Township Administrator’s Corner
Recently proposed Ohio House Bill 1, if approved, could have a dramatic negative impact on local government funding throughout the state. At its core, the bill impacts two separate taxing structures in Ohio, both of which are vital to the sustainability of local governments and the important services they provide.
House Bill 1 would first change the state income tax structure, creating a flat income tax rate of 2.75%, replacing a graduated rate that increases with corresponding income growth. Currently, state income tax rates range from 2.75% for incomes over $26,050 to a maximum rate of 3.99% on incomes that exceed $115,300. Opponents argue the flat tax would necessarily benefit higher wage earners and not adjust the lower scale of the income tax rate. The result would be a decrease in state revenue by an estimated $2 billion annually. In contrast, proponents of the bill contend the potential loss in income tax revenue would be offset by business investment from companies seeking to relocate to states with favorable taxing structures.
The bill would also reduce the valuation on residential real property from 35% of fair market value to 31.5%, while eliminating state subsidies currently extended to property owners. The changes proposed would ultimately reduce residential property tax collections that are vital to local governments, schools, libraries and park districts.
While at first glance this change in valuation may appear to be a significant benefit to property owners, a separate provision in the legislation would eliminate a vital subsidy to homeowners known as the property tax rollback. The rollback is essentially a state subsidy that pays 10% of a homeowner’s property tax liability on residential and agricultural properties. This rollback revenue is reimbursed to local governments, schools, libraries, park districts, children’s services, mental health and disability boards, all of which are subsidized through property tax levies.
For owner-occupied properties, an additional 2.5% homestead rollback would be replaced in favor of a flat $125. Repeal of the rollback would impact local governments and other services reliant on property tax revenue by an estimated loss of $1.2 billion each year. While legislators have said offsetting funds would be appropriated in 2024 and 2025 to assist local governments with expected revenue losses, there’s no guarantee of subsidies beyond 2025 when the legislation goes into full effect.
Another important aspect relative to property valuation adjustments relates to House Bill 920, enacted in 1976. Approved at a time when high inflation was affecting homeowner property values, the intent of the legislation was to protect homeowners from the rapid increase in a property’s value. The result of House Bill 920 was the creation of reduction factors designed to adjust downward the effective tax rates on properties when values increased. Those reduction factors guarantee a levy will collect at the same rate as the date on which voters approved it. There remains uncertainty as to the potential impact on House Bill 920 reduction factors with the proposed 10% decrease in property values considered in the current legislation.
Local government leaders throughout Northeast Ohio continue to evaluate the impact of House Bill 1 and have reached out to legislators to express concern with the proposed legislation, as currently drafted. Opponents believe it has become increasingly apparent that passage of this legislation will not only significantly decrease property tax revenues for local communities, but will also result in many cases of homeowners paying more in property taxes. The end result would be a reduction in services local governments could provide to residents through the rate structure of existing property tax levies. Repeal of the roll back subsidy would require homeowners to pay 100% of the property tax liability.
Furthermore, bond levies and emergency levies deemed “fixed sum” levies would not be affected by a change in the decreased valuation, as those initiatives were passed with a guaranteed property tax revenue return. Voters approved those types of levies based on a guaranteed dollar amount as opposed to a particular tax rate.
As a consequence of the structural property valuation changes proposed in House Bill 1, commercial properties, while not specifically addressed in the legislation, would most certainly be impacted based on the holdings in a series of Ohio Supreme Court cases that confirmed effective rates between residential, agricultural and commercial properties must remain uniform. Since Ohio repealed rollback subsidies on commercial and business properties in 2005, the property valuation change in House Bill 1 would provide immediate benefit to those property owners.
The Ohio Township Association and many other local government entities have opposed House Bill 1 and are working closely with legislators, requesting they amend or rescind the bill. Because Ohio townships rely almost exclusively on property tax revenue for operations and don’t have the ability to collect income taxes, the proposed legislation would have a devastating end result. Bath Township will continue to monitor this legislation to ensure the community can provide the important township services residents and business owners expect and deserve. ∞