Debora (Dardinger) McGraw, JD, CPA, LLM – Member
Revamping the Ohio Joint Economic Development District Law
UPDATE (06/14/2016): Governor John Kasich Signs Substitute House Bill 182
On June 13, 2016, Governor John Kasich signed Ohio Substitute House Bill (the “bill” or “Sub. H.B.”) 182. As the bill did not contain any appropriations, the Governor could not line item veto any of the language in the bill. Sub. H.B. 182 contains a number of provisions revamping the law governing Joint Economic Development Districts (“JEDD”), as described below. The bill also contains some changes to other areas of state and local law applicable to economic development. Sub. H.B. 182 exempts from property taxation real property owned by a nonprofit organization selected by the Federal Small Business Administration as an intermediary lender in the Federal Microloan Program. The bill extends the deadline for municipal corporations to report information to enable a computation of fiscal effects of recent changes to net operating loss deductions for municipal income tax purposes. Finally, the bill expands the businesses able to claim the Ohio New Markets Credit. The bill expands the credit-eligible investments to include businesses that derive 15% or more of revenue from real estate sales or rentals. Such businesses do not qualify for the credit under current law. The changes contained in Sub. H.B. 182 will be effective in ninety days, on September 11, 2016.
On May 25, 2016, the Ohio General Assembly passed Substitute House Bill 182 (“Sub. H.B. 182” or the “bill”), which updates the existing Ohio Joint Economic Development District (“JEDD”) law. Ohio townships cannot impose an income tax. The JEDD law was passed in the mid-1990s to allow a township and a municipality to partner in the imposition of a local income tax for economic development purposes. The partnering municipality’s net profit and income tax is effectively imposed on the businesses and employees located in the JEDD, but not residents. The tax revenue is shared with the township to support economic development of the parcels located in the JEDD, such as utilities and services. The parcels are generally otherwise undeveloped areas. Previously, townships typically had to be annexed by a municipality in order to obtain the funds necessary to promote economic development. The JEDD law also provides some protections to townships against annexation.
Sub. H.B. 182 simplifies the existing JEDD law, makes various changes to how a JEDD may be utilized, and provides some protection to businesses already operating in a proposed JEDD, including:
Consolidates the JEDD Provisions: The bill consolidates the existing JEDD law that is generally applicable statewide and is currently set forth in R.C. 715.72 through 715.81. The law now appears in one code section, new R.C. 715.72. The sections were consolidated to make the JEDD provisions easier to understand. Most of the procedural steps required to establish a JEDD remain unchanged. These steps include a public hearing, obtaining approval from a majority of the property and business owners located in the proposed JEDD, and a unanimous vote of the township’s Board of Trustees.
Allows for Redevelopment: The original goal of the JEDD law was to allow tax revenues to fund new economic development. The bill allows the tax revenues to also be used for redevelopment purposes.
“Multi-Use Development” Addition: The bill expands the use of JEDDs to certain new combined residential and business areas referred to as “Multi-Use Developments.” In such areas, the residents living in the JEDD area may also be taxed. This addition is a significant policy deviation from the current JEDD law because it allows residents of a township to be taxed for the first time (whether or not they work in the JEDD), which could pave the way for future policy changes that could authorize local income taxes to be imposed on all township residents.
Exclusion of Parcels: The existing law requires that the JEDD be a single, contiguous area. The bill allows the contracting parties to exclude parcels from the JEDD area at inception or at a later point, so long as certain procedural requirements are met.
County Approval No Longer Necessary: Existing law allowed a county to issue a resolution disapproving the JEDD, which was unintended when the law was originally drafted. The bill deletes the language allowing the county to disapprove the JEDD.
Requires the Economic Development Plan be Incorporated into the Contract: Existing law requires that an economic development plan be available at the required public hearing and for viewing by the public. The bill also requires that the economic development plan be incorporated into the contract. This change is intended to emphasize the use of the tax proceeds for economic or redevelopment purposes, as well as to ensure that the public understands how the tax revenue will be utilized.
Broader Definitions: Currently, a JEDD must be approved by a majority of the business and property owners located in the JEDD area. The bill broadens the definition to businesses “operating” within the JEDD area, rather than just those property owners and businesses physically located in the JEDD geographical area. The broader definition also expands the business owners that are subject to the JEDD tax.
Change in Use of Proceeds: The bill modifies the language describing the use of the proceeds to purposes set forth in the economic development plan and other lawful purposes. The existing law has similar language allowing for any use described in the contract. It is unclear whether the new language will be viewed differently than the existing language. The bill retains existing language requiring that the contract provide a certain percentage of the tax revenue be utilized for the long-term maintenance of the JEDD.
Opt-Out: A JEDD is similar to the old Joint Economic Development Zone (“JEDZ”), except that the latter required a vote of the electors (which were not subject to the tax). The JEDZ law was repealed in 2014 when a number of townships established JEDZs that would apply to existing businesses within the JEDZ in an effort to generate tax revenues for general fund purposes. Since the JEDD law requires that a majority of the property owners and business owners approve the creation of the JEDD, the same level of abuse has not typically occurred.
However, the bill allows an owner to file an action in a court of common pleas to be excluded from the imposition of the JEDD. The compliant must be filed on or before six months after the effective date of the JEDD contract. The owner must: 1.) show that it operated within the JEDD area before the effective date of the JEDD contract, 2.) that the owner did not sign a petition in support of the JEDD, and 3.) that, “Neither the business nor its employees has derived or will derive any material benefit from the new, expanded, or additional services, facilities, or improvements described in the economic development plan for the district, or the material benefit that has, or will be, derived is negligible in comparison to the income tax revenue generated from the net profits of the business and the income of employees of the business.” The court of common pleas must render a decision within 60 days of receiving the complaint, unless the parties agree to a longer period of time.
The bill was signed by Governor Kasich on June 13, 2016 and will be effective September 11, 2016.
If you have any questions about the new JEDD law, contact Deb McGraw or any other ZHF professional.