Working From Home in Ohio Could Get City Income Tax Refund

Many municipalities, in Ohio and elsewhere, impose an income tax on people who live or work within the city limits. The logic is simple: municipalities provide services such as police protection, firefighting, road repair, and more. Those services benefit not only those who live in a city or town, but those who spend a substantial amount of time there. Employees who commute from a neighboring town or suburb to work in offices fall into that category. Accordingly, those employees pay Ohio income tax to the municipality in which they work.

But what happens when an employee stops going into the physical office location and begins working from home for an extended period? That’s what happened on a large scale in March of 2020 when the COVID-19 pandemic descended, and many of those employees are continuing to work remotely for the foreseeable future. Is it reasonable to require them to pay income tax to a city in which they neither live nor work?

On the one hand, it seems patently unfair to make workers subsidize a municipality whose services they are not using. On the other hand, cities need to make those essential services available—and to pay for them.

The loss of revenue from workers’ taxes could devastate some cities. The six largest cities in Ohio get approximately 88% of their revenue from income taxes, and many smaller cities in the state due as well. In 2020, Cleveland had $410 million dollars in income tax revenue. Most people would be surprised to learn that 85% of that total came from commuters who worked in Cleveland but lived outside the city limits.

Ohio Legislature Considers Tax Refund for Those Who Work from Home

That’s the dilemma with which the Ohio Legislature has wrestled as the pandemic wears on. The Ohio House passed a measure earlier this year that would revoke a law passed in 2020. That law, House Bill 197, permitted cities to collect income tax from commuters whose offices were in the city even after the pandemic forced those offices to close their doors.

Ohio law requires employers to withhold and remit employees’ taxes at their principal place of work. House Bill 197 defined an employee’s “principal place of work” as “the fixed location to which an employee is required to report for employment duties on a regular and ordinary basis.” The goal of the law was to prevent cities from losing revenue due to a temporary closure of offices during the period of emergency declared early in the pandemic and for 30 days thereafter. In short, the law let cities continue to collect income tax from employees as if they were still working in their offices in the city.

However, it is unlikely that the legislature expected the closures, and the pandemic, to continue for as long as they have. The dividing line between a temporary absence from the office, and a permanent one, has become unclear. At what point does it become unfair for employers to withhold taxes from employees and pay them to a municipality in which those employees will not work for the foreseeable future?

The Buckeye Institute, a conservative think tank based in Columbus, alleges that House Bill 197 is unconstitutional because it allows municipalities to impose tax on people who neither live nor work within their borders. In effect, it is taxation without representation.

The new legislation seeking to revoke House Bill 197 would make a refund of the city income tax paid by remote employees retroactive to January 1, 2021. In other words, cities would not only have to do without the former commuters’ tax revenue going forward; they would have to return funds they had already collected.

What Municipal Tax Refund Could Mean for Ohio Workers and Cities.

If the legislature revokes House Bill 197, remote workers could be eligible for a refund of income tax paid to municipalities where their company has an office in which they used to work. Some cities in Ohio offer a discount on municipal tax to residents who work in another municipality and also pay income taxes there.

It is possible that going forward, remote workers who previously paid a discounted city income tax where they lived will now pay the full amount, meaning that they realize little or no tax savings. However, other workers, who paid non-discounted income tax in the city in which they live as well as the one where their office was located, could benefit.

For cities and towns affected by the recent legislative measure, decisions will need to be made about how to make up the budget shortfall created by the loss of commuter income tax revenue. For some municipalities, the loss in revenue may lead to a reduction in services.

The Bottom Line

If you have questions about developments in Ohio or federal income tax law, we invite you to schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.