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Bill could save taxpayers, cities say it would cause drastic cuts

Proposal would eliminate taxes on commuters.

A bill that would eliminate the income taxes on commuters could save taxpayers money, but city leaders say it could result in drastic cuts in services.

State Sen. Kris Jordan introduced the legislation earlier this year. It would prohibit municipalities from levying a tax on the incomes of people who work there but don’t live there.

“It’s just a tax fairness issue,” said Jordan, R-Ostrander. “If you have no say on increased taxes in a particular area and you don’t get to vote on it or the elected officials in those areas, then you should not be forced to pay those taxes.”

If approved by lawmakers, Springfield would likely collect millions of dollars less annually, Finance Director Mark Beckdahl said. About 35 percent of people who work in Springfield don’t live in the city, he said, but it’s difficult to estimate how much could be cut because the city doesn’t require nonresidents to file a tax return.

The city may be forced to cut police and fire staffing if a large loss of income tax revenue occurred, Mayor Warren Copeland said.

“We’ve already cut 130 jobs, so where we go from here is really hard,” he said.

State impact

Of the 920 municipalities in Ohio, nearly 600 of them collect income taxes, said Kent Scarrett, director of communications for the Ohio Municipal League.

Both residents of those cities and villages and nonresidents who work there are taxed. It also applies to businesses that have earned net profits within the municipality.

It’s a payroll tax based on wages, meaning it doesn’t affect pensions, retirement benefits, unemployment, interest or rental income.

In Clark and Champaign counties, 10 cities and villages collect income taxes, including Springfield with a 2 percent tax and Urbana with a 1.4-percent tax.

Some cities give credits for taxes paid to other municipalities, reducing their bill. The city of Springfield gives half-credit to residents who work in other cities up to 1 percent, Beckdahl said, while other cities, such as Dayton, don’t provide credits.

It’s impossible to say how much eliminating taxes commuters would cost cities across Ohio because municipalities don’t track where the withholding comes from, Scarrett said. In some instances, cities could lose up to 60 to 70 percent of their revenue, he said.

“It would just be devastating,” Scarrett said.

Municipalities do their best to host businesses to create jobs for their residents, Scarrett said.

“If those employers and those employees were no longer subject to withholding to subsidize or pay for the services they benefit from, it would be a challenge for municipalities to continue to be good hosts,” Scarrett said. “In many instances, it would actually cause administrations to maybe not be as aggressive in courting businesses into their community because they’re not paying for the services that they use.”

The proposed changes present a sort of parasitic relationship, Scarrett said, where people use the services but don’t contribute to the sustainability of those services over time.

“It would be a tremendous hit to the revenue of those municipalities who have those sort of taxpayers in them,” Scarrett said.

The legislation would affect each district differently, Jordan said, but as a matter of fairness he believes it needs to be done.

“I would ask them: Is it fair to tax people who receive very little of your services? Is it fair to tax them at the same rate as people who live and work in their community?” Jordan said.

The bill was assigned to the Senate Ways and Means committee. A hearing hasn’t been scheduled, but the co-sponsor, state Sen. Tim Schaffer, R-Lancaster, is also the chairman of the committee, meaning a hearing could take place this winter. If the bill expires at the end of the year, Jordan said he will likely reintroduce it.

‘Primary driver’ of jobs

The city of Springfield expects to collect $28.6 million in income taxes next year, up 11 percent from 2011. The income tax makes up about 76 percent of its $37.7 million general fund.

Nonresidents who work in Springfield use city services such as police, fire, emergency medical services, roads and snow removal, Beckdahl said.

“There are numerous services both citizens and those working here consume during the course of the week, so it’s only right in our mind that they help pay for some of those services,” he said.

Copeland agreed.

“We’re the primary driver in bringing jobs to the community and I think it’s only fair that they pay 2 percent,” said Copeland, a Democrat.

Attracting businesses

About 60 to 70 percent of Jordan’s constituents live outside of municipalities in Delaware County, but he said they are forced to subsidize a municipal government because many of them work in cities in Franklin County.

“I’ve heard the complaints hundreds of times and I just thought it was time we tried to make it more fair,” Jordan said.

The bill will also reduce the competition among cities to offer the largest tax incentive to attract businesses, Jordan said.

“They’re trying to see who can give the most away to attract (businesses),” Jordan said. “If you get rid of the heavy reliance on income tax, I think that will help get rid of some of those issues.”

In his district in north central Columbus, some businesses have moved 15 miles to receive better tax abatements, he said. In some of those cases, the tax abatement had expired in a nearby community.

Income taxes are the worst form of taxation, said Steven Curtis, the state director of the Ohio FairTax Association. They’re destructive to the economy and burdensome to taxpayers, said Curtis, a Greene County resident.

“It should be blatantly obvious that the income tax is ultimately destructive to a municipality,” Curtis said. “They should be working very hard to get rid of them in those places where they already have them.”

States such as Texas, Florida and Tennessee, where there are no income taxes, are the area’s that are growing the most, Curtis said.

“The income tax, by its very, very destructive nature, argues against growth, expansion and success,” he said.

‘Double whammy for cities’

The bill is not a new concept at the Statehouse, Scarrett said, but it’s the most activity the municipal league has seen on it in recent years.

City leaders are concerned about the bill seeking to eliminate taxes on commuters, but said the most pressing issue for them is House Bill 5, which would create uniform municipal income tax regulations across Ohio.

State Rep. Bob Hackett is opposed to the bill eliminate commuter taxes because it would be a double whammy for cities when combined with HB 5, which he said could be approved this fall.

“They’re already losing enough revenue with HB 5,” the London Republican said. “If you couple that with the additional revenue loss, it would be too much.”

State Rep. Ross McGregor and State Sen. Chris Widener didn’t return calls seeking comment last week.

Earlier this year, the state budget update was first written with language that would have required municipal tax administrators to annually report revenue received from residents and nonresidents. If the information wasn’t reported to the Ohio Department of Taxation, cities and villages could have faced losing local government funding from the state.

That language was later taken out by the conference committee, Scarrett said, but he doesn’t think it’s going to go away. It’s possible a similar clause could be added into House Bill 5, a municipal income tax uniformity bill.

“It’s something that a number of legislators are interested in capturing and seeing,” Scarrett said.

It would create more work for the nearly 600 taxing municipalities in Ohio because they would have to manually separate the filings by hand or purchase software, which could be costly, he said. The municipal league is working with lawmakers about seeking alternative ways to find that information or creating a pilot program.

Curtis Mumma of Mumma Realty and Auctioneers lives in New Carlisle and works in Springfield. Taxing nonresidents is just more money out of his pocket, he said.

Mumma supports the bill to remove nonresident taxation, but he said he also wouldn’t want to see a reduction in city services.

“I don’t think anyone is for more taxes,” he said. “They want what’s fair.”

The legislation in the long run won’t solve Ohio’s local tax structure that’s hurting economic growth, said Dan Harkins, a local tax attorney and former Clark County Republican Party chairman, but rather only fixes the problem for commuters.

A form of unified government — merging county and city governments similar to those in Lexington, Ky., and Indianapolis — would improve efficiency and create less duplication in services, Harkins said.

“The better thing would be to eliminate the tax completely,” Harkins said.

If enacted, the changes would benefit the city, he said.

“At the end of the day what this change would do is actually make the city of Springfield more attractive for commuters because our housing stock is inexpensive, we have adequate services and the cost of living is low,” Harkins said.

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