Ohio GOP income tax bill could increase property taxes and cut business taxes
Mar. 14, 2023
CLEVELAND, Ohio – A proposed Ohio income tax cut would have multiple hidden consequences, including raising property taxes and cutting business taxes, experts told cleveland.com.
House Bill 1 would cut income taxes, predominantly for the state’s highest earners, at the expense of funding for schools, parks and libraries, cleveland.com and The Plain Dealer earlier reported. But experts who have analyzed the bill say it also carries potentially severe ramifications for taxpayers that the bill’s backers have, so far, failed to address. Specifically, a decades-old state law designed to stabilize property tax collections against crashes or spikes in property valuations, could mean higher taxes for homeowners, in light of HB 1′s reduction in the percentage of property that can be taxed. Also, a series of Ohio Supreme Court decisions suggest that HB 1 might result in corporate tax cuts – a result that could further erode funding for public services.
The bill’s sponsor, Rep. Adam Matthews, a Republican from Lebanon, is promising to amend the bill so it doesn’t directly increase any taxes and only provides tax relief to residential and agricultural property. “We are not going to be raising property taxes on the final bill that we vote upon,” Matthews told cleveland.com.
But those changes have yet to make it into a draft of the bill, which has already had two hearings before the House Ways and Means Committee. Support for the GOP-backed bill has fractured along party lines, with Republicans and conservative groups saying the bill will entice businesses to set up shop in the Buckeye State and empower consumers by letting them keep more of their earnings.
“The more money we can keep in the hands of our citizens, the better it is for economic growth,” Lebanon Mayor Mark Messer said at a recent HB 1 hearing.
Democrats, local governments, parks, libraries and schools have opposed the bill, saying it would gut funding for crucial services, while providing tax relief to those who need it the least. “Nobody likes taxes...but the problem is we need to have something to underwrite the cost of critical services,” said Ohio Rep. Daniel Troy, a Democrat from Willowick, during a committee hearing.
HB 1 aims to set a flat income tax rate of 2.75% for everyone who makes more than $26,050. The bill seeks to pay for that by removing the 10% property tax “rollback”, a decades-old law in which the state government pays 10% of residential property taxes. The bill then seeks to offset the property tax increase by reducing the percentage of a property that can be taxed from 35% to 31.5%.
Ohio’s current income tax rate ranges from 2.765% for the portion of income people make between $26,051 and $46,100, up to 3.99% for the portion of their incomes above $115,300 per year, according to the Ohio Department of Taxation. If approved, the 2.75% flat tax would be the lowest tax rate for the state’s top earners in the history of Ohio’s income tax system, cleveland.com reported previously. Savings from the tax cut vary greatly based on how much one earns. Those who make $75,000 per year would save $140, while those who make $500,000 per year would save $5,209.
HB 1′s proposed income tax cut would remove $1.7 billion from the state coffers in fiscal year 2024, $1.9 billion in fiscal year 2025 and more in the years after that, according to an analysis from the Ohio Legislative Services Commission. The property tax cut proposed by HB 1 would reduce the amount of school and local government revenue by $538 million in fiscal year 2025, a number that would increase in future years, according to the commission’s report.
Matthews has said – and the legislation suggests but does not codify – that state government would set aside money to minimize the fiscal shock to local governments, should HB 1 pass. “Before we have a vote on a final bill, we will have a full transition fund procedure to make sure it’s clear,” Matthews said.
While HB 1 is still early in the legislative process, local governments are taking it seriously. Cuyahoga County would face a $33.6 million loss through the rollback portion of the bill alone. At least one county council member has joined parks, school systems, libraries and more in predicting that service cuts or levy increases might have to make up for money lost through HB 1. “With this being house bill No. 1 to me, that suggests this is a topic the majority leadership is very interested in and has to be taken very seriously,” said Cuyahoga County Councilman Dale Miller, who has served in both chambers of the Ohio Legislature.
Hidden tax increase
HB 1′s economic impact to both taxpayers and public agencies would largely depend on how it interacts with a decades-old law that seeks to provide stability in property tax. That law, passed in the 1970s, is known as HB 920. It created “tax reduction factors” that were designed to prevent homeowners’ property taxes from increasing, following a spike in home values. Anyone who has paid Ohio property taxes in the past several decades may recognize 920 as a line-item on their property tax bill that reads “Less 920 Reduction.” It typically shaves off hundreds or thousands of dollars from homeowners’ property tax bills. However, HB 920 works in reverse as well. If property values in a given area decrease, the tax rate will actually increase to maintain a consistent stream of revenue for local government entities, as long as the new tax rate does not surpass the amount approved by voters.
The idea that HB 920 will raise property taxes after a decline in taxable home value is not just a theoretical or academic possibility, said Howard Fleeter, a consultant who previously taught at Ohio State University and authored an analysis of HB 1 for the Ohio Education Policy Institute. Following the Great Recession, HB 920 resulted in increased property taxes where property values fell. “I don’t think the people who put (HB 1) together understood how this was all going to fit together,” Fleeter said of Ohio’s tax laws.
While it’s not certain whether HB 920 would apply to HB 1, it seems likely 920 would be effective, Fleeter said. For example, the Ohio Legislative Service Commission – a nonpartisan government body that calculates the economic impact of potential legislation – assumes an impact from HB 920 and even uses some of HB 920′s language in its analysis, Fleeter said. Taxes in general are complicated, but that’s especially true of Ohio’s tax system, Fleeter said. HB 920 is a unique feature of Ohio’s tax law, and something few people realize affects them, Fleeter said. “If people don’t understand you’re doing it, it doesn’t give you a lot of political benefit,” Fleeter said.
Corporate tax break
HB 1 only explicitly applies to residential property tax; however, the actual impacts of the bill could also result in corporate tax cuts, said David Seed, a partner at Brindza McIntyre & Seed LLP who specializes in state and local taxation. The reason why is because of a series of Ohio Supreme Court decisions involving Park Investment Company between 1964 and 1980 that required all properties, regardless of classification, to receive the same assessment percentage. In other words, if residential properties are taxed at 31.5% of their fair market value, businesses must also be taxed at 31.5% of fair market value.
As written, HB 1 would apply to commercial and industrial properties because of Park Investment cases, but Matthews said lawmakers are trying to find a way to cut residential and agricultural property taxes without providing that same cut to commercial and industrial properties. Unless amended, the bill’s reduction in the corporate tax rate would further reduce the amount of government revenue available for services.
“You only have two choices, you’re either going to raise taxes or you’re going to cut funding for schools and parks,” Fleeter said.