Support for the statewide broadcast of the state of Ohio comes from Medical mutual providing more than 1.4 million Ohioans peace of mind with a selection of health insurance plans online at med mutual dot com slash Ohio by the law offices of Porter Wright, Morris and Arthur LLP.

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Maude Porter Wright dot com and from the Ohio Education Association representing 124,000 members who work to inspire their students to think creatively and experience the joy of learning online at OHEA.org Plans for an August special election are moving forward, but a lawsuit could be as well.

And a bill that would rewrite Ohio's tax law is still under consideration and could end up as part of the state budget.

How it will affect taxpayers, local governments and schools.

This weekend, the state of Ohio.

Welcome to the state of ohio.

I'm Karen Kasler.

The state legislature has been busy with the Republican sponsored resolution that would require 60% voter approval for future amendments to Ohio's constitution, which lawmakers have set for a statewide vote on August 8th.

A lawsuit has been filed claiming that election date could not be attached to the resolution creating the amendment.

Since most August special elections were eliminated in a law that just took effect last month.

But elections officials who oppose the August 8th vote have been told to prepare for it and are running into some problems in finding locations and recruiting poll workers.

Republicans want that higher threshold in place before a reproductive rights amendment could be before voters in November.

Other bills are moving, such as the budget, which needs to pass both chambers with the differences worked out and signed by Governor Mike DeWine by the end of next month.

One bill that notably hasn't moved or been amended is House Bill one, which seeks to rewrite the tax system through a flat income tax and property tax changes.

There were elements that were included in the House version of the budget, but there's a lot more to House Bill one.

It would reduce all four income tax brackets to two and three quarter percent.

People making under $26,050 a year would pay no income tax.

But it also would eliminate the state's 10% property tax rollback, reduce the percentage that determines homeowners property taxes on the appraised value of their homes from 35% to 31 and a half percent increase.

The homestead exemption for seniors and replace the two and a half percent rollback for Ohioans who live in the homes they own with a $125 flat rate and as if that's not complex enough, there's a measure of price inflation or deflation in the bill called a GDP deflator that could reduce the property value assessment percentage to 27.9% in six years.

Also, there's House Bill 920, which was designed to keep inflation from increasing taxes on previously approved levies.

On March 10th, I talked with economist Howard Fleder, who is the leading authority on funding for the state's more than 600 traditional public school districts.

When the dust clears on this, right after the, you know, the 10% rollback for homeowners and agricultural taxpayers is eliminated.

And after the reduction in the assessment percentage, what happens is, you know that when the dust clears on this, Lisa is estimating that homeowner and farmer taxes will go up by $929 million.

And that is a complicated story because I don't believe that was the intention of this bill.

And so if you'd like me to explain how how that works, I'd be happy to do it.

So so almost $1,000,000,000 potential tax increase for property tax payers, homeowners and agriculture owners.

Right.

Right.

So explain that.

So, you know, the elimination of the rollback, which LSC estimates at about $1.3 billion for tax year 24, that if all if all House Bill one did was eliminate that, it would be an immediate increase in property taxes of $1.3 billion.

Because I think even though I think most Ohioans don't know this, but the state pays 1/10 of their property taxes if you're a homeowner, if you're a farmer.

Right.

And so eliminating that payment, which is what eliminating the rollback would mean, would be an automatic increase in taxes.

So I don't think that the framers of House Bill one wanted that to happen.

So that's why they did.

The second thing, which is they lowered the assessment percentage from 35% to 31 and a half percent.

That's the next thing that I think most homeowners don't understand is that the value of their property is only 35% of the value that the county auditor puts it puts on it.

So if the auditor says your house is worth $200,000, that's not what you pay taxes on.

The amount you pay taxes on is 35%, which is $70,000.

So when you decrease the 35% to 31 and a half percent, their hope was that they would nullify the fact that they removed your rollback, which was the state paying 10% of your taxes.

So the I think the idea that they had was, well, if you pay if right now we're paying 90% of 35% of the value, then when we pay 100% of 31 and a half percent of the value, those two numbers ought to be about the same.

