The Ohio Supreme Court Gives Municipalities a Victory
The state's high court rules Covid-19 municipal income tax provisions were constitutional.
Earlier this week, the Ohio Supreme Court ruled on the ability of municipalities to collect income tax from employees that worked from home, rather than their traditional place of work. The decision in Schaad v. Alder, not only gave the state’s cities and villages an important legal victory, the decision will emerge as a significant case study in the interplay between state legislative power and constitutional rights, particularly under the extraordinary circumstances brought forth by the COVID-19 pandemic.
At the heart of this legal battle was a state law that directed municipalities to continue collecting income taxes from employees based on their "principal place of work," despite these employees working remotely, often from different jurisdictions than their usual workplace due to pandemic-related restrictions. This legislation, a response to the unprecedented public health crisis, aimed to stabilize municipal revenues at a time when conventional work patterns were disrupted.
Josh Schaad, an employee who worked from his home in Blue Ash, Ohio, during the pandemic, while his employer's base remained in Cincinnati, challenged this taxation approach. Cincinnati's refusal to refund municipal income taxes for the days Schaad worked outside its jurisdiction sparked this legal challenge. Schaad argued that the state law violated the Due Process Clause of the Fourteenth Amendment to the United States Constitution, asserting that it was unconstitutional for a municipality where he did not perform his work to tax his income.
The Ohio Supreme Court's unanimous decision to affirm the lower court's ruling, thereby upholding the law, is grounded in several key legal principles and interpretations. The court's analysis began with the acknowledgment of the Ohio General Assembly's broad legislative authority. This authority allows the enactment of any law that does not directly conflict with the Ohio or United States Constitutions. The court found that the temporary law in question fell within this permissible scope of legislative power, as it did not infringe upon any explicit constitutional prohibitions.
Central to the court's reasoning was the application of the rational-basis review. This legal standard assesses if a law is rationally related to a legitimate government interest. In this case, the court determined that the law's aim to ensure municipal revenue stability during the pandemic was a legitimate state interest. The temporary adjustment to municipal income tax collection practices was seen as a rational means to achieve this goal, especially considering the sudden shift to remote work and the potential for significant impacts on municipal finances.
Moreover, the court addressed the due process concerns raised by Schaad, specifically the argument that the law allowed for unconstitutional extraterritorial taxation. The justices clarified that the limitations on extraterritorial taxation discussed in federal due process jurisprudence primarily apply to interstate, not intrastate, matters. Since the taxation in question involved income earned within the state of Ohio, albeit in different municipalities, the court found that the federal due process precedents concerning interstate taxation were not directly applicable.
Another pivotal aspect of the court's decision was its interpretation of the emergency powers granted to the General Assembly under the Ohio Constitution. While agreeing with Schaad that these powers do not inherently expand the legislature's substantive constitutional authority, the court noted that the temporary law did not exceed these bounds. Instead, it was a valid exercise of the state's power to respond to the emergency situation posed by the pandemic.
The Schaad v. Alder decision underscores the legal complexities that arise when traditional work arrangements are disrupted by unforeseen crises such as the pandemic. It highlights the balance that courts must strike between upholding constitutional rights and allowing state and local governments the flexibility to respond to emergencies. By ruling that the temporary law did not violate the state or federal Constitutions, the Ohio Supreme Court has affirmed the principle that governments may take extraordinary measures to manage extraordinary circumstances, provided these measures are within the bounds of constitutional authority.
For municipalities, this ruling provides a legal precedent for the temporary adjustment of tax collection practices in response to emergencies that disrupt normal economic activities. As a practical matter, had the court ruling not favored Ohio’s municipalities, cities and villages across the state may have been staring at refund liabilities that could have significantly hurt local budgets and strained local services.
For employees, it clarifies the extent to which their income may be subject to municipal taxation when their work locations shift due to emergency mandates. More broadly, the decision contributes to the ongoing legal discourse on the interplay between state legislative powers, municipal governance, and individual constitutional rights in times of crisis.
In summary, the Schaad v. Alder ruling is a landmark decision that reflects the challenges and legal questions brought to the forefront by the COVID-19 pandemic. It not only addresses the specific issue of municipal income taxation during emergency conditions but also sets a precedent for how states and municipalities can navigate the legal terrain in future crises. As society continues to grapple with the implications of remote work and other pandemic-induced changes, this decision will likely serve as a reference point for similar legal debates and policy considerations.
Thanks for reading today’s Civic Capacity Newsletter. This newsletter is designed to help you understand your hometown and the decisions made to help make our hometowns great places to live for generations. Please feel free to share your ideas and insights in the comment section and to share this information with your friends and neighbors.
Also, if you hae not considered to being a paid subscriber to our work, please do so. Your support allows Civic Capacity to continue to provide the in-depth analysis that you simply can’t find other places about the issues in your hometown.