Tax certainty: Multiple slices taken by state, cities
Alex Fischer was surprised—and not in a good way—when he came to Ohio from Tennessee in 2007 and saw a proliferation of local government agencies, which may request their own taxes.
Michael Dalby was similarly taken aback when he moved from Indiana three years ago to head up the Columbus Chamber. “One of our challenges is we have multiple layers of taxation,” Dalby notes. Taxation and regulation is the number three top concern of Columbus’ business community, just behind worries about healthcare and workforce, according to a recent Chamber study for the city of Columbus.
“If you’re someone who’s lived in Ohio and operated a business in Ohio for a number of years, you’re kind of just accepting of it as part of doing business in this region,” Dalby says. “If you move into Franklin County from another state, this taxation layering is surprising. There’s only like nine states that allow municipalities to levy an income tax,” he adds.
At the state level, tax reform begun under Governor Bob Taft in 2005 and continued with Governor John Kasich is helping to keep Ohio’s tax climate better than many other states, but when local taxes are factored in, Columbus rises to among higher-taxed areas nationally.
“I think everybody would agree that the proliferation of local governments in Ohio—cities, townships, county government, and multiple school districts—has in part caused Ohio’s cost of local government to be higher than a lot of places,” notes Fischer, president and CEO of the Columbus Partnership.
It’s not just the typical government jurisdictions grabbing a slice of the local tax loaf to fund services like schools, police and fire departments and local infrastructure. Social service agencies, parks and libraries also compete for local tax dollars. And so do zoos.
An overwhelming defeat of a new and replacement property tax levy for the Columbus Zoo in May, by a 70-30 margin, caught the attention of local business and community leaders and has some wondering if the local tax climate has taken a precipitous turn.
Not to worry, say those who have studied recent tax votes in the context of history. They say the zoo levy failure and a similarly lopsided defeat of a Columbus Public Schools levy in November 2013 are easily explained in terms of specifics of those requests.
Mayor Michael Coleman has studied voter behavior on local tax issues for decades and sees nothing to indicate a significant shift. In his analysis, voters approve tax requests where they trust the entity making the ask, understand how money will be used and believe the money is needed.
“I don’t see anything negative about the long-term viability of voted issues in our city. I think it’s just a reminder that you have to meet these three criteria in order to get public passage of public dollars. And you know what, that’s a good thing, not a bad thing. It hasn’t changed,” Coleman says.
Tom Stalf, president and CEO of the zoo, says the zoo is taking time to analyze data and talk with voters to better understand why the levy failed so dramatically and to prepare for the next request. “One thing’s for sure that we cannot do, and that would be to lose another levy,” Stalf says.
The zoo won’t be back on the ballot this year, but its current levy expires at the end of 2015. Nor will the Columbus Public Schools return in the near future, as recalculations and budget cuts since a lopsided defeat of a 9.01-mill levy in November 2013 are reported to have district finances in good shape through the 2017-18 school year.
There is some breathing room, as the next county-wide levy request is a renewal for Franklin County Children Services, which means no increased cost.
“I do hope we’re not a community of ‘no,’” Fischer says. “If I look over history, we never have been.” And he adds, “I’m not as worried about being a community of ‘no’ as making sure that we are investing in critical areas.”
“From a tax standpoint, Ohio is much friendlier to business now than 10 years ago,” says Howard Fleeter, a PhD economist and owner of a Columbus public policy and research firm.
“Columbus—that gets more complicated,” Fleeter continues. “From a rate standpoint, Columbus is higher than the other major cities,” he says.
Fleeter points to annual analyses by the Ohio Department of Taxation, comparing state and local tax burdens across the country. The state analysis looks at the tax burden in terms of per capita taxes and as a percent of personal income and compares both at state and local levels.
Looking at state taxes, Ohio fares well in the most recent analyses done in 2013, which examined 2010-2011 taxes. Ohio ranks 33rd for per capita state taxes, falling under the $2,440 average U.S. tax burden at $2,167. As a percent of personal income, Ohio ranks 32nd, at 6.0 percent for state taxes compared to the national average of 6.2 percent.
Local taxes tell a different story. Ohio ranks 21st nationally with a local per capita tax burden of $1,742, but still under the national average of $1,856. As a percent of personal income, local taxes in Ohio rank 12th in the nation at 4.8 percent, just over the 4.7-percent national average.
Even more striking was a federal report earlier this year by the Office of Revenue Analysis of the District of Columbia, which looks annually at property, sales, auto and income taxes for a hypothetical family in the largest city in each state. The report ranks Columbus as having the fifth-highest local tax burden nationally and calls out the local property tax burden, with an effective rate of $3.57 for every $100 in home value. The report says that rate is the nation’s highest.
