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Municipal Taxes

Last November, the Tax Foundation issued its 2016 State Business Climate Index. There, the authors placed Ohio at No. 42 – making it one of the ten worst performing states in the nation. (It also commended Ohio’s cut to its individual income tax, to 4.997 percent. Because this occurred after the Index’s July 1, 2015 snapshot date, it will be reflected in the 2017 edition.)

Ohio’s No. 42 rank stems, in part, from the Buckeye State’s municipal tax system, which the Tax Foundation has characterized as the worst in the nation. In fact, in May 2013 economist Scott Drenkard, testifying before a hearing of the Ohio House of Representatives Ways and Means Committee, asserted that Ohio’s system is too complex to achieve the ideal goal of collecting revenue for necessary government services in the most efficient way possible. As evidence, Drenkard pointed to the numerous additional local income tax forms that some individuals and businesses are required to fill out, despite the fact that the resulting tax bills are often trivial. In this way, “municipalities are contributing a great deal to compliance costs, which economists will tell you are just a tax burden that doesn’t even collect any revenue."

What’s worse, Drenkard argued, each individual locality is permitted to come up with its own calculation of taxable income, as well as its own collection requirements. This is problematic because it can lead to double taxation, such that a taxpayer may pay local income taxes on the same dollar to more than one jurisdiction.

Last week, Drenkard weighed in again on Ohio’s municipal tax system, summarizing the problem as one that causes “Ohio residents [to] pay income taxes to the municipality that they work in, and then also to the municipality they live in.” He cited an example of an electrical contractor that had to fill out 221 W-2 forms for his 19 employees, even though most of them had a tax bill of less than $5 in each jurisdiction.

Drenkard wrote his article in response to a recently introduced proposal that would ask Cleveland voters to approve an increase in that city’s income tax from 2 percent to 2.5 percent. Cleveland.com reported that Mayor Frank Jackson submitted the measure to fix an anticipated multi-million shortfall in next year’s budget, improve services to the public, and help fund the implementation of the federal consent decree on police use of force. Mayor Jackson invoked a parade of horribles that would befall the city absent voter approval of the increase: “…it would mean mass layoffs of city workers and a devastating decline in the quality of life in Cleveland. In short, more potholes, more blight, unplowed snow and slower police response.”

The increase to the 2 percent income tax rate, which has not changed since 1981, is projected to raise $83.5 million. Mayor Jackson has publically lamented the $111 million in state tax cuts from which Cleveland has suffered; we addressed these cuts last March, when Gov. John Kasich introduced his state budget proposal containing $500 million in reductions, including the elimination of an income tax for pass through entities. Although most small businesses benefitted from this, the savings were expected to be relatively small for any individual taxpayer firm, just $364 per year on average.

Like Mayor Jackson, the Tax Foundation also criticized the proposal; not only would it likely cost more than projected because it encourages firms to restructure to take advantage of the exemption rules, it does nothing to simplify the onerous municipal tax system.

Sales tax holidays

Under consideration by Ohio lawmakers is the implementation of Senate Bill 264, legislation that would make permanent a 3-day back-to-school sales tax holiday. It would be held on the first Friday, Saturday and Sunday of each August, and would exempt sales of back-to-school clothing and school supplies from sales and use taxes. More specifically, any one item of clothing selling for $75 or less, any school supply item selling for $20.00 or less, and any school instructional item selling for less than $20, would fall into the exempt category during the tax holiday.

The Tax Foundation points out that “economists generally agree that consumption will just shift from periods of normal taxation to tax exemption,” with a zero net effect on the economy, along with a reduction in revenue for the state. In last week’s Multistate Tax Update, we mentioned the group’s disapproval of a Florida proposal to replace a hurricane preparedness program with three new tax holidays, in addition to the 10-day back-t0-school holiday that Gov. Rick Scott supports.

As for the argument that Ohio’s back-to-school tax holiday provides relief for low-income consumers, the Tax Foundation asserts that a tool like a sales tax holiday, which anyone can take advantage of, is “peculiar and inefficient.” It would be smarter to offer a tax rebate targeted specifically for the consumers lawmakers want to assist, or better yet, eliminate sales tax holidays all together and replace them with broad based sales tax cuts.

A report prepared for Focus on Ohio’s Future offers a different perspective. In the University of Cincinnati Economic Center’s Economic Analysis on the Effects Of Back-to-School Sales Tax Holiday in Ohio, economists looked at the impact of Ohio’s August 2015 sales tax holiday, and found the following:

  • Overall retail sales in Ohio increased by 6.48 percent. 
  • Gross sales tax collections increased by 9 percent, possibly because consumers purchased other items at the same time that were not exempt. 
  • Net sales tax collections increased by $4.7 million. 
  • Ohio consumers did not postpone certain purchases in anticipation of the sales tax holiday, though this would likely occur in the future, based on prior studies. 
The center noted that no states on Ohio’s border offered a sales tax holiday. Should that occur, the results in Ohio may be different.
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