Ohio is a national oddity in how it allows cities to be overwhelmingly dependent on municipal income taxes to fund their operations. It’s a peculiarity that could hammer the state’s cities financially much more quickly than others around the nation.

Ohio’s city and village governments are among the worst-positioned in the nation to ride out the financial impact of the coronavirus downturn, due to the state’s unique system of funding them primarily with income taxes, some experts say.

Four of the five most income-tax dependent large cities nationally are in Ohio, with Columbus topping the list as having the highest percentage of its revenue derived from income taxes of the 139 cities surveyed, a Brookings Institution report released last week says.

Cincinnati came in at No. 2 and Toledo and Cleveland at Nos. 4 and 5, respectively. The four cities received between 67% and 76% of total general-fund revenue from income taxes, while 50 of the cities nationwide surveyed had no income tax.

"When people aren't working and people aren’t making money, the municipal income tax is dead," said Kent Scarrett, executive director of the 730-member Ohio Municipal League. And with the extension of the tax filing date until July 15, it might be even more compromised, Scarrett added.

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Ohio had a record 460,000-plus unemployment claims for the two weeks that ended March 28, as opposed to 364,603 initial claims for all of 2019.

"They're not paying tax starting the day that they're laid off," said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago, who co-authored the Brookings study. "Who knows how long this is going to last, but the effect will be felt immediately."

Columbus City Auditor Megan Kilgore acknowledged that the city is heavily reliant on income taxes, but noted that its top sectors of banking, insurance, government and education are all largely operating and still generating income taxes.

However, those in the retail, restaurant, hotel, salon and entertainment sectors "are what we’re assessing now," she said. "These collectively will be what may cause our city’s revenue needle to sizably move."

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Other revenue sources that could have acted as a buffer against the near-term municipal revenue losses were eliminated under former Gov. John Kasich a decade ago, Scarrett and Pagano said.

They included eliminating the estate tax, speeding up the phaseout of the business inventory tax, and cutting in half the state’s "local government fund," which together produced hundreds of millions of dollars that could have acted as buffers.

"That was shortsighted," Pagano said, noting that only a dozen states allow any municipal income taxes, and half of those limit the tax to a select few cities.

"Ninety percent of the municipalities in the country don’t even have access to the income tax," Pagano said, with many relying to a higher degree on property taxes, which are slower to react to crises.

The property tax bills Franklin County residents paid in January were actually based on property values as of Jan. 1, 2019, a time that "everyone would agree, things were booming," said Mark Gillis, a Columbus attorney specializing in Ohio property tax law.

That means that even by the time bills are sent out next January, they still will be based upon the rising market values as of Jan. 1, 2020, before the pandemic’s economic disruption hit, Gillis said.

And even if market prices drop significantly, Ohio has a "reduction factor" that is designed to keep bills stable during periods of real estate inflation. But that system, to a point, works in reverse when market values drop, Gillis said.

Translation: The property tax system in Ohio is, by design, stable in the face of economic disruptions.

Take Columbus City Schools, which just received its first-half annual property tax receipts on all parcels within the district (except those exempted from paying any taxes) totaling hundreds of millions of dollars just weeks before job losses spiraled across the city.

Cash in the district’s bank account is "substantial now, because we just got through the March collection," district Treasurer Stan Bahorek said. That cash normally gets spent down through the summer.

Property taxes represent just over half of the district’s revenue, with state aid kicking in about another 35%. Gov. Mike DeWine has warned state agencies to prepare for budget cuts of 20%, but he hasn’t said what will happen to state education aid going forward.

"It could change in a day, but right now we haven't heard anything that payments will change for this (school) year," which ends in June, said Barb Shaner, a lobbyist for the Ohio Association of School Business Officials.

"Obviously, it will be critical," Bahorek said. "We need to know as soon as possible if they’re going to slow down the payments to school systems."

Because thousands of area workers are assigned to work from their homes due to the threat of contracting or spreading the coronavirus, the income tax implications for cities like Columbus, with many Downtown workers who commute from the suburbs, would normally be under further strain.

But an emergency law signed last week by DeWine temporarily halts that revenue shift.

Municipal income taxes are based mainly on the taxpayer’s work location, meaning in normal times thousands of employees working from home for more than 20 days a year could have shifted money from Columbus to the suburbs until they returned to their normal work sites.

However, the new law suspended that until 30 days after DeWine ends the state of emergency.

The emergency law "treats income earned by an employee required to work at a temporary work site because of the emergency as being earned at the employee’s principal place of work," according to an analysis for lawmakers by the Legislative Services Commission.

bbush@dispatch.com

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