Thousands of Ohioans spent the last year working from their kitchen table while paying income taxes to the city where their empty office building stands.
A pair of Republican representatives say it's time to put an end to the pandemic rule that lets cities collect taxes from people who neither live nor work inside their borders. A conservative think tank says the COVID-19 municipal income tax law is unconstitutional. And the cities say, law or no law, working from home could completely change how they pay for services and how Ohio creates jobs.
"This is not something we can cure by ourselves," Lima Mayor David Berger said. "We’re going to need a real partnership with the state to come up with a revenue stream we can count on."
A temporary fix for municipal income
The basic idea is that people pay taxes to the places they live and work because they use city services like roads, police and fire.
Some Ohio cities offer discounts to their residents who work and pay taxes in another municipality but others don't. It all depends on where you live and work.
This is how it worked until the coronavirus pandemic hit Ohio and thousands of workers traded their morning drive for a walk down the hall. Cities were instantly worried. They routinely paid partial income tax refunds to workers who split their time between the home and office. Giving refunds to all those people could have meant steep cuts to critical city services and even bankruptcy.
It's not just a big-city problem. Lima gets $20 million of its approximately $28 million general revenue fund from the municipal income tax, and 60% of those dollars come from people who live outside the city.
"I can't really describe how crippled we would be without it," Berger said.
So, state lawmakers passed House Bill 197 in March 2020. It let local governments collect municipal income taxes as if those workers were still in their offices.
Taxation without representation?
A couple of Ohioans and the Buckeye Institute (a conservative think tank based in Columbus) think the COVID-19 tax law was unconstitutional, and they've brought their cases to Ohio courts.
None of those cases is resolved yet, but the crux of their argument is cities can't tax people who don't live or work there.
Ohio's constitution, Buckeye Institute President Robert Alt said, "doesn’t allow you to be taxed based on ‘Let’s pretend.’”
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A number of Republicans in both the House and Senate agree. They've been working on different bills to eliminate the temporary tax provision.
"It’s really about fairness," Rep. Jay Edwards, R-Nelsonville, said. "It’s not about cutting income taxes anywhere. We wouldn’t ask you to pay the bill for Wendy’s if you went to McDonald's, but that’s what we are asking people to do right now."
But cities and even Senate President Matt Huffman, R-Lima, have called the provision a reasonable response to exceptional circumstances.
If people don't go back to work
Most pandemic restrictions are expected to lift in the coming months, but not everything will go back to the way it was before.
The coronavirus pandemic accelerated the work from home movement by at least a decade, Dayton Mayor Nan Whaley said. We all learned how to video conference, flex our work schedules and digitize what were once paper processes.
Just look at Kettering, a city south of Dayton, Whaley said. Two of its biggest employers decided to close their physical offices.
That's not a one-off. That's the start of a trend, she said. And it's going to be a problem.
The six biggest cities in Ohio (Cleveland, Columbus, Cincinnati, Akron, Toledo and Dayton) get about 88% of their revenue from income taxes.
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"We’re anticipating about a $25 million loss," Whaley said when asked whether Dayton has an idea how many workers won't come back.
And Ohio's Regional Income Tax Agency has started modeling how much money cities will lose if 10%, 20% or even 30% of city workers decide to stay at home.
"We don’t have authority under the laws of the state to invent things unilaterally," Berger said. "They (lawmakers) have actually been eroding our ability to come up with those solutions by ourselves."
Ohio doesn't allow cities to require new hires to live within their borders anymore, and state lawmakers cut another source of their funding (local government fund) in half during the Great Recession. They also increased property tax deductions and homestead exemptions while eliminating the estate tax.
"There is an opportunity in this disruption to have a broader conversation about what Ohio is about and what our cities are about," Whaley said. "But I don't have a lot of confidence in this legislature."
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