CLEVELAND, Ohio — A proposed income tax cut in Ohio would have several hidden consequences, including raising property taxes and reducing business taxes, experts told cleveland.com.
House Bill 1 would cut income taxes, primarily for the state’s top earners, at the expense of funding schools, parks and libraries, cleveland.com and The Plain Dealer previously reported. But experts who have analyzed the law say it also has potentially serious implications for taxpayers that the bill’s backers have so far failed to address. In particular, a decades-old state law aimed at stabilizing property tax collection against dips or spikes in home valuations could mean higher taxes for homeowners given HB 1’s reduction in the percentage of taxable property.
Also, a series of Ohio Supreme Court decisions suggests that HB 1 could result in corporate tax cuts — an outcome that could further undermine funding for public services.
The bill’s sponsor, Rep. Adam Matthews, a Republican from Lebanon, has promised to amend the bill so that it does not directly increase taxes and only provide tax breaks for residential and farm property.
“We will not raise property taxes on the final bill that we are voting on,” Matthews told cleveland.com.
But those changes have yet to be included in a bill that has already had two hearings before the House Ways and Means Committee.
Support for the GOP-backed law has fractured along party lines, with Republicans and conservative groups saying the law will entice businesses to open a business in the Buckeye State and empower consumers by keeping more of their earnings .
“The more money we can keep in the hands of our citizens, the better it is for economic growth,” Lebanese Mayor Mark Messer said at a recent HB 1 hearing.
Democrats, local governments, parks, libraries and schools have opposed the law, saying it would cut funding for essential services while giving tax breaks to those who need it least.
“No one likes taxes … but the problem is that we need to have something to cover the cost of critical services,” Ohio Rep. Daniel Troy, a Willowick Democrat, said during a committee hearing.
HB 1 aims to establish a flat income tax rate of 2.75% for anyone earning more than $26,050. The bill seeks to pay for this by scrapping the 10 percent “rollback” wealth tax, a decades-old law in which the state government pays 10 percent of homeownership 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%.
According to the Ohio Department of Taxation, Ohio’s current income tax rate ranges from 2.765% on the portion of income people earn between $26,051 and $46,100 to 3.99% on the portion of their income above $115,300 per year.
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 previously reported.
The savings from the tax cut vary widely depending on how much you earn. Those making $75,000 a year would save $140, while those making $500,000 a year would save $5,209.
According to an analysis by the Ohio Legislative Services Commission, HB 1’s proposed income tax cut would remove $1.7 billion from the state coffers in fiscal 2024, $1.9 billion in fiscal 2025, and more in years thereafter.
HB 1’s proposed property tax cut would reduce school and local government revenues by $538 million in fiscal 2025, a figure that the commission’s report said would increase in the coming years.
Matthews has said – and the legislation suggests but does not codify it – that the state government would set aside money to minimize the fiscal shock to local governments should HB 1 pass.
“Before we vote on any final bill, we will do a full transition fund process to make sure it’s clear,” Matthews said.
While HB 1 is still in the early stages of the legislative process, local governments are taking it seriously. Cuyahoga County would suffer a $33.6 million loss from the rollback portion of the bill alone. At least one county councilor has joined parks, school systems, libraries and others in predicting service cuts or tax increases may need to make up for the amount of money lost through HB 1.
“Because this is House bill #1 for me, it suggests this is an issue that the majority leadership is very interested in and needs to be taken very seriously,” said Cuyahoga County City Councilman Dale Miller, who is in has served in both houses of the Ohio legislature.
Hidden tax increase
The economic impact of HB 1 on both taxpayers and public bodies would depend largely on how it interacts with a decades-old law designed to ensure stability in property taxes. This law, passed in the 1970s, is known as HB 920. It created “tax reduction factors” designed to prevent homeowners’ property taxes from rising following a rise in home values.
Anyone who has paid Ohio property taxes in the past few decades can recognize 920 as a line item on their property tax bill that says “Less 920 Reduction.” It typically saves hundreds or thousands of dollars off homeowners’ property tax bills.
However, HB 920 also works in reverse. In fact, if real estate values in a given area decline, the tax rate will increase to maintain a steady stream of revenue for local government agencies as long as the new tax rate does not exceed the amount approved by voters.
The idea that HB 920 will raise property taxes following a decline in taxable home values isn’t just a theoretical or academic possibility, said Howard Fleeter, an advisor who previously taught at Ohio State University and is an analysis of HB 1 for the Ohio Education Policy Institute.
After the Great Recession, HB 920 resulted in increased property taxes when property values fell.
“I don’t think the people who put (HB 1) together understood how this was all supposed to fit together,” Fleeter said of Ohio’s tax laws.
While it’s not certain that HB 920 would apply to HB 1, it seems likely that 920 would be effective, Fleeter said. For example, the Ohio Legislative Service Commission — an impartial government agency that calculates the economic impact of potential legislation — anticipates an impact from HB 920 and even uses some of the language of HB 920 in its analysis, Fleeter said.
Taxes in general are complicated, but so is Ohio’s tax system, Fleeter said. HB 920 is a unique feature of Ohio’s tax code, and something few know affects them, Fleeter said.
“If people don’t understand that you’re doing it, it doesn’t get you much political benefit,” Fleeter said.
Corporate Tax Exemption
HB 1 explicitly only applies to residential real estate tax; But the actual impact of the bill could also result in corporate tax cuts, said David Seed, a partner at Brindza McIntyre & Seed LLP, which specializes in state and local taxation.
This is due to a series of Ohio Supreme Court decisions involving Park Investment Company between 1964 and 1980 that required that all properties, regardless of classification, be given the same appraisal percentage. In other words, if residential properties are taxed at 31.5% of their market value, businesses must also be taxed at 31.5% of their market value.
As written, HB 1 would apply to commercial and industrial properties due to park investment cases, but Matthews said lawmakers are trying to find a way to reduce residential and agricultural property taxes without the same cut for commercial and industrial properties to foresee.
Left unmodified, the proposed law’s corporate tax rate cut would further reduce the amount of government revenue available for services.
“You only have two choices, you will either increase taxes or cut funding for schools and parks,” Fleeter said.
