The Cleveland income tax (which stacks on top of the Ohio state income 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. ) has stood at 2 percent for 34 years. Cleveland City Council President Kevin Kelley—with backing from the mayor and some other council members—has a proposal to increase the tax to 2.5 percent to fill a budget hole the city is facing.
The proposal has been drawing quite a bit of conversation from local media, and for good reason.
To a casual observer, a hike from 2 to 2.5 percent might not be too much to whine about, but in Ohio, the state with the worst municipal income tax system in the nation, residents are leery about ceding any additional taxing authority to localities.
That’s because most Ohio residents pay income taxes to the municipality that they work in, and then also to the municipality they live in. So while the statewide rate tops out at 4.997 percent, Cleveland gets another 2 percent, and the neighboring bedroom community of, say, Shaker Heights gets another 1.25 percent. All of a sudden, you have an income tax rate of 8.247 percent—higher than any neighboring state.
And if Ohioans work in multiple municipalities (think of service-providers; plumbers and electricians), they have to pay income taxes (with separate forms) to all of them. I know of one horror story where an Ohio electrical contractor had to fill out 221 W-2 forms for his 19 employees, and most of them only had a tax bill of less than $5 in each jurisdiction.
This cross-border phenomenon is just the tip of the iceberg with problems with Ohio’s municipal income tax system. There is no uniformity between different Ohio localities as to their definition of income. They aren’t required to start with the state’s definition, and they don’t have a common local standard either. Each locality also has different provisions related to deducting losses from previous years.
So how can Ohio fix this mess? In 2013 and 2014, Ohio legislators considered H.B. 5, a simplification bill, which had some laudable goals but ultimately passed in a very watered down format.
I am hopeful that further simplification of this system will remain at the forefront of the Ohio tax conversation. I think the ideal solution to Ohio’s municipal income tax woes is to emulate Maryland (how often do I get to say that?), which collects its local income taxes on just five lines on the state income tax form.
Maryland Local Income Taxes Are Just a Few Lines on the State Form
Until some serious simplification occurs, many Cleveland residents and commuters might see this proposed increase as what it is; one more tax on top of an already wobbly system. Or, as some news sources are keen to note, a money grab from commuters without Cleveland voting rights, as 87 percent of the city’s income tax is paid by people who work in the city, but live elsewhere.
Be sure to check out our testimony to the Ohio House Ways & Means Committee on municipal income tax reform.
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