Ohio Cities Sue to be Able to Individually Collect City Income Tax

Ohio has one of the more complicated state taxing systems in the US. Individual cities levy income tax on the residents, workers and companies.  While state laws set some parameters, the cities have developed a system of requiring separate tax returns for each jurisdiction.  You can imagine the administrative burden and cost to the cities on maintaining the ability to review and process the returns.  Not to mention the burden on taxpayers and corporations that must file with each jurisdiction they touch.

It is not unusual for companies to files a dozen city income tax returns. Think of fast food chains and the return burden climbs.  Two agencies, the Regional Income Tax Agency and the Central Collection Agency provide state-wide filing for over 250 cities today but the fees cost the cities 0.50% or more.

Individuals also must file where they live and often file where they work as well. The individual pays the highest tax to the multiple jurisdictions but they may pay one rate where they work and a differential where they live.  Often bedroom communities have high income tax rates because they have minimal employment.

In 2017, the Ohio legislature passed rules requiring a single corporate city income tax return filed with the state which the state would then apportion to the cities. The state’s fee is less than charged by the two agencies.

Now some cities are challenging the constitutionality of the state level changes. Two taxpayer-funded governmental entities are paying attorneys to fight with one another. The municipalities have gone so far as to stipulate that companies receiving economic development funds must agree to not filing centrally.

Ohio has made great progress by eliminating the state corporate income tax, which was replaced with a Commercial Activity Tax on revenue, and is trying to simplify the city income tax process. I believe it is time for the state to consider a totally new method of funding cities so that the taxing structure doesn’t continue to discourage companies from considering Ohio in their location selection process.

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