Ohio city prepares for possible court loss against state
Many municipalities worry about losing millions of dollars.
Akron is updating its tax code in case it loses a lawsuit against the state.
City Council will take a week to consider adhering to a law the Ohio legislature passed in the two-year state budget last year. House Bill 49 called for a new staterun system for businesses to report their profits. The state would tax the profits, taking a cut for its troubles and sending the rest to places such as Akron where the money was made.
The move streamlines the tax filing process for businesses in locations across the state.
“Over 600 municipalities levy a net profits tax on business entities, meaning that one business may be forced to file dozens, sometimes hundreds, of net profit returns,” Ohio Tax Commissioner Joe Testa told the Ohio House last year. “... (I)t can cost a business more to prepare a net profits filing than the actual tax owed. Furthermore, with variations in how municipalities interpret and enforce municipal income tax law, businesses are subject to changing rules and enforcement practices ...
“(And) businesses like to have tax predictability.”
But Akron and 136 other cities and villages suing Testa and the state are concerned about losing millions of dollars in local income taxes and the ability to audit businesses to ensure they pay their fair tax share.
Akron joined the lawsuit in November after a Franklin County judge granted a temporary stay against the Ohio Department of Taxation’s new system, which was supposed to come online last summer. The judge could lift that injunction at an upcoming hearing.
In the meantime, Akron must prepare for the worst. Should the state prevail, the city could fall out of compliance. So Mayor Dan Horrigan is updating the local tax code, just in case.
Central to the lawsuit, aside from the loss of local revenue and accountability, is the legal concept of home rule. It’s a term used when states claim federal overreach or when cities and states fight over whose public policies come first.
Local governments cite home rule when states strike down or challenge local rules like the use of certain firearms in densely populated cities or how many residents private contractors must employ on locally funded road and sewer projects.
HB 49, which covers “state programs,” does not require businesses to use the new centralized filing system, which has the support of the Ohio Chamber of Commerce and is featured on the Ohio Department of Taxation’s website. But city administrators say Ohio Gov. John Kasich and lawmakers are overreaching by inserting themselves in a local matter.
“It’s another attack on home rule. And they are attacking us where it hurts,” said Diane Miller-Dawson, Akron’s finance director.
The Ohio Constitution and state laws allow local governments to levy taxes; otherwise police stations and schools would go without. The constitution, however, also allows the Ohio General Assembly to pass laws that limit local taxation.
Pulling out of the recession, state lawmakers shared less income tax with cities and local governments, instead putting $2 billion in Ohio’s empty rainy-day fund. With fewer income tax dollars returning from the statehouse, lawmakers continue to dictate what local governments can and cannot tax.