Ohio Considers Changes to Complex Municipal Tax Codes

December 03, 2012

Ohio has a history of poor tax policy that negatively affects its business climate. In an attempt to improve its performance, the Ohio House Ways and Means Committee is considering a bill that would change Ohio’s municipal tax structure. Right now, Ohio allows its municipalities to levy both individual and business income taxes. Additionally, each municipality gets to write its own regulations and rules for things like employee withholding and how to calculate penalties.

Because each municipality is creating its own rules, businesses that have to file in multiple places have to comply with entirely different sets of rules, leading to increased compliance costs. Tax compliance often requires businesses to hire outside professionals to interpret the tax code and ensure that all the rules are being followed. For small businesses, this is a costly endeavor that in Ohio is leading to them often paying more in administrative costs  than they owe in actual taxes. Placing such severe burdens on small businesses keeps them from flourishing and leads to a bad business environment with low incentives for both starting businesses and for existing businesses to stay (Ohio scores 39thin our State Business Tax Climate Index for FY 2013). HB 601 would be a step toward a simpler and more uniform tax code that would prevent the confusing and costly base differences between municipalities.

To help increase uniformity, HB 601 would also set a standard for net operating loss carry forwards. “Carry forwards” allow businesses to take a net loss from one year and use it to offset the net income of another year on its tax forms. In Ohio, each municipality sets the rule with some allowing up to five years of NOL carry forward and some allowing none. This prevents neutrality because some businesses create consistent profit every year while others have years of loss followed by profit. Making one rule for carry forwards in the state will allow businesses to treat their net income the same across all municipalities, reducing complicated compliance issues.

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