Cities, legislators clash over municipal income tax reforms

City leaders around the region said Tuesday they are frustrated that a plan to standardize municipal income taxes that they initially championed now could cost their cities millions of dollars if passed by the General Assembly.

But one of the bill’s sponsors said many of the fears are unfounded and the bill contains safeguards to ensure fairness.

The House of Representatives is expected to take up the measure, House Bill 5, today.

Most cities use different tax forms and procedures, making it confusing — particularly for businesses, such as contractors, — that pay taxes in several localities.

Supporters, led by the the Ohio Municipal Income Tax Coalition, a 24-member consortium of statewide organizations that includes the Ohio Chamber of Commerce, said the bill is about boosting productivity, slashing red tape and leveling Ohio’s economic playing field with those of other states, 40 of which don’t have local income taxes.

“The current system is such a mess. It’s virtually a weekly issue,” said Jack Kostak, president of Vandalia-based All-Seal Home Improvement Inc. Because his employees sell and install windows, siding and other residential upgrades in multiple jurisdictions, he’s required to withhold taxes for them in each of those towns.

“It’s a constant thorn that is way out of value to the local governments, to my business and my employees,” Kostak said. Last year, he had 621 pages of withholding documents with 21,000 entries. “Many of them are just for pennies, but I have to write those checks,” Kostak said.

Supporters and opponents agree the municipal income tax needs uniformity. But city officials say they want revenue neutrality, meaning they will neither gain or lose money in any change.

They argue HB5 is filled with tax breaks for business, and one of the major ones allows businesses to deduct previous losses from their current taxes.

“House Bill 5 is not revenue neutral. It’s costly to municipalities,” said Mark Schwieterman, Kettering city manager. He estimates Kettering could lose between $500,000 and $1.4 million annually if the current bill passes.

Officials from several cities said the potential loss of funds could affect city services in the future.

Municipalities are particularly sensitive to any fiscal actions by the General Assembly. Recent state budgets included cuts to the Local Government Fund, a direct payment from the state to local governments, and the elimination of several taxes, including the estate tax.

Dayton lost $9 million in the last state biennial budget, said Tim Riordan, Dayton city manager. “This (HB5) will cost us upwards of $2 million annually.”

Riordan led a coalition of seven counties and 33 localities in Southwestern Ohio that put together a proposed bill to standardize municipal income tax procedures and forms throughout the state without affecting the amount of money a city would collect.

That same coalition now is uniformly opposed to HB 5. Ohio Municipal Advocates estimates the bill in its current form would cost Ohio cities between $36 million and $38 million annually.

Rep. Michael Henne, R-Clayton and a sponsor of HB5, said those estimates are flawed. “Some of the fear is a misunderstanding of the bill. We have in place a number of safeguards. The bill is a giant step in the right direction.”

The cities claim HB5’s inclusion of a net operating loss deduction is shifting more of the costs for city services to individual taxpayers. Under the bill, a business that owes taxes can deduct an annual loss it might have had in the previous five years from its owed taxes.

“Those businesses were still using city services during that period. But now its up to the individual taxpayers to pay for them,” said Patrick Titterington, Troy director of public service and safety. “That benefits the businesses but not the taxpayers.”

About one-third of cities statewide do not have such a deduction in their current municipal income tax. Kettering has a three-year deduction, while Troy and Dayton have none.

Henne said HB5 specifies that a business can take only deduct 50 percent of any annual net operating loss. He said the fear of the deduction is overwrought. “Many of the cities do not have a … deduction, so they have no data.” He said the deduction would be phased in over five-year period.

The bill also establishes a committee to study the deduction in 2011, 2012 and 2013 “to determine what the effects are,” Henne said. “The committee will report back to the General Assembly before the next budget cycle so we can take whatever corrective actions are needed.

“We don’t want to damage our partners.”

Xenia is projecting a decrease in tax revenue should HB5 pass of around $477,000.

“HB5 winds up costing us money,” said Jim Percival, Xenia city manager. “We’ll have to continue to tighten our belts, but our belts are so tight we cannot breathe.”

Rep. Henne said the bill was a series of compromises among various interests. “Any time you do any significant change, there are people who want to hang on to the status quo.”

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