“The first way I think of it—tax climates aren’t static but are dynamic. From a business standpoint, what you’re looking for is predictability and reliability in tax and regulatory environments,” Fischer says.
“Every day I work with companies on state and local taxes issues,” says Tom Zaino, a lawyer and CPA who was state tax commissioner from 1999-2003. “Ohio’s climate has really improved compared to what it was 10 years ago,” he adds.
Zaino continues, “Something that’s important to business is certainty in the tax climate. We’ve had that, but when there’s talk of doing things dramatically different, that makes people nervous….We want to make sure we maintain that certainty in Ohio.”
Zaino advocated for passage in late May of House Bill 289. It changed state law to prohibit municipalities and townships from creating new joint economic development zones just to extend their tax base to businesses not previously taxed.
Recent attempts to form JEDZs—between Reynoldsburg and Etna Township and between Gahanna and Jefferson Township—were indications of how local governments’ struggle with revenue problems creates uncertainty for business, Zaino says.
The tax climate is just one aspect of the overall environment businesses need to continually assess as they make decisions about operations in a particular area, Fischer stresses.
“We’re not the bottom of the barrel. We are better than many of the places we compete with,” Fischer says. “We have a very competitive business tax environment, and more importantly, a business cost environment. The cost of living, combined with the cost of distributing goods, combined with our workforce, combined with taxation and other factors come together to create a very competitive environment from a business standpoint. And that’s why we’re seeing record job creation,” he concludes.
“We still have lots of work to do on the efficiency equation, but the fact we have 88 counties and approaching 1,000 school districts, and not only those, how many townships? It’s not likely something we’re going to solve real quickly, but it’s something, as we advocate for policy changes, we need to advocate for efficiencies,” Fischer says.
Economist Fleeter agrees. “The last time I looked in Franklin County, there were almost 140 separate and distinct property taxing districts,” says Fleeter. The overlap of multiple taxing entities is not as pronounced in Cleveland or Cincinnati, he says.
Income, sales and property taxes make up the local tax picture—and a look at each helps explain why Columbus has shown up in at least one national study as a high-tax area, and why voters may be feeling some tax fatigue.
As Dalby noted, Columbus is in a minority of states where voters may be asked to approve local income taxes. While rare for municipalities, income taxes are rarer still for schools, and Ohio allows both. The city of Columbus’ local income tax of 2.5 percent—upped by voters from 2 percent in August 2009—is among the highest in the state, notes economist Howard Fleeter.
Akron, Dayton and Toledo are at 2.25 percent, Cincinnati is at 2.1 percent and Cleveland is at 2 percent.
Of more than 600 cities in Ohio that collect their own income taxes, only five have a rate more than 2.5 percent—up to a high of 3 percent in the Cleveland suburb of Parma Heights. Twenty cities share Columbus’ rate, including local suburbs of Bexley, Grandview Heights, Whitehall and Worthington.
More than 100 municipalities have a 2-percent income tax, including Canal Winchester, Dublin, Grove City, Groveport, Hilliard, New Albany, Upper Arlington, Urbancrest and Westerville. Upper Arlington is on the November ballot, seeking to raise its rate to 2.5 percent.
Gahanna and Reynoldsburg are lowest in Franklin County at 1.5 percent. Gahanna voters defeated a request in November 2013 to raise its rate to 2.5 percent.
Administrative relief proposed
Along with Ohio’s 600-plus municipal income taxes come hundreds of different income tax forms and definitions, prompting the Ohio General Assembly to consider legislation aimed at simplifying municipal income tax administration.
“Ohio is the most convoluted municipal tax state in the nation,” says State Rep. Cheryl Grossman, a Republican from Grove City. As mayor of Grove City for 12 years and now in her sixth year in the legislature, Grossman has long been concerned about Ohio’s challenging municipal tax structure. “The next state even close is Pennsylvania with three forms,” Grossman says.
“The system began in 1946 in Toledo, and it evolved with no structure or guidelines. It just sort of happened, so we ended up with all these” different municipal tax approaches, Grossman says. She is the primary sponsor of House Bill 5, legislation to require uniform municipal tax forms and definitions. HB5 has passed the Ohio House of Representatives and is pending in the Senate. Statehouse observers predict passage before the legislature adjourns at the end of the year.
“We call it the income tax but I think of it as more of an earnings tax because it’s based on where you work first,” Fleeter says. That requires multiple forms and multiple filings for those who work in multiple locations. In many suburbs, residents pay income taxes where they work and additional income taxes where they live.
Grossman says she has heard from businesses that have relocated to Indiana, Kentucky and Pennsylvania “just because of our convoluted municipal tax system we have in Ohio. Lots of businesses say it is their number one problem in doing business in Ohio.
