Moving to a community with more attractive tax rates is nothing new. Elon Musk made the high-profile shift from California’s 13% state income and capital gains tax rates to the zero income and capital gains tax rates in taxes. 17 states permit municipalities to charge an income tax. States generally decide who these municipalities can assess income taxes from—usually around whether only residents can be taxed. States like Ohio permit residents and non-residents who work in the city to be assessed an income tax. More controversial and spurred on by the evacuation of hundreds of office buildings due to COVID 19, the Ohio General Assembly and Governor Mike DeWine supported legislation, Ohio House Bill 197, to permit cities to continue to assess remote workers an income tax even though the workers had no longer had a nexus or connection to the city. That “temporary” law is a year old and is a hot topic of debate in the Ohio General Assembly, as well as the courts but also ties into the remote worker discussion going on all over the United States.
Ohio’s debate over who should pay municipal taxes has led to three taxpayer lawsuits filed with the support of the Conservative Buckeye Institute. This litigation not only could end the impact of HB 197 but could result in the judicial overturning of HB 197 on Constitutional grounds that would result thousands of Ohioans seeking municipal income tax refunds from cities in which they have not been working in for the majority of 2020.
Not to be out done, the Ohio General Assembly is busy looking at the issue as well. Members of both the Ohio House of Representatives and Ohio Senate are promoting legislation to end the operation of House Bill 197 and cities would not be permitted to tax non-resident remote workers or those not working in the city.
This creates a nightmare scenario for Mayors across Ohio. Ohio cities pay for the vast majority of their services based upon the municipal income tax. A common misperception is that Ohio’s big cities are the only communities impacted by the loss of non-resident, worker income taxes. Cities with substantial job centers, factories, logistics centers, office complexes, retail and other commercial centers, gain substantial municipal income tax revenues from non-resident workers. In an odd twist of fate, the loss of tax revenues from non-resident workers who shift to remote working at home will likely punish cities who have executed economic development strategies that retained and attracted high-wage, white collar advanced service and technology jobs. Losses for these cities could be from 10%-30% of their current revenues.
Some cities are ahead of the curve on the remote working trend. Rather than focus just on the taxes they will lose, cities like Tulsa, Oklahoma and Natchez, Mississippi are actively recruiting remote workers. Tulsa Remote is a program that offers eligible participants $10,000 to live in Tulsa and work remotely— https://tulsaremote.com/. The Mississippi River town of Natchez, Mississippi is offering $6000 to eligible participants to move to their community and work remotely through their Shift South Strategy—http://natchezinc.com/images/uploads/ShiftSouth-Application.pdf. Communities across the United States are developing economic development strategies to capitalize on the remote working trend that is likely to continue at some levels after COVID 19 dies off.
Without a legal basis, municipal income tax on non-residents who do not work in the city is doubtful to last. Cities will be faced with tough decisions that include reducing salaries, benefits and headcount of employees, charging fees for non-resident services such as fire and police, raising taxes to pay for the current level of services or seeking additional funding from the state and federal government on a long- term basis. What is clear is that the trend of remote work is sure to last for some period beyond the immediate impact of COVID-19 and the question is how the state and cities will work to develop a remote working strategy that attracts workers and maintains strong economic centers in Ohio.
Please contact Dave Robinson at Montrose Group at [email protected] if you need assistance in addressing any economic development or lobbying matters.