Are Local Taxes Too High in Ohio?

The Ohio Chamber of Commerce looks like at local taxes in the state and elsewhere

The Ohio Tax Benchmarking Analysis, prepared for the Ohio Chamber of Commerce Research Foundation, was recently released. The report provides a comprehensive comparison of Ohio's tax climate with that of peer states. The study finds that while Ohio's state-level tax system is relatively competitive, the local tax burdens are significantly higher, impacting small municipalities, counties, and school districts differently.

Tax Structure Overview

Ohio's tax system includes several types of taxes: business entity taxes, personal income taxes, sales and use taxes, property taxes, and unemployment insurance taxes. Notably, Ohio utilizes a Commercial Activity Tax (CAT) on gross receipts instead of a traditional corporate income tax. The state also has a personal income tax with a top marginal rate of 3.75%, which is set to decrease to 3.5% in 2024. Ohio's state sales and use tax rate is 5.75%, with local rates varying by county, and its property tax rates, which revenues go to local government (counties, townships, schools) are among the highest when compared to peer states.

Municipalities in Ohio heavily rely on income taxes for their funding. This system imposes significant administrative burdens on businesses due to the state's complex municipal tax structure, as each municipality can set its own income tax laws. As a result, businesses face high compliance costs, especially small businesses, which need to manage multiple local jurisdictions.

Over the years, some communities have come together to outsource income tax collections to cooperative agencies, such as “RITA”, the Regional Income Tax Authority. RITA now collects and administers local income taxes for nearly 390 municipalities in Ohio, including Piqua and Pleasant Hill. The centralized approach tends to keep costs to communities down, while there are some concerns that local customer service may suffer.

Regardless, the Ohio Chamber or Commerce believes that the high local tax burden and administrative complexity can deter business investment in these municipalities, affecting their economic vitality and growth prospects.

Counties in Ohio are primarily funded through sales taxes. While Ohio's state sales and use tax rate is competitive, local variations impact county revenue. Sales taxes provide a stable revenue stream; however, high local sales taxes can influence consumer behavior and business operations negatively.

Counties with higher local sales taxes may struggle to attract and retain businesses compared to counties in peer states with lower taxes. In addition, counties with lower sales tax burdens tend to promote development that increase retail development. This dynamic, while it can help a county secure more tax revenue, it can also have a negative impact of creating development that causes more traffic and requires more intensive infrastructure development. These dynamics impact the economic development and competitiveness of these counties.

School districts in Ohio are funded through a combination of property and income taxes. Without a doubt, high property tax rates have direct implications for school funding. Although high property taxes generate substantial revenue for school districts, they can also burden property owners. Reliance on property taxes can lead to disparities in school funding, as districts in wealthier areas collect more revenue than those in poorer areas. Including income taxes as a supplementary funding source can help mitigate some disparities but adds complexity to the tax system. Similarly to RITA, school income taxes are collected on a statewide basis through the Ohio Department of Taxation and then submitted back to the individual districts in which they were collected.

Comparative Tax Burden

Ohio's overall tax burden on businesses is slightly higher than the average of peer states, driven primarily by local taxes. Businesses in Ohio face an average combined state and local effective tax rate (ETR) of 13.7%, compared to 12.5% for peer states, with local property taxes and business income taxes being significant contributors. The tax burden varies by industry, with sectors such as hospitals and consumer goods facing higher than average ETRs in Ohio.

The study provided a survey of 52 Ohio firms and highlighted the significant compliance costs associated with local taxes. Businesses reported substantial time and financial resources spent on complying with local tax requirements, with costs increasing with the number of employees. Smaller businesses are disproportionately affected by these compliance costs, making it harder for them to compete.

Putting it All Together

To reduce the tax burden and compliance costs for businesses, particularly small businesses, Ohio could consider simplifying the municipal tax system and reducing the number of taxing jurisdictions to alleviate administrative burdens. Communities not using the RITA service may be well served in reviewing the system and determining if such a system makes fiscal sense for the community; with over 300 municipalities, RITA serves nearly a third of the state’s villages and cities, who have found their services valuable and presumably cheaper than doing income tax collection on their own. In addition, revisiting property tax rates and assessment practices could ensure a more equitable distribution of tax burdens. Additionally, offering targeted tax credits and incentives could support small businesses and attract new investments.

Ohio's local taxation system, characterized by high property and income taxes, poses significant challenges for small municipalities, counties, and school districts. And in all honesty, the state has not always been a helpful partner to Ohio’s local governments. The large-scale rollback of successful revenue sharing programs, such as the Local Government Fund gave state politicians an opportunity to tout their ability to roll back taxes, but it put the burden to fund local efforts back on local governments, that often needed support from the ballot box to fund these critical services.

Addressing the complexities and high compliance costs associated with local taxes is crucial for enhancing the state's economic competitiveness and ensuring equitable funding for essential services. The State and Local government would be well served to not look at what taxpayers pay to each level of government, but to look at what taxpayers are doing, supporting a challenging and complex and often, inequitable system of public services that are getting more and more expensive as time goes on.

What do you think? Are taxes too high? Are local taxes too high? Do you live in a RITA Community? What has your experience been like? Our paid contributors are more than welcome to leave their ideas and insights in the comment thread!

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