Northeast Ohio cities have taken their fight over the state of Ohio’s effort to become the collector of local taxes to court.
Just before Christmas, 22 Northeast Ohio communities filed suit in Lorain County Common Pleas Court to block provisions of the state budget bill, H.B. 49, that would allow businesses to choose to file their net profit tax forms with the state, rather than the municipalities in which they do business. The communities use the Regional Income Tax Agency (RITA) to process their business and municipal taxes.
The new provisions were scheduled to take effect Jan. 1.
Gov. John Kasich’s administration had hoped the legislation would make filing through the tax department mandatory and that the state could charge businesses a fee for the filing. The final bill dropped the fee and made filing with the state optional.
Although it’s now optional, the communities are asking the court to declare the net profits tax provisions of H.B. 49 unconstitutional and to issue preliminary and permanent injunctions to prohibit the state from implementing the centralized administration of the tax.
Cleveland-based Walter Haverfield LLP filed the suit against the state of Ohio and Tax Commissioner Joseph Testa.
The legislation allows businesses to elect to file their net profit tax forms with the state, which would then distribute the taxes collected to the local governments, taking a 0.5% cut off the top. The communities argue in their lawsuit that, with this legislation, the state “is even confiscating a portion of the municipal net profit tax for its own use in violation of the Ohio Constitution.”
This comes on the heels of a similar lawsuit filed in Franklin County Court of Common Pleas last November by a coalition of more than 100 municipalities.
These suits are the latest steps in what municipalities see as a decades-long erosion of home rule — the section of the state constitution that grants cities broad powers of self-government, including the right to assess and collect local taxes like an income tax.
The General Assembly, backed up by Ohio Supreme Court decisions, has been narrowing the powers of cities since the 1980s, when legislation overruled cities’ collective bargaining laws. More recently, the Legislature took away cities’ rights to register firearms, regulate oil-and-gas drilling and force city employees to live in their work city.
The Kasich administration has been trying to take over collection of this net profits tax since at least 2014. Testa told legislators last year that businesses he talked with on a listening tour consider compiling and filing their net profits tax the biggest tax headache they face. That’s because each of the approximately 600 communities that levy a net profits tax on businesses set their own rules and enforcement practices.
“On the listening tour, we heard stories of how it can cost a business more to prepare a net profits filing than the actual tax owed,” he told the House Finance Committee on Feb. 9, 2017. “Businesses like to have tax predictability. That is difficult to achieve under the current net profits system.”
The Tax Foundation, a Washington, D.C., think tank, considers Ohio’s municipal taxing structure one of the worst in the country because it allows individual cities so much freedom to craft their own tax.
Also, the state argues that its 0.5% administrative fee would save cities money, including cities that use RITA, whose charges typically run about 1.5%. But the filing of the lawsuits suggest the cities disagree.
While some large businesses may have to file many tax forms, cities and their tax collectors believe the tax commissioner overstates his case.
Don Smith, executive director of RITA, said his agency processes net profit tax filings for 71,000 businesses and administers tax collections for 319 taxing districts. That means that nearly half the communities that levy a net profits tax already file only one form for those communities. And of those businesses, he said, 76% filed in only one community in 2015, the latest year for which he had data, and only about 13% filed in more than four communities.
“When you begin to make the argument that this is an overwhelming burden for businesses, we really have to step back and say, ‘Not for most businesses,’ ” he said. “For some, for sure, but not most.”
Smith also argued that while the state is charging a smaller fee than RITA, his agency provides more services, including auditing, collections, setting up payment plans, providing assistance to business filers and other administrative work. Cities, he said, also are concerned that they won’t get their tax receipts as quickly from the state, which intends to send revenue to the cities quarterly. His organization transfers the money in half that time.
Kent Scarrett, executive director of the Ohio Municipal League, which is backing the Franklin County lawsuit, expressed the same sentiment and added that, in addition to the communities that contract with RITA, 125 cities and villages contract with the Central Collection Agency, an arm of the city of Cleveland, to process their taxes.
“It’s not the 0.5% fee, but the lack of accountability and enforcement power that (cities) currently have,” he said. “Our members feel, and we think taxpayers should feel, a pretty significant level of angst with the state getting into the business of managing local revenue and not letting us assure the accuracy and accountability and auditing as we currently do now. They are not as interesting in municipal filings as they are in state filings.”
Scarrett also is concerned that allowing the state to take over the administration of this business tax will lead to the state seeking to take over the municipal income tax collections, a far larger pot of money for cities.
“This is the first bite of the apple,” he said.