Saturday, March 15, 2003

Taft seeks end to tax deals with neighbors

Cross state line on way to work? Plan aimed at you

By Amy Higgins
The Cincinnati Enquirer

Almost 29,000 Southwest Ohio residents could see their state income taxes as much as double under Gov. Bob Taft's proposal to end income tax reciprocity with surrounding states.

Another 61,800 Northern Kentucky and southeast Indiana workers could face costly tax filing headaches.

And employers all over Greater Cincinnati could see higher costs of doing business if Ohio ends the decades-old agreements.

Under reciprocity, workers pay income tax to the state where they live instead of where their income is earned.

But because more commuters come into Ohio to work rather than leave, ending that practice and collecting income tax from out-of-state workers could bring $17.9 million a year - which would otherwise be paid to neighboring states - into Ohio's depleted coffers, Taft administration officials say.

The future of the proposal isn't clear. Rep. Tom Brinkman, a Republican from Mount Lookout who serves on the tax-writing House Ways and Means Committee, said Friday that state legislators aren't considering ending reciprocity as a budget fix. But administration officials say ending the agreements are still part of the governor's budget proposal.

"We have a budget crisis in the state of Ohio, and we're looking for ways we can overcome this," said Thomas W. Johnson, director of the Office of Budget and Management.

According to the 2000 Census, almost 240,000 commuters cross into or out of Ohio each day - 90,800 of them in Greater Cincinnati. To those workers, ending reciprocity would be more than an academic exercise or easy budget fix.

It would mean real dollars spent either on higher taxes or higher tax filing costs. And those effects would most likely be most heavily felt in the Tristate, where almost one in 10 workers crosses state lines every day to earn a living.

Unusual deal among states

Having reciprocity is actually unusual. Only 15 states and the District of Columbia share these agreements. Budget crises are causing some of those states to think twice about their agreements.

According to the Federation of Tax Administrators, Illinois last year ended its reciprocal agreement with Indiana so that Illinois could collect more tax revenue, particularly from Chicago-area commuters. New Jersey's governor last year made a similar proposal to end its agreement with Pennsylvania - but the Legislature rejected it.

Ohio has reciprocal agreements with all its adjacent states: Kentucky, Indiana, Michigan, Pennsylvania and West Virginia. Tristate businesses and employees alike are concerned that ending those agreements - particularly with Kentucky and Indiana - will add too much complexity to the state's tax system.

Greater Cincinnati's unique geography ensures that its residents will be vastly more affected by what is supposed to be a statewide solution than anywhere else in the state. Area companies will see higher payroll administration costs, and cities may become less attractive to new businesses.

"I think the whole thing is a bad idea," said Bob Coughlin, chief executive of Paycor, a Queensgate-based payroll-processing firm.

Sticky tax problems

The problem is not double taxation. Workers still can't be taxed twice on the same income. The problem is the differences between the state tax systems.

For example: Indiana and Kentucky's income tax rates are higher than Ohio's. That will mean higher tax bills for workers like Aaron Buda without reciprocity.

Buda, a lawyer for pharmaceutical firm Shire US Inc. in Newport, pays about $4,500 in state income taxes to Ohio. Without reciprocity, if he owed tax instead to Kentucky, the Cheviot resident would pay about $5,200.

"It's the price to pay to live where I do," Buda said. "But at the same time, it does result in a disproportionate increase in my tax from my neighbors'."

And it might also result in him seeking professional tax preparation help instead of doing his own taxes, as he does now. That's because it won't be as easy as just paying to Kentucky instead of Ohio. Buda would still have to file an Ohio state income tax return to declare that he already paid Kentucky, taking the Kentucky tax payment as a credit against what he would otherwise owe Ohio. With the Kentucky credit higher than the Ohio tax bill, his bill to Ohio would be zero.

But this is where ending reciprocity really gets sticky for the 51,000 Northern Kentuckians and the 10,800 southwest Hoosiers traveling to work every day in Ohio.

They would complete a similarly complicated process of filing in two states. But because the credit of what they paid to Ohio would be less than what they would otherwise owe to Kentucky or Indiana, they still have to pay the difference to their residence states.

Take Amanda Gregory, who crosses the Ohio River from Erlanger to her job at a Kellogg Avenue financial planning firm. With or without reciprocity, she will pay a total of $1,100 in state income tax. Now, she pays it all to Kentucky. If Ohio ends reciprocity, she would pay $450 to Ohio then another $650 to Kentucky.

If she had the same income and commuted from Ohio to Kentucky, she would be paying about $450 to Ohio with reciprocity. But her total tax bill would skyrocket to $1,100 without reciprocity.

$17.9 million gain for state

Commuters like Gregory are the reason the Taft administration wants to end reciprocity. Collecting her $450, along with similar payments from the other thousands of commuters, adds up to the $17.9 million annual gain state officials say would help plug the $2 billion annual budget shortfall.

But payroll experts say the state's accounting is shortsighted - and the complexity of payroll processing and income tax filing without reciprocity would do more long-term economic damage to the region than those annual collections.

"Employees will incur higher costs of compliance, and companies will incur higher costs of compliance," said Paycor's Coughlin.

And that's not good for the economy or Greater Cincinnati's economic development efforts, he said.

Without reciprocity, Ohio companies that employ southeast Indiana and Northern Kentucky commuters will have to figure out how to simultaneously withhold Ohio and Kentucky state income taxes.

Coughlin said some less sophisticated payroll processing software wouldn't be able to handle the complexity. It might create more clients for his company - but he might have to raise his prices to handle the new rules.

Tax season will also become more complicated and expensive for taxpayers, who will have to file returns in two states regardless of which they owe. Buda, for example, would still have to file to Ohio even though his tax would be zero.

Accountants, storefront tax preparers and retail preparation software all charge more for completing two state returns than for completing one return. TurboTax, for example, charges $29.95 to complete a second state return. So does H&R Block.

Gregory might have an even more complicated picture: Her employer might opt to not withhold for both Ohio and Kentucky. If her company continues to withhold the $1,100 for Kentucky, then she'd have to file her Kentucky return, and use the $450 refund for what she owes in Ohio.

Or her company could withhold the $450 for Ohio and force her to write a check for Kentucky's $650 share come April 15.

Struggle at first

Ohio Budget Director Johnson acknowledged that some employers might struggle with a new system at first, but that any pain would be short-lived.

Plus, any inconvenience - even if localized in Greater Cincinnati - is better than alternative budget fixes of cutting services or raising general taxes.

"We believe this can be done. ... They can do this with minimal costs or minimal inconvenience," Johnson said. "We believe this is fair."

Staff writer John Byczkowski contributed to this report.


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