COLUMBUS — Ohio cities have based their economic growth strategy on offering tax and development incentives to businesses in return for new jobs — all to generate more city income taxes.
But that model is now threatened by a growing work-from-home model that was rushed into place during the coronavirus crisis.
That could put a dent in the billions of dollars in municipal tax revenue collected across Ohio that pays for police, fire and other services, as large job-center cities lose their hold on workers.
Across the nation, companies have announced that they will permanently shift large numbers of employees to working from home. Facebook will assign up to half of its employees to home in coming years, and Twitter said a portion of its workforce will remain assigned to home “forever.”
“We’re not sure where it’s headed,” said Kent Scarrett, executive director of the Ohio Municipal League. “Folks can expect some changes, and how everything shakes out – I think there will be a certain degree of tax-shifting.”
The potential for lost revenue is large: About 80% of Ohio businesses are located in a municipality, and upsetting the revenue stream could threaten the financial sustainability of those communities, Scarrett said.
An emergency Ohio law adopted in response to the state’s work-from-home order due to COVID-19 temporarily locked in the cities to which municipal income taxes were owed, but that provision expires 30 days after Gov. Mike DeWine decides that the emergency has ended.
Though it’s unclear when DeWine will do that, he has called on Ohio businesses to continue allowing their employees to work from home during the pandemic and said the state also would do so.
“What we’re finding is that people can work from home and a lot of different jobs,” DeWine said.
The Buckeye Institute, a libertarian-leaning think tank in Columbus that long has called for reforms to Ohio’s municipal income tax structure, opposes an extension of the emergency COVID-19 state law provision.
Research Fellow Greg Lawson said employees working away from physical office spaces located within other corporate limits aren’t using the services covered by municipal tax collections.
The lingering economic impacts of the coronavirus pandemic, including the shuttering of small businesses unable to weather the downturn, should prompt a larger discussion of municipal income tax policy and related government funding issues, Lawson said.
“We may be seeing some pretty significant structural shifts for certain types of jobs,” he said. “This (municipal income tax) question is going to loom very large for a lot longer than just the immediate aftermath of COVID. … This whole situation is forcing a conversation that has long been papered over. … As long as we were able to muddle through and do OK economically, nobody wanted to take the bull by the horns and wrestle with the real questions.”
State government is Columbus’ third-largest employer, with more than 21,000 workers based within the city in 2019, according to the city’s state audit. Only Ohio State University, with 33,300 employees, and OhioHealth with 23,800, had more workers in the capital city.
At the end of April, Ohio State had 2,878 “essential employees” working on campus and 16,828 employees teleworking, not counting medical, undergraduate student and temporary employees, spokesman Ben Johnson said. When classes resume in the fall, employees will continue teleworking when possible, he said.
Insurance giant Nationwide, the city’s fifth-largest employer with about 12,500 Columbus-area workers, moved 98% of its 27,000 total employees to home over five business days in early March, Fortune reported.
Nationwide announced April 29 that it would “permanently transition” to employees primarily working from home, except for four campuses, including Columbus.
“Our associates and our technology team have proven to us that we can serve our members and partners with extraordinary care with a large portion of our team working from home,” Nationwide CEO Kirt Walker said in a written statement.
Under Ohio law before the coronavirus crisis, employers were broken into two groups for income-tax purposes: “small employers” with sales under a half-million dollars a year, and those with sales greater than that, said Amy Arrighi, chief legal counsel with the Regional Income Tax Agency, or RITA.
Small employers can withhold their employees’ city income taxes for the municipality in which the firm is located, without regard to where the employees are actually working, Arrighi said.
But for larger employers, it’s more complicated. If their employees spend more than 20 days working in a different municipality, the employer must collect for that city or village starting on the 21st day, Arrighi said. If there isn’t a municipal income tax where the employee lives or it is lower, the employee pockets the difference.
Across Regional Income Tax Agency’s about 330 Ohio municipalities for which it administers municipal income tax collections and distributions, 35% of firms are large businesses, Arrighi said.
Businesses in New Albany employ about 9,000 workers who live outside of the village — 60% of the total — and the village doesn’t know how many of them have shifted to working from home, said village spokesman Scott McAfee.
“But there is no doubt New Albany will experience a negative impact to our revenue stream in 2020 and 2021,” McAfee said.
“Cities that are large employment centers may lose out on revenue if employees continue to work from home, but the impacts are truly unknown as they depend on how long the declared state of emergency lasts,” said Elizabeth Brink, chief administrative officer of the Columbus Income Tax Division.
As for what would happen to existing Columbus tax incentives if the firms that got them transfer the promised jobs to home assignments, the city of Columbus Development Department declined to comment for this story. Columbus’ income tax is 2.5%.
“I think our cities have already been working with the business communities to talk about those upcoming disparities and challenges,” Scarrett said, adding that what happens to existing tax incentives ultimately may be decided by the courts.