Policy Documents

Research & Commentary: Ohio Municipal Income Tax Reform

June 3, 2013

In an effort to improve their state’s economic competitiveness, Ohio legislators are considering major reforms to the state’s unique municipal income tax system. House Bill 5 was introduced by state Reps. Cheryl Grossman and Michael Henne to streamline Ohio’s municipal income tax system, which is currently a jumble of local rules and forms. 

Ohio is one of only a handful of states that allow local governments to levy income taxes and the only state that allows each municipality to draft its own set of rules and regulations about who must pay taxes, how much tax they will pay, and on what type of income the tax will be charged. In most other states that allow municipalities to charge an income tax, only larger cities have imposed a tax. According to the Buckeye Institute, Ohio currently has 593 municipalities levying local income taxes, and only Pennsylvania has more. 

Ohio’s business tax climate, while improving, still ranks 39th among the states, according to the nonpartisan Tax Foundation. Critics of the current system argue its complexity places an undue burden on Ohio businesses while creating an unnecessary barrier to new business. In many instances, companies working in several cities are required to pay income taxes to multiple taxing authorities and file multiple tax returns, each with different rules, regulations, and rates. In some instances the cost of complying with the labyrinth of paperwork exceeds the actual taxes collected, the Buckeye Institute states in an article criticizing the system

House Bill 5 would simplify and streamline the municipal taxing systems by creating a new, uniform set of rules for municipalities that tax income and implement a new, standardized definition of what business and individual income is taxable. The reforms also would create a uniform procedure for how employers file employee withholding payments and provide taxpayers with a single, standard municipal income tax form.

Although critics of the reforms express concern the new system would shortchange communities that rely on local income tax revenue, the bill does not prohibit local governments from changing their tax rates. The ideal reform would be to eliminate or at least lower income tax rates, but the proposed reforms would be a significant step toward simplifying Ohio’s tax system and making the state more economically competitive.

The following articles examine Ohio’s municipal income tax system and the proposed reforms.


Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Municipal Tax Reform Could Make Life Easier for Residents, Businesses but Hurt Cities' Revenue
http://www.cleveland.com/business/index.ssf/2013/03/municipal_tax_reform_could_mak.html
Teresa Dixon Murray of the Cleveland Plain Dealer discusses Ohio’s municipal tax system, the proposed reforms, and how businesses and elected officials are reacting to the proposed changes. 

Ohio Needs Simpler Municipal Tax System
http://www.dispatch.com/content/stories/editorials/2013/04/27/ohio-needs-simpler-municipal-tax-system.html
In a Columbus Dispatch editorial, Ohio State Treasurer Josh Mandel identifies problems with the state’s municipal tax system and recommends reforms to simplify it. 

Fact Sheet: Municipal Tax Reform Legislation
http://heartland.org/policy-documents/fact-sheet-municipal-tax-reform-legislation
The Municipal Tax Reform Coalition outlines in this fact sheet the problems Ohio’s current municipal tax system creates, how HB 5 may solve some of those problems, and the benefits of reform.

Interested Party Testimony on Municipal Tax Reform before the Ways and Means Committee Ohio House of Representatives
http://heartland.org/policy-documents/interested-party-testimony-municipal-tax-reform-ways-and-means-committee-ohio-house
In testimony before the Ways and Means Committee of the Ohio House of Representatives, Greg Lawson of the Buckeye Institute argues for reform of the state’s municipal tax system. Lawson contends the reforms would go a long way toward making Ohio more economically competitive with its neighbors. Few things could better help Ohio show the business community it is serious about competing with its neighbors than to eliminate the confusion in its municipal income tax system, he states.

Local Income Taxes: City and County Level Income and Wage Taxes Continue to Wane
http://taxfoundation.org/article/local-income-taxes-city-and-county-level-income-and-wage-taxes-continue-wane
Joseph Henchman and Jason Sapia of the Tax Foundation find that although most local income tax rates are low (1 percent to 3 percent), they generally have broad bases and are difficult to avoid. The authors recommend state and local officials ensure these taxes do not discourage economic development or drive out mobile workers and businesses. Officials also must be careful not to impose excessive compliance costs associated with these taxes. 

An Open Letter to the Ohio Legislature: Simplify the Municipal Income Tax System!
http://static.squarespace.com/static/5123c769e4b03a5603ce7853/t/51782140e4b084b94e4ca166/1366827328986/NTU_LTR_HB5.pdf
The National Taxpayers Union voices its support of the municipal tax reforms in HB 5 in this letter to the Ohio Legislature. The letter argues the severe complexity of the current system creates a heavy burden for taxpayers and hinders Ohio’s competitiveness.

Municipal Tax Reform: Myths and Facts
http://munitaxreform.org/myths/
The Municipal Tax Reform Coalition examines several myths and facts about HB 5 and municipal tax reform, addressing the critics’ arguments. 

Why Is Municipal Income Tax Reform Needed in Ohio?
http://www.youtube.com/watch?v=0W8Q7XwJcnQ&list=PL2F6AE20E70B99BE4&index=4
James Gottfried and David Reape of the Ohio Society of CPAs explain the current municipal tax structure in Ohio and why municipal income tax reform is needed in Ohio. 

Ohio’s Local Income Taxes: Complex and in Need of Reform
http://heartland.org/policy-documents/ohios-local-income-taxes-complex-and-need-reform
In testimony before the Ways and Means Committee of the Ohio House of Representatives, Scott Drenkard of the Tax Foundation argues HB 5 would do a great deal to remove some of the complexity built into Ohio’s municipal tax system. Drenkard expresses hope that the proposal represents a start of a movement by lawmakers to make the code more sensible and user-friendly.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.  

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.