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Recently enacted Ohio legislation, H.B. 5, imposes numerous changes on municipal taxes, including:

  • Employers do not have to withhold municipal tax for an employee until the employee has worked 20 days in the municipality (it used to be 12).
  • For municipal tax purposes, companies can carry forward net operating losses for five years to offset taxes on future profits.
  • A uniform definition of taxable income applies to all municipalities, as well as standards for determining who is a resident of a municipality
  • All municipalities must follow a uniform tax return filing schedule, and certain rules for refunds and assessments.

These changes take effect in 2016. See Porter-Wright article, Ohio Municipal Tax Reform Bill – H.B.5 – Passes the Legislature and Legislative Service Commission Final Analysis of HB 5.

The law is intended to streamline the municipal tax system, make it more uniform, to benefit small business and make compliance easier for employers.  The Ohio Municipal League objects to HB 5, not only because municipalities will lose a lot of tax revenue, but because the Act unduly takes away municipalities’ Home Rule authority to administer taxes, as granted by the Ohio Constitution.  See Akron Legal News, Advocates and opponents weigh in on HB 5.

As stated in the Legislative Service Commission Final Analysis of HB 5:

Municipal corporations’ authority to levy taxes is an aspect of their home rule powers conferred by Article XVIII, Section 3, Ohio Constitution.  Although the General Assembly does not grant municipal corporations the authority to tax, it may limit their taxing authority or prohibit municipal taxes by express acts;(Article XVIII, Section 13 …Laws may be passed to limit the power of municipalities to levy taxes and incur debts for local purposes…) however, it cannot command a municipal corporation to impose a tax when the municipal corporation chooses not to do so.  The limits on municipal income taxes are codified in Chapter 718.
There is authority that:
While there do exist provisions allowing the General Assembly to limit the exercise of municipal taxing power, Cincinnati Bell Co., 81 Ohio St.3d at 605, 693 N.E.2d 212, those provisions must be interpreted in a manner consistent with the purpose of home rule. Id.
S.B. Carts, Inc. v. Put-in-Bay, 2005-Ohio-3065, ¶ 11, 161 Ohio App. 3d 691, 694, 831 N.E.2d 1052, 1055
Future litigation is anticipated to discern whether any of the provisions of this Act impinge on municipalities’ home rule authority.

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