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Income tax changes: Work-from-home could have big impact on city budgets

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Posted at 6:50 PM, Jul 11, 2021

Shifts toward more people working from home long-term could mean large income tax losses for many Ohio cities while other cities could reap more, according to local leaders and experts.

The state legislature recently wrote into the two-year budget that Ohioans working from home in 2021 onward will pay income taxes based on their home office location, not the address of their employer’s empty office building.

Many Ohio cities depend on income taxes to pay for a wide range of local services — police officers, firefighters and paramedics, parks, code enforcement, road repairs and snow plows. So where your municipal income taxes go every year has far-reaching implications.

Nobody knows exactly how many people are working from home this year or how many will continue working from home. It’s also difficult to predict how many Ohioans next year will take advantage of 2021 refunds from cities for taxes improperly withheld when for some the money would go not into their pockets but instead go to pay their hometown taxes.

This shifting municipal income tax landscape will impact each city differently. Experts predict suburban bedroom communities could see gains while bigger places, where many workers reside outside the city limits, could lose millions of dollars annually. One estimate is that Ohio’s six largest city governments could see a reduction of local income tax revenue of $306 million a year combined.

“We were very disappointed that the General Assembly took yet another swipe at Ohio’s municipalities and cities,” said Wendy Patton, senior project director at Policy Matters Ohio. “There have been deep cuts to revenue sharing. Cities have lost over a billion dollars due to state actions over the last decade, and this was one more swipe at the fragile resources of Ohio cities, which are the engine of the economy.”

Jay Carson, a senior litigator at the Buckeye Institute, said Ohio cities do not have the constitutional right to tax individuals not benefiting from their services.

“The city can’t simply deem you to be working in one place when you’re not,” he said. “If you’re a non-resident and you commute into the city and you work there five days a week, then while you’re there, you’re taking advantage of the city services… so it’s only fair that you pay a portion of that.”

But that’s not the case for the untold number of Ohioans who worked from home in 2020, he said. The Buckeye Institute, a conservative think tank, is involved in at least four court battles in Ohio challenging the constitutionality of how at-home workers were taxed in 2020 during the pandemic.

The implications for cities

Keary McCarthy, executive director of the Ohio Mayors Alliance, said this all has the potential to be destabilizing for large and small cities across the state.

The Regional Income Tax Authority collects municipal income taxes for 330 Ohio jurisdictions, or about half of all state municipalities that levy an income tax. RITA does not serve the state’s largest cities. It estimates that shifts in income taxes would make about 85% of 300 Ohio cities it serves net losers.

Earlier this year, the Greater Ohio Policy Center released a report on the impact 20 legacy cities would see if Ohio were to repeal the legislation stating that income taxes should be collected by the municipality where employers are located.

The report found that Springfield could suffer a net loss in income tax revenue since about 15,464 residents are employed outside the city and 21,992 non-residents are employed inside the city.

The report also found that Middletown could see a net gain in income tax revenue since about 18,885 residents are employed outside the city and 14,874 non-residents are employed inside the city.

Shifting toward more remote work could mean cities will need to shift their priorities, McCarthy said.

“A lot of the tax incentive programs that our cities run are tied to bringing jobs into the community,” he said. “A lot of times those incentives are offered on the promise that cities will see a net benefit from more workers coming into the city and paying income tax in the city as a result of that incentive. And so if remote work is going to have a long-term impact on how employers situate their employees, those types of incentive deals are going to have to be looked at a little bit more carefully.”

How should Ohio cities fund themselves?

Greg R. Lawson, research fellow at the Buckeye Institute, said Ohio cities should take this opportunity while federal aid is flowing in to diversify their revenue streams.

“Most American cities don’t fund themselves just from income tax,” Lawson said. “There’s combinations of sales and property taxes, revenue sharing with the state. There are a lot of different ways that this could be done. And the legislature and the cities should get together and think through what would a 21st-century tax system look like? I fear that what’s going to happen is cities are going to just hope that enough people don’t seek refunds, and they just kind of muddle on through. And they lose some revenue, but it’s not as bad as they thought. And they’ll just keep doing what they’ve been doing.”

Alison Goebel, executive director of the Greater Ohio Policy Center, said she also does not like that Ohio cities are so reliant on municipal income taxes.

“Any good functioning entity should have a diversified revenue stream for exactly these types of situations,” she said. “But the fact of the matter is, is that the state policymakers over the last few decades have taken away several key sources and cities have really sort of been left to figure out revenue streams on their own.”

A key revenue-sharing program, Ohio’s Local Government Fund, has been cut in half between 2006 and 2018, according to a 2019 report by Policy Matters Ohio. Wendy Patton, senior project director at Policy Matters Ohio, wrote that local governments in Ohio lost $1.4 billion annually, adjusted for inflation, through cuts in state-distributed funding and loss of local tax revenues done away with by the state, such as the estate tax.

“We have long felt that the cuts to the revenue sharing program have been a mistake,” Patton said.

Refunds explained

Most Ohioans pay their municipal income tax to the city where they work and if they live somewhere else, their hometown usually gives them a credit for those taxes paid. If your hometown has a higher income tax rate where you work, you pay the difference to your hometown.

As droves of Ohioans suddenly worked from home in 2020, the state legislature passed an emergency measure that allowed cities to continue collecting income taxes based on where employees would have paid income taxes if there were no pandemic and they were in the office.

But that emergency measure has ended. And the state legislature recently wrote into the two-year budget that Ohioans in 2021 onward will pay municipal income taxes where they work, including if that’s at the kitchen table. This means Ohioans can apply for refunds on 2021 taxes withheld improperly.

You qualify for a refund if you meet all the following criteria:

  • You worked from home in 2021 for more than 20 days (they need not be consecutive). A day is counted based on where you spent the majority of your working hours that day.
  • Your home is not located in the same municipality as your work.
  • Your employer withheld municipal income taxes from your paycheck for a municipality based on your employer’s location.

You will only get money back in your pocket if the municipality you reside in has no income tax or a lower income tax rate than the city where your employer is located or your hometown does not give you full credit for taxes paid to another municipality.
By the numbers:

  • $306 million: Amount Ohio’s six largest cities could lose annually under new municipal income tax model, according to the Greater Ohio Policy Center
  • 85%: The percentage of 300 Ohio cities studied by the Regional Income Tax Authority predicted to see net losses from a shift in income taxes