On Dec. 19, 2014, Gov. Kasich signed Sub. H. B. No. 5 (HB 5), applicable to municipal tax years beginning on or after Jan. 1, 2016. The Columbus Dispatch described the bill as a “long-needed simplification of Ohio’s overly burdensome municipal-tax code,” and “one of the best, most-revolutionary things to come out of the lame-duck session of the legislature.” The article revealed that the bill increases the amount of time a worker can work in a city before having to pay taxes there from 12 days to 20 days (occasional entrant treatment), and phases-in a requirement that cities allow businesses to deduct net operating losses over a five-year period, reducing future tax burden.
The article recognized that several business groups, like the Ohio Society of CPAs, the National Federation of Independent Business/Ohio, and the Columbus Chamber, strongly backed HB 5.
In a Summary of Key Provisions, the Ohio Society of CPAs observed that HB 5 establishes a uniform tax base across all municipal tax corporations that levy an income tax. It does this by further defining the income that municipalities can and cannot tax.
The group listed four key areas of reform:
- Net operating loss carry forward (described above).
- Pass-through entities: With the exception of the 119 municipalities who previously voted to tax resident S corporation owners at the shareholder level, HB 5 imposes the municipal net profits tax on a pass-through entity at the entity level, with the owner needing to file only in their city of residence.
- Occasional entrant treatment: In addition to the provision described above, among other things, HB 5 creates a separate exemption that prohibits the taxation of income of employees of businesses with less than $500,000 in annual revenue by any municipality other than the municipality where the business’ fixed location is located.
- Administrative procedures: HB 5 sets up numerous administrative prescriptions and requirements. For instance, taxpayers will receive an automatic municipal tax filing extension if they timely filed a federal extension.
According to the Municipal Tax Reform Coalition (Coalition), Ohio is one of just a few states that allow municipalities to assess income tax on businesses and individuals, and the only state in which each municipality creates its own definition of income. The Coalition supported reform because the high cost of compliance hinders economic growth, often costs businesses more than they owe in taxes, and is especially burdensome for businesses whose employees work and travel in multiple cities.
The Coalition opined that HB 5 will benefit Ohioans by making the tax system fairer, more predictable, simpler, and less costly. Ultimately, the Coalition expects “Ohio will no longer stand out as the worst state in the nation in terms of municipal tax requirements.”
In contrast, the Ohio Municipal League (League) sent a letter to Gov. Kasich asking him to veto HB 5. The main reason for the League’s opposition was that it would cause revenue loss that is “unsustainable for scores of Ohio cities and villages.” While contending that it has always championed the notion of greater uniformity in the administration of the municipal income tax, the League lamented that the goal shifted from uniformity to reform.
Gov. Kasich continues to pursue tax reform with vigor. The Plain Dealer recently reported that he intends to seek additional cuts to personal income taxes while asking the business community to “share some of the burden…Everybody's going to have to be part of tax reform...We have to have a system that encourages economic [growth], that allows us to collect the revenue we want."