And I think the thing that the framers of this bill did not anticipate was House Bill 920.

And so that gets to the third thing that most homeowners don't understand about Ohio property taxes, which is since 1976, we've had a law which four years later was put in the state constitution, which actually rolls back the effective tax rate for schools and other local governments with voted levies.

When your property is reappraised and the idea of this bill was to protect homeowners from, you know, inflation, you don't want people to not be able to stay in their homes because their taxes are going up so quickly, because their homes are increasing in value and your income doesn't always go up at the same rate.

And so we put this law in place over 50 years ago to to do that.

And it has been very, very effective in that.

In fact, it's the most stringent property tax limitation bill across the all the 50 states.

No other state has anything that works quite like this.

The thing that you know, because property values almost always go up and hardly ever go down, you know, it was very surprising when ten years ago during the you know, in the aftermath of the 2829 recession, property values actually went down when auditors reappraised them and people found out House Bill 920 works in reverse.

Right.

I mean, when when property values go down, the tax rates will get adjusted upward.

When property values go up, which was the original intention, they get adjusted downward.

And that way you maintain revenue stability and property tax payments stability.

So this is a case where when they reduced the assessment percentage from 35% to 31 and a half percent, the value of all our homes goes down by 10%.

And House Bill 920 kicks in and ratchets up the tax rates and voted levies to offset that.

And so that's the reason that we've got a $929 million tax increase as a result of this is because House Bill 920 is undoing the reduction in the assessment percentage, which itself was intended to undo the reduction, the elimination of the rollback.

So they did thing A to offset the effect of thing and they did thing B and then things C which they didn't even think about offset thing B, And so that's how we end up with a, you know, we end up with, you know, what I think some people might describe as the worst of both worlds, right?

When the dust clears on this, you're getting not only a decrease in, in school and local government revenues of over half a billion dollars, but you're also getting a $929 million tax increase for farmers and homeowners.

And that brings me and I that brings me to my next question.

The effect is different on business and commercial property owners and their property taxes.

Right.

And so that's that is also something which I don't think the framers of this bill intended to have happen.

Right.

When I think their idea was we eliminated the 10% rollback for homeowners.

So we want to reduce the value of their property.

What they didn't understand was that the way you know, that that Ohio property tax law mandates that the assessment percentage be the same on residential and agricultural property as it is on business and commercial property.

So even though I think they probably wanted to leave that business and commercial property tax payers out of this, they have to lower their per their assessment percentage as well.

And so that results in $157 million decrease for those property tax payers, which is part of that over half a billion dollar reduction in state and local tax revenues.

I asked the I asked Speaker Jason Stevens, this is House the one.

It's a priority, bill, for him whether this could mean that schools might have to put more levies before voters.

And he said not necessarily it could, but obviously communities could decide to put levies on the ballot if they want more services or different services.

But school levies are not a sure bet for school districts.

No, I think schools and local governments are going to find themselves between a rock and a hard place on this issue.

Right, Because they're not only losing, you know, $538 billion is the LSC estimate.

$298 million of that is for schools and the rest of it, about 240 million is for the other local governments.

They're going to lose those revenues.

It's going to compromise their services.

I think their first choice would be to try to go to the voters and recoup that revenue so they can continue delivering services at the same level they are right now.

That's going to be a very tough hill for them to climb, though, for two reasons.

The first is these same voters that they're going to be asking to approve.

New levies are just just received a $929 million vote in tax increase as a result of this plan.

That's not going to put most people in a very favorable mood when they're given the chance to vote their taxes even higher.

And the second thing is that for school levies, I track those and since 2014, the passage rate for new school levies is only 30%.

So 20 years ago, the passage rate for new school levies was 70%, and it has been declining very steadily.

And school districts complain all the time about levy fatigue.

One of the ramifications of House Bill 920 that stabilizes revenues for, you know, from the homeowner's perspective, is it it also doesn't allow growth from inflation for schools and local governments.

We go to the ballot more often than any other state in this in this country as a result of having the most stringent property tax limitation.