“I have talked with businesses looking to expand and they won’t come to Ohio, and that breaks my heart,” she adds.
HB5 is backed by a broad coalition of more than 30 business organizations representing state and local chambers of commerce, contractors, physicians, lawyers, CPAs, truckers, landscapers, manufacturers, grocers and pharmacists. The Ohio Municipal League has raised questions about loss of revenue and local control, but Grossman contends simplifying the municipal tax code will increase compliance.
Columbus first imposed its municipal income tax at 0.50 percent in 1947, at a time when municipal income taxes were in their infancy. Now nearly two-thirds of Ohio’s municipalities and almost 30 percent of the state’s 611 school districts impose an income tax. The Columbus city income tax rate was raised by voters from 2 to 2.5 percent in a special election in August 2009.
In some parts of Franklin County, residents pay more than one municipal income tax—to the city where they work (if it’s not where they live) and an additional amount to the city where they live.
Governor John Kasich has championed efforts in recent years to lower the state income tax rate in Ohio.
Five states in which school districts may levy income taxes
- In addition, Oregon allows income taxes to support two transit districts.
Municipalities levy taxes
- New York
A year ago, Franklin County was in the middle of the pack for sales taxes in Ohio at 6.75 percent, but two recent changes have made this county second-highest in the state.
First, sales taxes were increased statewide by 0.25 percent in September 2013 due to state budget decisions, raising the state’s share of sales taxes from 5.5 to 5.75 percent.
Then in January, Franklin County commissioners increased sales taxes by 0.50 percent to help pay for a new jail and county morgue. With the Franklin County sales tax now at 7.5 percent, only Cuyahoga County is higher at 8 percent. In most of the state—48 of the 88 counties—purchasers pay a 7.25-percent sales tax.
Part of the Franklin County sales tax includes 0.50 percent for the Central Ohio Transit Authority. That tax is also collected in areas served by COTA in Delaware, Fairfield, Licking and Union counties—which bumps the sales tax in part of Licking County to 7.75 percent.
Other than to vote on COTA levies, voters generally have no direct say on their local sales tax rates.
Franklin County sales tax
- Aug 2013: 6.75 percent
- Sept 2013: 7 percent
- Jan 2014: 7.5 percent
Taxable goods or services
The current Ohio state sales tax rate is 5.75 percent—or 5.75 cents per dollar of taxable goods or services. Franklin County charges:
- An additional 1.25 percent for county operations
- Plus another 0.50 percent to support COTA, for a total sales tax rate of 7.50 percent.
Voters must approve COTA tax requests but county commissioners have authority to enact up to 1.5 percent in sales tax increases on their own.
COTA’s half-cent sales tax comes from two separate quarter-cent levies, one of which expires at the end of 2016.
A business coalition successfully fought a state budget proposal to extend sales taxes to professional services and B2B sales in 2013.
Where voters have the most sway—and in Columbus have been historically generous—is in deciding requests for property tax levies. It is also the area prompting most discussion about the local tax climate, and it is probably the most complex component.
“I hear about the local tax burden most often when there are levies on the ballot,” says Mike Curtin, a second-term state representative and former Dispatch writer and editor. In his 38 years as a journalist, Curtin frequently wrote analyses of local and state tax history and tax trends.
Informal conversations about the local tax climate were ramped up by the defeat in May of the 1.25-mill permanent levy request for the Columbus Zoo and Aquarium.
“There has been an awful lot of informal discussion—breakfast and lunch conversations—largely driven by the size of the defeat of the zoo levy,” Curtin says. “It wasn’t the defeat of the zoo levy. It was the size—70-30 essentially—as resounding a defeat as one can possibly conceive and more. That was the wakeup call.”
In an analysis he prepared for fellow members of the House Democratic caucus, Curtin flatly dispels any notion that Ohio is a high-tax state and goes on to stress, “Balance is important in ensuring basic fairness. Property and sales taxes are generally regressive—requiring poor and modest-income citizens to pay a higher percentage of their incomes in taxes. Income taxes, such as Ohio’s, are generally progressive—requiring upper-income citizens to pay higher rates than those paid by poor and modest-income citizens.”
In Franklin County, property owners pay taxes to support schools, provide local government services, maintain parks and libraries, operate the zoo, ensure services to senior citizens and neglected or abused children and to boost care for those with developmental disabilities or in need of treatment for alcohol or drug abuse and mental illness.
The zoo had asked voters to support ambitious plans for a Downtown location and to make the tax permanent. A local group, Citizens for Responsible Taxation, opposed the levy, arguing the tax increase and Downtown location were not needed.
