In an effort to improve its economic competitiveness and improve its attractiveness to new businesses, Ohio legislators are currently considering major reforms to its 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 just one of a handful of states that allow local governments to levy income taxes, but is 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 a local income tax, only Pennsylvania has more.
Critics of the current system have argued that the complicated system places an undue burden on Ohio businesses while creating an unnecessary barrier to new business. In many instances, companies working in several cities were required to pay income taxes to multiple taxing authorities and file multiple tax returns, each with different rules, regulations and rates.
HB 5 attempts to simplify and streamline the various municipal taxing systems by creating a new uniform set of rules on municipalities that tax income while implementing a new standardized definition of what income is taxable for businesses and individuals. The reforms would also create a new uniform procedure for how employers file employee withholding payments and provide taxpayer with one standard municipal income tax form.
Other key changes include an extension of the occasional entry rule, which requires companies to withhold taxes for employees not working the principle location of the business from the current 12 days to 20 days and the set definition of a “day,” workers will be required to pay taxes in the city where they spend “preponderance of the work day.” While many of these changes seem commonsense, many businesses in Ohio accrued significant time and monetary costs keeping up with the current system and its complexities.
In an editorial, Ohio Treasurer Josh Mandel argues that Ohio’s current municipal tax system creates a complicated web of municipal tax codes that dramatically increases cost of filing income tax returns for Ohio businesses.
“Ohio is the only state in which every city and village sets its own rules and regulations about who must pay taxes, how much and on what type of income. More than 600 local government entities have devised more than 300 different tax forms. As a result, our municipal-tax reality is an unnecessary maze of inconsistency, uncertainty and inefficiency.”
In an article criticizing the current municipal tax system the The Buckeye Institute found that in some instances, the cost of complying with the labyrinth of paperwork exceeded the actual taxes collected. Amy Mignogna, director of tax policy for the Ohio Society of CPAs speaking on behalf of the Municipal Tax Reform Coalition agreed, commenting in a press statement that for many companies this was an unwelcome part of doing business in Ohio.
“House Bill 5 gives Ohio the long overdue opportunity to simplify its municipal tax structure.
Our current system is so complex, it often costs Ohio businesses more to comply than what they owe in taxes. This is the wrong way to do business. A simpler, more uniform set of rules and regulations will reduce paperwork, encourage better compliance with the law, and allow businesses to invest resources into growing and creating more jobs.”
While critics of the reforms under HB 5 are concerned that the new system would shortchange communities that rely on income tax revenue, the bill does not take away the ability of local governments to change their tax rates. While the ideal reform would be to eliminate income taxes altogether, these reforms take a significant step towards simplifying Ohio’s tax system and making the state more economically competitive.