not one, not two, but between 30 and 40 W-2 tax forms for their employees? Or how about a state with local governments collecting income taxes on as little as $5 earned? Or a state with more than 15,000 pages of local ordinances defining hundreds of different local taxes?

And can a state really be open for business if it doesn’t even have a standard “net operating loss carry-forward” provision, or enforce caps on local income taxes?

The answer to each of these questions, of course, is no.

And so, businesses have fled and our economy has languished as Ohio’s byzantine municipal income-tax system continues to impose these and other hidden costs that have plagued development and economic growth for decades. Even the nonpartisan Tax Foundation recently found that ours is “ the most complicated, absurd and punitive system of municipal taxation in the nation” — a system that will tax you twice if you live in one municipality but work in another, compounding the injustice with every paycheck.

The good news is that the General Assembly has acknowledged that this system is a problem. Acknowledging the problem is always the first step to recovery, and the legislature has proposed House Bill 5 in an effort to make our municipal taxes more uniform and straightforward.

The bad news is that House Bill 5, currently before the Senate Finance Committee, barely scratches the surface of the systemic, deep-seated problems that cause and perpetuate the current absurdity. As the Tax Foundation’s Scott Drenkard laments, House Bill 5 is “not making the amount of uniformity necessary to really affect (Ohio’s) horrid tax system.”

A war of attrition has been fought between status quo-minded municipalities that fear that reform will cost them tax revenue, and reformers who want to disassemble or at least simplify the Rube Goldberg contraption we in Ohio call municipal taxation.

That fight is understandable. But if our state leaders are serious about getting Ohio open for business, then the time for half-measures is over. Passing weak reform measures today almost certainly will rule out stronger reforms tomorrow, and reform-minded legislators should resist the siren song of any reform bill that fails to address the problems that need to be reformed. That should go without saying, and yet that is precisely the sort of “major reform” offered in House Bill 5.

When considering real reform, Kasich and the General Assembly should remember that only around 10 states levy any municipal income taxes. Of those, most have only a few cities that levy income taxes. Ohio, on the other hand, boasts nearly 600 different municipalities assessing income taxes — second only to Pennsylvania, which has a far simpler tax-filing method than Ohio.

Would eliminating Ohio’s municipal income taxes altogether be a bridge too far? Probably, at least for now, which is why uniformity and streamlining are imperative.

The Buckeye Institute and the Tax Foundation have suggested the following steps that Ohio could take to help re-open its doors for business: eliminate double taxation on pass-through entities; cap municipal tax rates; set reasonable thresholds that prevent filings for ridiculously low tax bills; implement uniform tax rules, forms and instructions across jurisdictions; set uniform rules for calculating tax credits; provide a meaningful “net operating loss carry-forward” so that new or struggling business can survive; and give a simple bright-line test for determining municipal residency.

Many of these reforms might not be easy for many municipalities, but Ohioans and their businesses cannot continue to labor under the burdens of the status quo. Making serious changes to our arcane municipal tax system offers at least one way for lawmakers to help get Ohio open for business again.

Greg R. Lawson is a Statehouse liaison and policy analyst for the Buckeye Institute for Public Policy Solutions.