So, you know, this is you know, this is there's you know, there's three challenges of if local governments are going to want to try to recoup that more than half a billion dollars in lost local revenue.

Right.

Because, one, we already vote a lot to your people.

You're asking me to vote for more levies.

Just we've gotten a very, very large tax increase.

And three, like, you know, the the inclination to pass new levies is not been very high in this state.

You know, renewal levies pass 85 to 90% of the time.

But asking for new money has gotten a lot harder in the last ten years.

You've been doing this analysis and in this area of property taxes, income taxes and school finance for ever, you are the expert on school finance in the state of Ohio.

What do you think in terms of the complexity and the potential impact of this bill?

I've been doing this since 1994 over 30, 30 years.

And this is by far the most complicated piece of legislation I've seen as far as it affects state and local government.

And it is also, I think, maybe the most concerning piece of legislation I've seen as well.

I think, you know, my my school and local government clients, I think, are viewing this as a five alarm fire right now.

And you know, I'm I'm trying to figure out because I think many of us were surprised to see the property tax features of this bill.

And I think there's been a lot of clues that the income tax is going to be changed and that they were going to move in the direction of a flat tax.

You know, that was not that big a surprise.

But to me, the property tax changes were out of the blue.

And I don't know if that was, you know, just because saving $1.3 billion in state payments helps them fund their property tax, decrease, or if this is also, you know, in some sense a property tax revolt or if it's both.

And so I I'd like to get some clarity on what the goals and objectives are as far as what they're trying to do.

Also, in March, I talked with four representatives of groups with different perspectives on House Bill one.

Greg Lawson is with the conservative think tank the Buckeye Institute, and testified on House Bill one as an interested party, though he said the bill makes a strong effort to improve Ohio's overall tax climate with a flat income tax that will be the lowest flat tax in the Midwest and the second lowest in the country.

But he's not sure about the nearly $1 billion property tax increase that researchers for state lawmakers estimated.

Truth is, is that we're not really sure what the aggregate impact is going to be on all of this, because there is a very complicated mix and we're talking about the way the property tax rollbacks work.

And these are essentially subsidies that the state is spending to local governments.

And I think that it's probably I'm sure there are some folks who know about this, but I suspect most people who have a home or whatever other property they might have aren't aware that the state has been subsidizing their local levies by 12 and a half percent for decades.

They think they are paying their property tax and they're actually getting, again, a subsidy, which means Columbus is paying in with general state dollars.

This is a really complicated issue.

We support flattening the income tax.

We think that's the right thing for a whole host of long term pro-growth reasons.

There's a lot of academic literature that's out there that talks about how lowering income taxes are not taxing as much on the income is better for long term growth of GDP.

We think that that is pretty clear.

But because of the way that they've decided to do the pay for it, in other words, to try to offset those costs, it has turned into a very kind of a it's a really just a very complicated labyrinth of things.

I want to ask you about your friends in Policy Matters and Zach Schiller, specifically what they've said about what this income tax cut or this flattening of the income tax will do.

They say it will benefit the wealthiest Ohioans, people making over $200,000 a year in Ohio already have an effective tax rate, which is when you take the income tax and then you divide it by the federal adjusted gross income of 1.4%.

Now, policy matters.

Ohio says people making $50,000 a year under this flat tax proposal would get back about $3, and people making over a half a million dollars would get back around $5,000.

So is that fair?

Well, here's the thing.

What we want to see if we want to see growth, I think we get stuck in this sort of hamster wheel of talking about fairness.

And I'm not sure if that's the right conversation to have, because the right conversation to have is what is going to help small businesses in the long run.

I know we've had some tax reform for small businesses do, but they're also ones who took it on the chin the most in the Great Recession and are the ones who took it on the chin.

The most in COVID, though, oftentimes are folks who are paying taxes, obviously through the income tax rate as opposed to other forms of taxes here in Ohio.

Those are people who don't get as often some of the big tax breaks and an intel goods or a big manufacturing.

It's when they come here for the big ribbon cutting ceremony, they.

Still get the first $250,000 of their income tax free.

