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Kasich plan to take over business-profits tax collection raises concerns

March 06, 2017

Kasich plan to take over business-profits tax collection raises concerns

March 06, 2017

Proposal strips local control and may reduce revenue for some

Proposal strips local control and may reduce revenue for some

Zach Schiller, 216.361.9801 Download issue brief Press release

Introduction

Ohio’s cities and villages rely on the municipal income tax as their biggest source of revenue. Governor John Kasich has proposed having the state take over collection of that tax on business profits, which accounts for over $600 million of the more than $4.7 billion collected annually. But there is reason to be wary.

Cities have raised significant concerns about the proposal, starting with the loss of local control it entails. The state would take over the entire process, so cities no longer would have any role other than setting rates and credits and receiving funds collected by the state. That includes the ability to audit taxpayers, which would be done “when appropriate,” according to a summary of the proposal. The state believes that its superior access to taxpayer data would bring better compliance and more revenue. Cities aren’t so sure. Columbus, which audits every business return, has been collecting about $1 million a year as a result of its audits.

Municipalities also are concerned that they will get tax receipts from the state only quarterly, less frequently than they do now, and that the Ohio Business Gateway, the electronic portal through which businesses will file net profits taxes, will require a huge increase in its capacity. The proposal doesn’t recognize how business taxes are integrated into city operations, notes Melinda Frank, income tax division administrator for the City of Columbus. For instance, she noted, the city requires that businesses be current on their taxes to be paid as contractors or to benefit from a sidewalk repair program. Under the proposal, that would be more involved, because the city would have to ask for the information.

Questionable cost savings

Ohio Tax Commissioner Joe Testa said that many cities spend 2.5 to 3 percent of the tax they get from business profits on collection. Under the proposal, the state will charge the cities 1 percent. Testa presented a list of 32 cities and $811,867 they would save under the proposal. Overall, he estimates Ohio cities will save $9 million a year. However, it appears this could be exaggerated. The Regional Income Tax Agency (RITA), which collects the tax for about 270 municipalities, says that its net cost of collections for 2015 was 1.57 percent, considerably lower than the 2.5 percent that the taxation department estimated. And RITA’s costs for collecting net profits are actually a good deal lower than the overall 1.57 percent figure, since it costs relatively more to collect taxes on individuals than businesses. Cincinnati would pay more under the proposal. And Columbus, which collects about one-sixth of the municipal income tax in the state, spends just a hair more than the 1 percent the state would charge—but the modest savings would be more than wiped out by another provision in the proposal.

A review of just 15 accounts by Columbus found the city would have lost $395,016 from them alone in 2015 had this proposal been in effect. Grove City estimated its losses from a similar proposal in 2013 at $106,000, or the cost of a police officer. Eliminating throwback will especially hurt communities with warehouses that deliver directly to consumers. An earlier move to eliminate throwback was removed from House Bill 5, the 2014 bill that overhauled the municipal income tax.

throw back tax copyCurrently, when a company sells goods and delivers them to another city where it doesn’t regularly solicit sales, those sales are “thrown back” to the home city and taxed there. Kasich’s proposal would end this provision, creating a new loophole so that tax would not be paid on those sales to any municipality. A majority of the 44 states with corporate income taxes have such throwback provisions to ensure that profit is taxed.

Proponents claim that the current system is burdensome to business, saying that those that operate in multiple locations have to file many times and deal with different collection practices and appeals processes. However, previous efforts to make the tax more uniform have already standardized many of the rules covering business profits.  Current Ohio law allows businesses to file a generic income-tax form. Companies already can file a single return with RITA covering all of its communities, as well as with the Central Collection Agency, which covers more than 70. These two forms would cover the majority of 613 communities in the state that levy local income tax.

Local governments may lose

Recently, the General Assembly has preempted local governments from passing their own minimum wages, adding requirements for family leave or similar benefits, regulating ridesharing companies like Uber and Lyft, or establishing requirements that public projects hire local residents (although a court decision has not allowed the last to go forward). It has stripped revenue from local governments by repealing the estate tax, reducing reimbursements for a now-defunct local property tax, and cutting aid through the Local Government Fund. Given these actions, cities are understandably mistrustful, and city councils across the state have been passing resolutions opposing the tax collection plan.

state take over copyTaking over collection of local income tax on business profits raises the prospect that the state will move to eliminate the local profits tax. Ohio approved the repeal of its own state tax on corporate income in 2005, becoming one of only six states without such a tax. Why would the state collect a tax on business profits at the local level when it doesn’t do so for itself? Ohio already has provided major giveaways to business owners with little to show for it. Though the current budget bill doesn’t call for the end of the municipal tax on business profits, there is reason for concern.

Asked about the possibility that the state might also look to collect the municipal income tax on individuals, which is far larger than the net profits tax, Commissioner Testa said in recent testimony that there were no such plans and that the focus is on business. The proposal, as the tax commissioner explained it, isn’t so much about municipalities as it is about making things easier for business. That perspective lacks balance:  Business cannot thrive when cities and villages are struggling. The Canton Repository got it right in a recent editorial. “Kasich and those lobbying for this change have not taken into account the negative effect this move would create on municipalities like Canton,” it said. “Until they do, the proposal to centralize municipal tax collections should suffer the same fate as it did in 2014 and all years prior.”

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