In Ohio, municipalities levy income taxes on non-residents’ income earned within their jurisdiction. It is not uncommon for localities to levy income taxes on non-residents for work performed within their borders as a way to recover the cost of the local services utilized by commuting non-residents. However, in Ohio, the result is a rather complicated system where businesses withhold income taxes in every jurisdiction that an employee works in. More than 600 cities and villages also tax a business’s net profits in the state as well.
At least, that is how it worked before the pandemic and state-wide stay-at-home-orders. Given the current conditions, the place of business has changed for many Ohioans (and millions of Americans in other states) who find themselves teleworking from their homes. As a result, many now earn their income in a different municipality from the one they regularly work in—a circumstance with significant tax implications.
To tackle these challenges, the Ohio legislature passed HB197 in March of this year. HB197 includes a provision deeming that “employees who must, as the result of the COVID-19 emergency, report to a temporary worksite, including their home, are temporarily considered to be working at their otherwise principal place of work, i.e., the location where the employee reports for work on ‘a regular and ordinary basis.’”
The legislature’s solution may seem straightforward, but it is not so simple. According to the plaintiffs, allowing municipalities to levy taxes on non-residents’ income with no fiscal relationship between the work and that municipality is unconstitutional. In this instance, the state requires employees to stay away from their offices in Columbus which resulted in some employees working from non-Columbus locations. The state subsequently deemed their work to have been performed in Columbus for tax purposes, resulting in a different (and higher) tax rate. HB197 also prevents many of the municipalities in which commuters live, and now work, from collecting taxes to fund services utilized by residents, since domiciliary jurisdictions generally provide a credit for taxes paid to other jurisdictions.
The Buckeye Institute argues that the new law violates the Fifth and Fourteenth Amendments to the U.S. Constitution as well as the Ohio Constitution. The state constitution does not grant municipalities taxing power beyond established limits, which is what is permitted under the statute.
The legislation was passed in an effort to simplify municipal tax collection and withholding during the pandemic. Simplification of Ohio’s local income taxes is a worthy goal as Ohio’s local income tax system is one of the most complex in the country. Each municipality has so-called “base autonomy,” meaning it is permitted to come up with its own calculation of taxable income and collection requirements. This is especially problematic if the localities do not treat credits for taxes paid to other jurisdictions in the same way. In Ohio, it is entirely possible to pay local income taxes on the same dollar to more than one jurisdiction. This is a violation of the time-honored principle of avoiding double taxation.
According to a recent study, many of Ohio’s cities rely heavily on commuters’ income taxes. In Columbus, only 41 percent of the workforce lives in the city. Others are even more commuter-oriented, such that the average city has as many as 75 percent of workers commute in to work.
As work increasingly takes place in home offices—a trend likely to outlast the immediate health crisis—cities and states will have to grapple with the revenue implications, and may find it necessary to adopt policies to better compete with outlying areas. Taxing people in places in which they no longer work, however, will not be the solution.
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