|April 22, 2014|
Previously published on April 17, 2014
Ohio has long claimed the dubious distinction of being the state with the most complex local tax regime. According to the Columbus Dispatch, Ohio has more than 600 taxing jurisdictions which employ a total of more than 300 income tax return forms. No other state allows nearly as much local autonomy, diversity or complexity in tax administration due simply to the sheer abundance of independent tax jurisdictions. Ohioans are especially aware of this issue this week with filing deadlines falling on April 15. For Ohioans who work in a city different than their city of residence, most were required to file returns and pay income taxes in at least two municipalities.
The Ohio General Assembly has the power to rectify the local tax situation, however, none of its actions to date have gone far enough. Nonetheless, the issues Ohioans face today have frustrated taxpayers (and ambitious lawmakers alike) for many decades.
The 1965 Ohio Supreme Court decision of Thompson v. Cincinnati, 2 Ohio St.2d 292, which is still valid today, summarily outlines the problem and the solution. As the court stated in 1965, “[t]he General Assembly may pass laws providing for the taxation of incomes[.]...However, until the state enters the field of income taxation as authorized by the Ohio Constitution, municipalities have within their general power of taxation the power to tax incomes.” 2 Ohio St.2d at 295 (emphasis in original). Under Section 13, Article XVIII and Section 6, Article XIII of the Ohio Constitution, the General Assembly may pass laws limiting the municipalities’ power to levy taxes for local purposes and may restrict the municipalities’ power of taxation so as to prevent the abuse of such power. The court further noted that both judicial precedent at that time and the constitution “clearly indicate that a municipality has the power to tax incomes subject to all lawful restraints imposed by the General Assembly.” Thompson, 2 Ohio St.2d at 295-96.
While Chapter 718 of the Ohio Revised Code does impose some restrictions on what and how a municipality may tax income, it does not go nearly far enough to place Ohioans on par with other states concerning local income tax complexity. Ohio remains on an entirely different spectrum than the rest of the country. In fact, individuals and businesses alike in Ohio are often responsible for multiple local tax returns, often filing in jurisdictions where they are unable to vote or have any say in how the locality taxes them.
In Thompson, the court addressed the following question: Can the City of Loveland levy an income tax on the wages of a resident, where such wages result from employment within another municipality and are subject to an income tax in that other municipality? The taxpayer in Thompson argued that to impose two municipal income taxes upon his wages was discriminatory. The taxpayer reasoned that the municipal tax was discriminatory because residents of Loveland who work in Cincinnati (which was the case of the taxpayer) are subject to two taxes. Conversely, residents of Cincinnati who work in Loveland are subject to only one municipal income tax. The difference in taxation was the result of Cincinnati’s allowance of a tax deduction for all of its residents who must pay an income tax on their wages from work performed outside the city, while Loveland did not have such a deduction.
Fortunately, Ohio lawmakers have recently revisited the issue of simplifying the state’s local tax regime. The Multistate Tax Update previously covered H.B. 5, a bill that seeks to cut through much of the complexity and push the state’s localities in the direction of uniformity. While this is not the first time simplification has been approached in either House of the General Assembly, it is our hope at the Multistate Tax Update that meaningful discourse in this area continues to ensue and that a simple and elegant solution is passed. In the meantime, we are here to help with any local tax issue that may arise for your business.