Akron and other Ohio cities could lose millions in revenue starting next month if commuters who work from home pay income taxes where they live rather than normally work.
The change would be a return to normal. Prior to the pandemic, Ohio law allowed cities and villages and school districts to levy municipal income taxes where corporate and employee incomes were made, not where workers lived.
The cities still have to determine how high the revenues are. There are many unknown variables, including the number of commuters asked to return to the office. Higher paying industries like the financial sector can more easily ask workers to stay at home – which saves businesses office costs – while hospitality, manufacturing and hospitality workers had no choice but to report for work.
Surveys conducted during the pandemic have shown that in some sectors the majority of workers are still staying at home, although the number of people vaccinated has increased and COVID-19 cases have decreased.
But if only one in ten employees worked from home by the end of July, larger cities would lose tens of millions of dollars annually. And the Senate is now considering House Bill 157, which would allow commuters to apply for a discount on income taxes paid in 2021.
How we got here
When the pandemic broke out, Ohio’s Stay Home Order shut down stores. Legislators recognized the potential danger to cities that, through no fault of their own, could no longer levy taxes on workers who had to stay at home.
For example, a law was passed that will keep tax collections uninterrupted for 30 days after the Ohio State of Emergency has ended. Republicans, including those currently supporting the 157 House Act, say the state should have lifted the tax loophole for the pandemic when the stay at home order ended more than a year ago. Democrats, who typically represent urban areas, refer to the removal of the pandemic tax regime as an attack on the budgets of urban police and fire departments.
Governor Mike DeWine ended the Ohio state of emergency on Friday, meaning cities can’t tax commuter income if they still work from home on or after July 18.
Prepare for loss of income
The city’s finance directors spend months preparing for potential lost revenue, setting aside federal funds from the American Rescue Plan Act to offset the loss of their most important source of income: income taxes. Akron plans to use $ 29 million of the $ 153.37 million federal funding it will receive this year and next to help cushion the economic impact of the pandemic. That includes keeping the city’s rainy day fund at $ 25 through 2026 “to weather additional economic impact / potential tax law changes” and related employee concerns.
Large Ohio cities, where the structure of state and local tax systems makes urban centers more reliant on local income taxes, have increasingly relied on income taxes to fund urban services such as police and fire services. The Greater Ohio Policy Center cracked the numbers in September after state lawmakers introduced plans to end pandemic rules that kept taxes flowing to cities regardless of where employees work.
The policy research firm found that income taxes represented about 85% of Akron’s local revenue in 2017, up from about 70% in 1980.
And 73% of Akron’s workers lived outside the city.
Impact in Akron
In testifying against House Bill 157 in March, Mayor Dan Horrigan said the removal of the pandemic tax regime “will undermine our ability to fund basic citizen services.”
The city collected roughly $ 142 million in taxes from employees and an additional $ 28 million in corporate profits in 2019. Two-thirds of the $ 142 million in employee withholding came from workers who worked in Akron but lived outside of town.
“This is based on the fact that Akron’s largest employers required their employees to work from home, and the majority of those employees do not work from home in Akron,” said Horrigan. “Therefore, the existence of HB 157 will result in massive revenue declines that will pose significant challenges not only to Akron but to all of the major Ohio communities.”
In September, several months before the COVID-19 vaccine program began in Ohio, the Greater Ohio Policy Center estimated that 30% of commuters could continue to work from home. As more businesses return to full capacity as more people get the chance, the tax implications could still be dire if only 10 percent of these commuters continue to work from home long after the pandemic.
Akron, for example, would lose more than $ 14 million a year if 10% of its employees worked from home indefinitely. That’s almost what the city raises annually from a 2017 income tax increase that supports first responders and road works.
As Akron loses millions, suburban towns and villages, as well as school districts with municipal income taxes, could see an influx of revenue. State law does not allow municipalities and counties to levy income taxes.
For example, if HB 157 passes, Akron company workers who live in a township could claim a local income tax refund when they file their 2021 returns next year, or stop deducting local income tax from their salary that year.
You can reach Doug Livingston at [email protected] or 330-996-3792.