Governor Kasich’s Municipal Tax Proposals – What is Really Being Proposed? – Questions and Answers
As part of his biennial budget bill proposal, H.B. 49, Governor John Kasich called for centralizing the administration of the municipal net profit tax. Many misperceptions are arising about the scope and purpose of this proposal, which seems to be making the Ohio House of Representatives nervous about the plan. This document is intended to clarify what provisions H.B. 49 actually proposes and how those provisions would affect municipal tax administration. Businesses wanting this plan to move forward in the budget bill should contact their Ohio legislators to express support for the Governor’s proposal.
1. Does the proposal call for centralized collection of all municipal taxes?
No. The proposal only calls for the centralized filing and administration of the net profit portion of the municipal income tax paid by business entities. For most cities, the net profit tax ranges between ten to twenty per cent of the total municipal income tax revenue. (Eighty to ninety per cent of a municipality’s revenue comes from the payroll tax withheld on employee compensation and income tax paid by individuals. The proposal does not call for the centralized collection or administration of these payroll and individual income taxes.)
2. Will businesses really benefit from this proposal?
Yes. Unlike nearly any other state, a business operating in Ohio faces multiple filing responsibilities for the net profit tax. The tax can often be less than the cost of preparing the returns. This increases the cost of locating a business in Ohio versus some other state. By centralizing the administration of this small portion of the municipal tax system, it will eliminate a heavy cost burden for Ohio businesses. This will make Ohio a more competitive place to do business without reducing the government’s tax revenue. It will also reduce the cost of administration for most municipalities.
3. Will municipalities lose tax revenue as a result of this proposal?
No. Municipalities should see an increase in revenue and a decrease in their costs. The increase in revenue should come from the benefit of leveraging the Department of Taxation’s resources and experience in mining data to identify delinquent taxpayers, as well as increased compliance due to easing the burden of filing in multiple jurisdictions. The decrease in costs should be realized because the state will only be charging a fee equal to 1% of the collected tax.
4. Could the state legally spend the municipal net profit tax it would collect?
No. First, nothing in the proposed law permits the state to re-direct the municipal tax it collects for its own use. Second, if the state were to keep the municipal tax it collects and spend it, this action would almost certainly violate Article XII, Section 5 of the Ohio Constitution. Under that section, any tax that is levied may only be spent for the purposes declared when the tax is levied. The municipal net profit tax will continue to be levied by the municipality and, therefore, must be spent by the municipality for its stated purpose.
5. Does the Ohio Department of Taxation currently collect other municipal taxes?
Yes. Since the early 2000’s, the municipal net profit tax imposed on members of the electric and telecommunications industry have been fully administered by the Ohio Department of Taxation. The approach has been highly successful for the businesses involved and Ohio’s municipalities.
6. Is there any experience with the state collecting local taxes that indicates a risk exists that the state would appropriate the municipal taxes it will collect?
No. For many years the state has collected the local county and transit sales taxes and distributed them back to the local entities without an attempt to appropriate them. Further, for many years the state has been collecting local option school district income taxes and distributing them back without an attempt to appropriate them. Finally, since the early 2000s, the state has been collecting municipal net profit taxes of electric and telecommunication companies and distributing them back to cities without an attempt to appropriate them.
7. Why was the proposed net profit provisions incorporated into Revised Code Title 57, the state tax chapter, rather than Title 7, the municipal law chapter?
For simplicity. No legal distinction is created by incorporating the centralized collection proposal into Title 57 rather than Title 7. However, referencing the law is easier because so many of the powers and duties of the Ohio Department of Taxation are incorporated into Title 57, including the various administrative provisions for all taxes. The municipal net profit tax provisions related to the electric and telecommunications industry are also located in Title 57, Chapter 5745.
8. Is it common for the state to charge a collection fee for administering local taxes?
Yes. The Ohio Department of Taxation collects many local taxes, including county and transit district sales and use taxes, some municipal net profit taxes, and school district income taxes. Similar collection fees have always been imposed to cover the state’s cost of providing this centralized service. This approach has proven to be a much more efficient process than having each county or other local jurisdiction establish its own tax collection infrastructure. Many cities currently pay another city or organization to administer their tax systems. For instance, the Regional Income Tax Agency (RITA) charged a net 1.68% fee for all its services in 2016.
9. Don’t some municipalities currently pay zero to administer their net profits tax?
No. Whether the municipality uses its own employees or retains an outside collection agency such as RITA, the municipality always has some cost of administering the tax. It is difficult for some municipalities to separately identify the portion of their costs related to the net profits tax administration versus the costs related to the withholding and individual income tax administration.
