Guess Which State Has the Worst Local Income Taxes

September 23, 2013

As if tracking federal and state income taxes isn't difficult enough, there are also 4,943 local income taxes in 17 states. In some places they are minute, in Maryland they are hefty, and in Ohio, the whole system is a mess.

My colleague Scott Drenkard and Greg Lawson of the Buckeye Institute have penned an op-ed in Forbes today about Ohio's awful local income taxes. What makes the Ohio local income taxes so bad?

The local ordinances defining these hundreds of distinct income tax systems exceed a staggering 16,000 pages. This complexity creates an extraordinary compliance burden, as employers, especially contractors of varying stripes, must track their employees’ location by hour, by jurisdiction to properly comply with the differing tax codes of all the localities in which they conduct business. A northeast Ohio electrical contractor once filed 221 W-2s for 19 employees, along with 39 business returns, most having a tax due of $5 or less.

Even worse, taxpayers who live in one community and work in another may owe income tax to both localities. They frequently pay taxes on the same dollar more than once because some localities refuse to offer a credit for tax paid to the other.

There are no caps on municipal tax rates, and with some cities also levying school income taxes, combined state and local income tax rates can skyrocket to 9 percent or more.

Businesses also suffer under unpredictable actions by local officials. For instance, after a major business booked a large loss during the Great Recession, one Ohio city hastily revoked a provision allowing losses to be claimed on future tax returns in order to wring more tax revenue from the company as soon as it returned to profitability.

Read the full op-ed here.

For Scott's testimony to the Ohio Legislature on this topic, see here.

For more on local income taxes across the country, see here.

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