Work-from-home could bring major changes to local city budgets

Some Ohioans working from home are eligible for an income tax refund.

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, said Stephanie Keinath, Dayton Area Chamber of Commerce vice president for strategic initiatives. 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 like Dayton, where many workers reside outside the city limits, could lose millions of dollars annually. One estimate is that Ohio’s six largest city governments, including Dayton, 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.

Income tax is Kettering’s most significant revenue source and any sustained revenue loss will certainly have an impact, Kettering City Manager Mark Schwieterman said. The city will consider multiple budget models to mitigate the losses and will consider using its federal American Rescue Plan funds as part of that.

“Although we are hopeful that the process will be one of balance, it is not likely since our daytime population is greater than nighttime,” he said. “It is possible that a material loss of income tax revenue could result from the work-from-home situation in 2021.”

Of Ohio’s six most populous cities, in 2017 Dayton had the largest percentage of workers who reside outside the city at about 82%, according to the Greater Ohio Policy Center’s most recent estimate. Dayton is predicting this move by the legislature will cost the city between $10 million and $20 million annually in municipal income tax revenue, Dayton City Manager Shelley Dickstein said. Income taxes account for about 71% of Dayton’s approximately $178 million general fund budget in 2021.

Dickstein decried the legislature’s decision.

“To me, this is such a major injustice,” Dickstein said. “We will get through whatever we have to get through, but it’s an injustice and I am deeply, deeply disappointed.”

She said the people who were impacted the least by the pandemic — higher-paid office employees who worked from home — will benefit and federal rescue funds will be diverted to cover the city’s losses instead of aiding more people who suffered the most — Dayton residents working in the retail, hospitality or restaurant sectors, many of whom lost their jobs.

Dayton is receiving a one-time payment of about $138 million of federal funds from the American Rescue plan.

Dickstein also said it is important for the entire region economically that Dayton, the area’s urban core and economic engine, has the funds to maintain infrastructure.

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 than 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 was 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.

Here are three examples of how it could work for taxpayers who seek refunds:

  • Some could get full refunds: If your employer is in Dayton and withholding the city’s 2.5% income tax from your paycheck but you work from home this year in a community like Beavercreek, where there is no income tax, you could get a refund.
  • Some could get partial refunds: For residents of a city like Clayton, where the income tax rate is 1.5% and residents working outside the city receive only a 50% credit for taxes paid to another city, work-from home employees could get a partial refund.
  • Some would move where they pay their taxes, but see no refund: If your employer in Centerville is withholding the city’s 2.25% income tax but you work from home in Kettering, where the income tax is also 2.25%, taxes would be shifted from one city to the other.

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 shift in income taxes
  • $10 million to $20 million: The amount Dayton estimates it could lose annually in municipal income tax revenue
  • 82%: The percentage of workers employed in Dayton who resided outside the city in 2017, according to the Greater Ohio Policy Center
  • 71%: The percentage of Dayton’s approximately $178 million general fund budget in 2021 which comes from municipal income taxes

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