Cities may sue over state plan to collect local taxes
Coalition opposes provision of Kasich’s two-year budget.
Cities across COLUMBUS —
Ohio are poised to sue the state over an impending income tax collection change they say is unconstitutional.
The coalition, including many central Ohio municipalities, opposes a provision of Gov. John Kasich’s two-year budget that would allow business owners to file net-profit income-tax returns with the Ohio Department of Taxation instead of the municipality where their business is located.
The state would then process the returns and distribute the money back to local governments, after charging a half-percentage-point fee for the service.
The change is set to take effect Jan. 1.
State officials say the move will save businesses time and money by streamlining the process of collecting more than $600 million in municipal income taxes paid by Ohio businesses each year.
But city officials say giving up the processing of tax returns will result in a loss of accountability and personalized customer service for businesses.
In terms of legal issues, they say, the change strips local governments of homerule rights and goes beyond the state’s statutory authority. Included in it is a requirement that each municipality grant the state the authority to administer the centralized tax collection before Jan. 31 or risk losing its income taxes altogether.
“This is the state looking for a problem, not a business-friendly solution,” Whitehall Mayor Kim Maggard said.
Additionally, placing the change in this year’s state budget bill may have violated the state’s single-subject rule that says “no bill shall contain more than one subject, which shall be clearly expressed in its title,” officials said.
Whitehall and Lancaster city council members were among the first in the area to approve ordinances declaring interest in litigation.
Grandview Heights, Hilliard, New Albany and Newark will discuss similar ordinances this month, and other cities, including Bexley, Dublin and Grove City, confirmed that they are considering getting involved, too.
Bexley Mayor Ben Kessler, chairman of the Central Ohio Mayors and Managers Association’s board of directors, said more than 70 cities across Ohio have already expressed interest in joining the effort.
Columbus is not at this time, said Joshua Cox, chief legal counsel in the city attorney’s office.
Law firm Frost Brown Todd is in discussions with the municipalities, which would share legal costs based on population.
Under the new plan, municipalities can’t check returns filed with the state for irregularities or easily access the state’s data, which Grandview Heights finance director Bob Dvoraczky cited as his main concern.
“The state becomes our gatekeeper,” he said. “It’s an administrative nightmare.”
The state would control a portion of a local government’s cash flow, too, which could cause issues for smaller governments when paying bills, he said.
Business owners would file returns using the Ohio Business Gateway, an existing online portal that’s undergoing upgrades to prepare for the change. Individuals on both sides of the issue agree its current form isn’t user-friendly and therefore underutilized — but those opposing the state’s plan say it’s unlikely the upgrades will be finished in time for the switch.
For some communities, the changes will also come at a cost.
Though the state would charge a half-percentage-point fee for its services, communities that self-collect net-profit taxes currently pay only about half that much, according to Kent Scarrett, the Ohio Municipal League’s executive director. Communities that use a third-party provider, such as RITA, the Regional Income Tax Authority, typically pay 0.5 to 1 percent.
Some officials fear that the state may siphon off a greater portion of local funds in the future, or that all local income tax could some day become state-controlled.
“When communities start to lose local control of their local revenue, it becomes a dangerous conversation,” Scarrett said.
Keary McCarthy, executive director of the Ohio Mayors Alliance, said a consortium like his group makes it easier for communities to collaborate and defend their rights — though usually it’s a last-ditch effort.
“I don’t think any municipality wants to be involved in litigation, but when the issues are irreconcilable by other means, they’re left with little choice,” he said.
Kessler agreed, and said Central Ohio Mayors and Managers Association members plan to reach out to legislators again to see if their issues can be resolved without litigation.