And then it's a 3% flat above that.

And so this would be lowering that.

In theory, you could be you'd be lowering that to 2.75.

But here's the thing.

They they are also that when you look at overall growth of jobs, you see historically more total jobs in small business not spread out because they're all small businesses.

They're not the big guys who have a lot of people in one spot.

But when you look at what is it that's going to keep Ohio and keep individual communities doing very well, it's going to be small businesses.

I think this kind of tax reform is what helps smaller businesses as time goes on.

But here's the thing.

We get talked about what is the average person do?

This is all about looking at how do we create a framework of growth in Ohio to reverse what has been decades of decline.

More than 50 groups representing school districts, local governments and other organizations are opposed to House Bill one.

The progressive think tank Policy Matters.

Ohio is among them, with its research director calling it, quote, a trifecta of bad policy.

There's this reduced aid to schools and local governments.

There's this property tax increase.

And then finally, this is a $1.8 billion reduction in taxes.

That is not by any means fully paid for, even though they're getting rid of the states, supporting local property taxes and getting some money back for the state for doing so.

It doesn't fully account for the cost of the bill.

So there's $780 million a year that where's the money going to come from?

I mean, you can argue that, oh, well, this is create some economic renaissance.

The see, diplomatically, states know that's not going to happen.

So, you know, given that this trifecta of higher property taxes, lower support for schools and local governments and unpaid for a tax cut is bad enough.

But to start with, this is a gigantic handout to the richest Ohioans that does nothing or practically nothing for lower and middle income people.

I mean, because of the way our income tax is structured right now, if you make $30,000 a year and have one kid, you get zero from this flat tax.

There is no change.

If you make $50,000, you get $3.

$3 for a year.

Yes.

$3.

The the amount that you get if you make half a million dollars is more like 5000.

So our partners who have a model of the state tax system, the Institute on Taxation and Economic Policy, ran this through their model.

They found that 89% of the tax cut would go to the top 20% of people by income, which is people making over $124,000 a year and 35% of it would go to the top 1%, making over $617,000 a year.

So this is more than most tax cuts that we've seen in Ohio.

Incredibly done for the richest people.

And really middle class people are going to see nothing or practically nothing out of this.

And given that our tax system is already weighted so that lower middle income people pay more of their income in tax and state and local tax than affluent people do.

This is taking away the graduated income tax is kind of the one thing that counteracts that, that balances that out at least somewhat.

And basically says we're just going to give this giant handout to the wealthiest of Ohioans while raising property taxes on residential pay.

And then here's one final bonus.

There's a tax cut for business property owners.

So while residential and agricultural property owners will see this tax increase, businesses who own property will actually see a property tax cut.

So this is the worst of all possible worlds.

House Bill one has support from the conservative groups Americans for Tax Reform and Americans for Prosperity.

The state director of the latter group is Donovan O'Neill, who says a flat tax will encourage investment in Ohio and keep people from leaving for lower tax states.

But I ask him why work now when Ohio has been cutting income taxes since 2005?

I love my state, but I think one of the critiques I would have of it, and it's its policymakers is is we're very incremental in the changes we make.

And while we've done a good job of cutting brackets and lowering rates over the past two decades, what we need to do is we need some bold leadership, but we need to make some structural changes to the way that Ohio operates, addressing the forms of revenue that are going to bring in getting to a flat tax on a home within and establishing a phase out to a 0% income tax, putting us in the same tier as many other highly competitive, economically competitive states is is what Ohio needs leaders need to do.

So we need that.

It's time for that bold leap forward, not just another incremental change.

It's argued that the income tax, creating a flat income tax has been paid for by the cut to state and local governments and also by $929 million in property tax increases.

I think a lot of conservative groups look at the overall tax burden when ranking different states.

This creates a tax burden at the local level.

It just shifts that down to the local level, doesn't it?

Well, again, I think part of the conversation that this that House bill one has brought to the forefront is how entangled state and local funds are.

What I would what you know, we put out a study by AFP, worked with the Buckeye Institute and we put together a study that explored four different scenarios for setting Ohio on a path to a 0% income tax.