10. Will municipalities need to lay-off employees once the state takes over the administration of the net profit tax?
No. Nothing in the law requires a municipality to lay-off employees that currently administer the net profit tax. While reducing the workforce could reduce overall costs, many municipalities are likely to put those resources to a higher and better use by having them focus on the withholding and individual income taxes (80% - 90% of a municipality’s revenue). This should result in the municipality collecting even more of those taxes from non-compliant taxpayers.
11. Isn’t it true that the state will be able to earn interest on the float of the net profit tax because it is only remitted to the cities on a quarterly basis?
No. Although the funds will be invested, interest will be paid pro rata to the municipalities.
12. What services will the Ohio Department of Taxation provide?
The Ohio Department of Taxation (ODT) will collect the filing data and tax returns from business taxpayers through the Ohio Business Gateway. ODT will propose rules, prescribe forms, process returns, distribute revenues, issue refunds, bill and assess delinquencies, audit for non-compliance, handle appeals, certify debts, and perform other administrative functions on a go-forward basis.
13. How will municipalities benefit from central administration of the net profit tax?
Municipalities should benefit in two ways:
1. The Ohio Department of Taxation has tremendous resources and data that can be leveraged to improve compliance, identify non-filers, and enforce collections, thereby increasing the amount of net profit tax paid to municipalities.
2. The municipality can focus its limited resources on “the big money”, meaning the withholding and personal income taxes which constitute approximately 85% of its revenue. This focus should also increase compliance and revenue collections for all municipalities.
14. Is the Ohio Business Gateway capable of handling the increased volume of the proposal?
Not yet. The Ohio Business Gateway (OBG) was initially developed by the state to facilitate a business’ ability to go to “one place” to comply with all governmental reporting requirements and to make payments. In the 2003 budget bill, municipal net profit taxes were scheduled to be added to OBG in 2005 and municipal payroll taxes were to be added in 2007. OBG admirably met those deadlines. In 2016, OBG handled over 5 million transactions—it is certainly capable of handling a high volume of activity. That said, currently scheduled upgrades to its user interface and other technical issues should be resolved before going live with mandatory filing. The Governor’s proposal includes the funds to finish upgrades to OBG. If legislators were concerned about timing, the rollout could be delayed until 2019.
15. If the Ohio Business Gateway has been available for use since 2005 for municipal taxes, why doesn’t it get more use?
Despite some common misconceptions, OBG does get quite a bit of use in the municipal tax area. For instance, with regard to employee withholding, in 2016 OBG had over 464,000 transactions, remitting nearly $500 million of taxes. In 2016, over 11,000 net profit returns were filed through OBG, remitting over $4 million. The reasons for lower net profit tax usage are likely to be the complexity of the tax before H.B. 5, the current inability to link a company’s net profit tax reporting software with OBG (which can be fixed), and the simple lack of an electronic filing mandate—OBG has been tremendously effective for the various state taxes which are mandated by law to be filed electronically.
Overall, OBG had over 5 million transactions reporting nearly $18 billion in taxes and fees in 2016. Clearly, OBG has been a great tool for Ohio businesses and the state, but has suffered from a lack of funding and municipal support. By requiring the state to be responsible for administering the net profit tax on behalf of municipalities, OBG should have the appropriate resources to increase its use for municipal net profit taxes—because it will be the state’s responsibility to process the returns. With the proper level of funding and management by the state, OBG can be made into an effective municipal tax compliance tool for Ohio.
16. Will the requirement mandating businesses to use OBG to file net profit tax returns hurt business?
No. If OBG is properly upgraded, mandating the use of OBG by business will not hurt businesses. While some businesses may not be comfortable with technology, Ohio currently requires all Ohio businesses to file their commercial activity tax, sales tax, and consumers use tax returns utilizing OBG. Despite initial concerns about mandating the use of OBG for filing these state taxes, the business community has adapted well.
17. Won’t businesses lose touch with their local government officials if they are required to file their net profit tax returns with the Ohio Department of Taxation?
No. The net profit tax is only approximately 15% of municipal revenue. The largest portion of municipal revenue is actually the withholding taxes, which will continue to be administered and collected locally. Therefore, businesses will still need to maintain close relationships with their local officials.
18. Will municipalities be able to obtain the data they need from the Department of Taxation to administer their payroll withholding and individual income taxes?
Yes. The tax commissioner has committed that the Department of Taxation will share the data it receives from taxpayers. He has proposed using an electronic portal, similar to the portal created for counties with respect to the homestead exemption. Of course, data sharing requirements could always be added to the legislation.