“Any time we come out, we are doing a public service to raise the awareness of what is being asked for in the context of everybody’s day-to-day lives,” says group spokesman Dan McCormick of Upper Arlington.
McCormick says individuals at the core of the group have been together about 20 years and collectively have come out against eight tax requests. He says their focus is getting government wages, salaries and benefits under control “so that the taxpayer doesn’t feel like an ATM machine.”
Local taxing agencies tend to view their situations independently, but voters must weigh them in the context of their ability to handle the entire tax burden, McCormick argues. “They all have to hold each other accountable. There is only so much real estate tax out there,” he says, adding, “The ideal situation is for us not to exist; that somebody is asking these hard questions.”
Next up for Franklin County voters to decide is the request by Children Services to renew a 10-year, 1.9-mill levy. The agency had initially eyed an increase of 0.4 mills but pulled back after the zoo defeat. As a renewal, the levy would still attract a 12.5-percent state reimbursement and be collected at currently effective rates. A 2013 change in state law calls for local taxpayers to bear 100 percent of the cost of new levies, but renewals keep the state subsidy.
“We couldn’t be positioned any better for a positive outcome,” says Children Services Executive Director Chip Spinning. “I think the question is not whether we’re supported but whether folks are willing to continue to support us at the current level that we’re at, which is no increase.”
“Children Services has a good story to tell,” says Yvette McGee Brown, a former juvenile judge who is chairing the agency’s levy campaign. She wants voters to know the agency has increased adoptions, increased the numbers of children being cared for by relatives and reduced expensive out-of-home placements.
“It saves taxpayer dollars, it’s better for the kids, it keeps them connected to their families.… I’m really proud of the agency’s efforts on that. And we as a community should feel good about that,” Brown says.
After the zoo levy defeat, Brown, a law partner with Jones Day, talked with business and community leaders about the Children Services levy. “What I’ve heard many community leaders say to me is that this is important. We have to be a community that can say ‘yes.’ We can’t just be a community that says ‘no.’”
“When it comes to taxes, what I think you see is people paying attention,” Brown says. “People have not seen their wages increase dramatically….What I think they want to see from government is that we’re responsible with the tax dollars that they give us.”
Curtin is one who believes the local tax climate has shifted, but he sees it as a gradually building change. “I think the climate change analogy is apt in that this increasing tax burden that has been far outstripping any growth of real income in the communities has been occurring for some time,” Curtin says.
“The average taxpayer in Franklin County has been very generous over the years, very generous in supporting increased taxes for schools and local government. That taxpayer wants to continue supporting these community assets, but has not been able to keep up. Most taxpayers would appreciate seeing some evidence that community leaders see and appreciate this disconnect,” Curtin adds.
Before the next big ask, “There needs to be broad engagement with the taxpaying citizenry over their willingness and ability to tax themselves at much higher levels,” Curtin says.
For those business and community leaders involved in the Columbus Partnership, “We think about it and look at it as it relates to our economic development programs in a very active and regular way. It’s not about doing a single study. It’s about continuously paying attention, monitoring, studying, being in continuous dialogue and conversation with our state and local policy makers,” Fischer says.
Overwhelming defeats of the zoo and school levies hasn’t signaled a change in how the business community views the local tax climate, Fischer says. “It was on our agenda then and it stays on our agenda now as something we remain keenly interested in.”
As long as levy requests continue to be presented by local taxing entities, it is difficult to undertake a comprehensive examination of the situation, Fischer says.
“When you have taxation by levies, then you inevitably end up doing them as one-offs, and you are less strategic and less integrated,” he says, adding, “From a public policy standpoint, I’m not convinced this is the best way to make public policy. I’d prefer to see a more integrated, involved community fashion, but it is what it is.”
Property taxes are levied in Ohio against the assessed value of real estate, which is 35 percent of its market value as determined by the county auditor.
Property tax rates are expressed in mills. A tax rate of 1 mill equals $1 for every $1,000 of taxable value.
Once voters approve a property tax levy, the amount of money it raises can be increased only by new construction being added to the tax base, not by existing property increasing in value.
As property values rise, the effective rate of voted millage may be decreased by the county auditor so that it collects no more than originally allowed.
From 1971 until a 2013 state budget change, the state paid a share of local property taxes as a rollback granted in exchange for enactment of the state income tax. Prior to 2013, taxpayers paid just 87.5 percent of property taxes on the books.
The rollback was eliminated for commercial property in 2005 and was eliminated for individual property owners, effective with all new and replacement levies approved after November 2013.
Existing levies and renewals will continue to receive the 12.5 percent rollback.
Mary Yost is the editor. Assistant Editor Kitty McConnell contributed to this report.