One of the ways you could begin to do that today would be with the with the revenues we have is you could probably accomplish that with with the budget would get us to a flat tax without raising disentangling the property taxes.

But I think the conversation is really important to have.

And if we're going to get where we need to be in the future as a state is beginning to disentangle that state and local dynamic.

One of the groups that's opposed is the Ohio Farm Bureau Federation.

It's senior director of state and national policy, says it's been pleased with efforts to lower taxes in the last decade in Ohio, but not with this one.

You had the fiscal note prepared by the Legislative Service Commission on House bill.

One suggests it could be a $929 million increase on homeowners and agricultural property owners.

So that's obviously a nonstarter for you.

It is.

It is.

You know, that's a that's a big, big number.

And for an industry you have to think about.

Our number one production asset is not necessarily a lot of the equipment.

The equipment.

It's it's the land that we use to produce food and when you when you have a tax on that, on that production asset, it directly impacts a farmers business operation.

And so for that tax shift to happen over to property taxes is just something that we cannot we can't really support from an agriculture standpoint.

It's interesting you use the word tax shift because a lot of people have been using that word.

And I'm wondering if you're concerned about the tax shift on to state and local governments or schools and local governments because of the $538 million estimated loss to them, that could mean more property taxes, couldn't it?

Absolutely.

I mean, I think, you know, in general, I think our members, members of the agriculture community, very much a part of their community.

They serve on local school boards.

They tend to be, you know, the township trustee.

They're very involved in their communities.

And from that standpoint, I think they're concerned, you know, potentially about the revenue loss that those entities could see as well.

But then, you know, if if those entities are going to lose revenue, they're going to turn around and have to seek, you know, potentially more property tax levies to help support their local operations, which could be, you know, more taxes on property taxes as well.

So it's kind of a little bit of a vicious cycle with, you know, the changes they want to make in the property tax portion of the bill.

Now, you've said that you support tax reform and some of the changes that have been made to income taxes in Ohio.

Would you support legislation that would take Ohio to a flat tax but without all these property tax changes in it?

Yeah, I think that we've been you know, if you look back over the last several cycles here, the legislature has continued to reduce income taxes.

We've been very supportive of that.

And, you know, we think that that has led to a lot of economic growth in Ohio, and we don't have a problem with that.

We could actually support that outside of what this proposal is.

So if you take away the property tax changes, I think would probably be okay from an agricultural standpoint.

But if you take away the property tax changes, you potentially take away the way that this income tax change is being funded.

So how would you make that sustainable?

Are you concerned about that at all?

Well, I think that's up to the policymakers, right?

We're not going to take the cop out there and leave that to the policymakers.

But from from an overall standpoint of of achieving greater economic growth in Ohio by reducing the income tax, that's that is something we can support.

The House version of the budget eliminates income taxes for people making under $26,050 a year and combine the bottom two tax brackets and lowers the rate to two and three quarter percent for people making under $96,000 a year.

But it's likely that House Bill One's flat to one three quarter percent tax rate could be expanded to the other remaining brackets in the Senate's budget.

But there's no word on whether the property tax changes from House bill.

One could also be drawn in.

And that is it for this week.

My colleagues at the Statehouse News Bureau of Ohio Public Radio and Television.

Thanks for watching.

Please check out our website at State Newstalk and follow us and the show on Facebook and Twitter.

My statehouse news bureau colleague, Joe Ingles, will be in this chair for the next two weeks.

We wish you a peaceful and safe Memorial Day weekend.

And please join us again next time for the state of Ohio.

Support for the statewide broadcast of the state of Ohio comes from medical mutual providing more than 1.4 million Ohioans.

Peace of mind with a selection of health insurance plans online at med mutual dot com slash Ohio by the law offices of Porter Wright, Morris and Arthur LLP.

Now with eight locations across the country, Porter Wright is a legal partner with a new perspective to the business community more at Porter Wright dot com and from the Ohio Education Association representing 124,000 members who work to inspire their students to think creatively and experience the joy of learning online at OHEA.org