Taft aims to end tax accord with neighbors

3/30/2003

COLUMBUS - Desperate for tax dollars, Ohio Gov. Bob Taft wants to tear up reciprocity agreements on the payment of personal income taxes with neighboring states.

Under those agreements, residents in states including Michigan and Indiana who work in Ohio do not pay Ohio income taxes. Ohio residents who work in Michigan do not pay Michigan income taxes.

That would end for tax years 2003 to 2008, as part of Governor Taft's proposal to raise $2.27 billion in taxes over the next two years.

Even if all five neighboring states retaliate by ending their reciprocity agreements, Ohio would end up ahead by about $36 million over the next two years, says Tom Zaino, Ohio's tax commissioner.

Ohio would gain money by requiring an estimated 26,701 out-of-state residents who work in Ohio to pay Ohio's income tax, Mr. Zaino says.

Ohio attracts 132,933 workers from neighboring states, with 106,232 Ohio residents crossing the lines to work in Michigan, Pennsylvania, Indiana, Kentucky, and West Virginia.

For example, 21,187 Michigan residents work in Ohio, compared to 13,502 Ohio residents who work in Michigan - a net gain for Ohio of 7,685 workers. Ohio's net gain of workers from Indiana is 5,819.

Terry Stanton, a spokesman for the Michigan Department of Treasury, says Michigan officials are examining Mr. Taft's proposal and how it would affect Michigan residents who work in Ohio.

Michigan residents can claim a credit for income tax imposed by a nonreciprocal state, which would mean Michigan could end up footing the bill for Ohio's decision to end reciprocity. Michigan has not decided yet whether to end its reciprocity pact with Ohio, Mr. Stanton says.

Another question is whether Ohio unilaterally can end a reciprocity agreement, Mr. Stanton says.

Thomas J. Jaffee, an Ottawa Lake, Mich., resident who is a partner in the Toledo certified public accounting firm of Lublin Sussman Group, says he expects a lot of Michigan and Indiana residents who work in Ohio will have to pay higher taxes.

That is because Michigan has a flat tax rate of 4.1 percent on personal income tax, and Indiana has a flat rate of 3.4 percent.

If Ohio ends reciprocity, Indiana would retaliate by doing the same, says Larry McKey, spokesman for the Indiana Department of Revenue. Indiana residents who work in Ohio would have to file returns in both states with Indiana providing a credit of 3.4 percent on income taxes owed to Ohio.

Ohio has a progressive income tax, ranging from 0.743 percent of taxable income for those who earn up to $5,000 a year, to $11,506 plus 7.5 percent of taxable income over $200,000.

The Ohio tax rate for those with taxable income from $40,000 to $80,000 is $1,337, plus 5.2 percent of excess over $40,000.

Those are numbers that the 15,891 people who commute from nearby Michigan counties into Lucas County will want to crunch.

An estimated 8,310 people commute from Lucas County to work in Michigan counties near Toledo.

“I think it is like declaring war on the neighboring states,” says Mr. Jaffee. “Because Ohio is one of the higher tax states, it just gives incentives for people to say `Why go into business on the Ohio side of the line when I can go to Michigan and save 1.5 or 3 percentage [points] on my state income tax?'”

Mr. Jaffee predicts if Ohio legislators approve Mr. Taft's proposal, a “short-term revenue increase” for Ohio will become a “long-term loss” as neighboring states retaliate.

Although Michigan residents who work in Ohio may end up paying more taxes, R. LaMar Frederick, supervisor of Bedford Township, Mich., says he does not think Mr. Taft's plan would have a big effect on growth patterns. The township's population has increased from 22,000 to 30,000 over the last decade.

Eileen Granata, vice president of the Toledo-based Regional Growth Partnership, an economic development agency, says,

“You just can't draw a line and say, `There is Ohio and there is Michigan. You live in a different economy,'”