FAIRBORN — A state budget provision that would transfer the collection of municipal net profit business taxes from local governments to the Ohio Department of Taxation could prove costly for the City of Fairborn.

City Manager Rob Anderson told city leaders during the July 10 city council work session that the new provision in the 2017-18 state operating budget could be detrimental to the city in terms of its income tax collection. Anderson said he recently received the information about the new legislation from the Ohio Municipal League (OML).

“There is an opt-in provision that allows businesses to file net profit income taxes directly to the Ohio Department of Taxation through the Ohio Business Gateway website for a 0.50 percent administration fee that is charged to municipalities,” Anderson said.

The city currently places a net profits tax on businesses and individuals that generate business income. The provision, which goes into effect on Jan. 1, 2018, centralizes the collection and administration of the municipal income tax on net profits.

According to City Finance Director Randy Groves, an opt-in provision already exists, which 10 percent of local businesses have used to file their business taxes at no cost to the city. However, he noted that the new opt-in provision reduces municipal authority by removing all auditing and enforcement capabilities of local tax administrators. The state could raise the administrative fee in the future as well.

“In the past, businesses would run their taxes through the business gateway and the local agency or tax collector would have the ability to audit those taxes,” Groves said. “Now, anyone who opts in and uses the business gateway will be audited by the state. They are taking that power away from us essentially and then charging us 0.50 percent to transfer the administration of the net profits tax to the Ohio Department of Taxation. It is a foot in the door, and they’re trying to go to centralize collections at an extra cost to us.”

Another provision that Anderson said has recently come forward eliminates the municipal income tax “throwback” rule for most taxpayers. The “throwback” rule allows cities to tax the profit a business makes when it performs a service or ships a product outside the city.

“Currently, the taxes paid on that service or product comes back to the municipality were it originated. In 2018, the taxes on those sales will no longer be paid to the city,” Anderson said. “It will be around a $46,000 hit to us every year. It is not a huge amount, but every little bit adds up.”

The city manager also pointed out that there were other provisions in the state budget that would weaken the city’s authority and its financial stability.

One provision allows the redirection of $35 million from the Local Government Fund (LGF) to fund statewide opioid interdiction programs. This revenue would directly come from the municipal LGF distribution plan and affect the financial resources delegated to local first responders.

Another provision will soon allow the rerouting of $24 million in municipal LGF dollars to all small villages and townships in the state. Yet, a number of townships in Ohio are not in need of municipal revenues to remain financially solvent. Revenues dedicated to municipalities should remain with municipalities, Anderson said.

A new provision also grants the state tax commissioner authority to inspect records of a person involved in the sale of oil, gas, or natural gas liquids.

“This provision also gives the tax commissioner broad authority on setting uniform guidelines, standard forms, and whatever he sees fit to do,” Anderson said. “And we know that the tax commissioner is pushing the centralized collection.”

Mayor Dan Kirkpatrick asked Anderson if any municipalities were filing lawsuits regarding the new tax provisions. Anderson said there was talk about some communities challenging the income tax provisions, but he had heard nothing about any lawsuits being filed.

Anderson said it would be profitable for elected officials in Ohio communities to get directly involved in the opposition to the tax provisions because they would have a big impact on state legislators. Council member Donna Wilson pointed out that, on occasions, legislators have reacted after receiving only five or six complaints or protests.

“You do not need thousands of people to speak up about this. We need to talk to other communities around here, and protest this,” Wilson said.

Anderson also noted that the Ohio Business Gateway is flawed, and there are other talking points local officials could argue.

“This whole thing happened with the budget bill in a blink of an eye. That is how they operate,” Anderson said. “Nobody audits our income tax returns like we do. There would be a revenue loss just from the state taking over because they cannot possibly do as thorough job as we can.”