Ohio has a history of poor taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy that negatively affects its business climate. In an attempt to improve its performance, the Ohio House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. 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 withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. 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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