Schools will lose millions if flat income tax bill becomes law, districts say

COLUMBUS, Ohio (WCMH) – Supporters of a bill overhauling Ohio’s tax structure call it key to ensuring the state’s growth, but school boards across the state consider it a blow to struggling districts.

House Bill 1 proposes sweeping changes to Ohio’s tax code. Emphasized by statehouse Republicans as implementing a flat income tax, Rep. Adam Mathews’ legislation nixes rollbacks, changes homestead tax credits and lowers the assessment rate on properties. Mathews (R-Lebanon) believes the bill "empowers our families and businesses to thrive as well as restart Ohio as the economic engine of the Midwest."

But as the bill makes its way through the Ways and Means committee, more than a dozen Ohio school districts have pleaded with lawmakers to reconsider – or cost districts millions.

Rollbacks, reappraisals: What does HB1 do?

HB1 would eliminate the existing bracket income tax structure, instead replacing it with a 2.75% tax across all wage groups above $26,050. It’s a reduction with variable effects – those in the lowest income tax bracket will see a 0.5% tax decrease, while those making the most money will see income taxes fall by nearly a third.

The bill also lowers the assessment rate – the percentage of property used to determine property taxes – from 35% to 31.5% and ties it to inflation, meaning the rate will decrease proportionate to inflation but shall not exceed 31.5%. It further eliminates a 10% rollback for property owners that the state reimburses to local governments and districts to make up for lost revenue.

Supporters have argued that a flat income tax and lower property assessment rates will save taxpayers significant money. But in written and spoken testimony to the committee, school districts from Athens to Cuyahoga counties have laid out predictions for what they – and their residents – stand to lose if HB1 becomes law.

The bulk of potential revenue loss depends on whether existing tax reduction factors – triggered automatically to stabilize property tax rates during inflationary and deflationary periods – will undo HB1’s goal of reducing taxpayer costs. Since the bill does not address those reduction factors, which were enshrined into law in 1976, it’s likely the factors will apply.

Mathews told NBC4 that the tax code is admittedly complex -- it's why he wants to change it. HB1 was drafted without considering the tax reduction factors, but he's open to amending the bill to ensure the greatest benefit to taxpayers and local governments.

"We're discussing the funding mechanisms of the state to see which of those don't serve people anymore," Mathews said.

In more than a dozen submitted testimonies, school districts argued that tax reduction factors will automatically counteract the impact on districts of the loss of the 10% property tax rollback, effectively negating the effects of lowering the assessment rate for taxpayers. Even if tax reduction factors apply, school board members and district administrators are projecting significant losses.

HB1: An ‘existential problem’ for school funding

At a meeting in late March, the Columbus City Schools board of education denounced HB1 and other legislation impacting school funding. The district expects a revenue loss of $5.56 million in the first year of HB1’s implementation, while taxpayers may see increases surpassing $20 million if current automatic tax reduction factors apply.

Columbus City Schools Board Member Eric Brown said at the meeting that HB1 would shift the tax burden to local school districts, which will have to pass more levies to make up for lost state funds.

"I am hoping that it goes nowhere, but I view House Bill 1 as an existential problem for public education in Ohio," Brown said. "If it were to pass, we would decline rapidly."

According to the Legislative Services Commission’s fiscal analysis of the bill, local governments will lose $538 million in tax revenue in the first year of implementation, more than half of which is a cut to school districts. Much of that expected loss comes from a compounding effect of lowered property taxes, which not only impact state-provided revenue, but also lower funds accrued by the fixed-rate levies on which many districts rely.

For nonbusiness taxpayers – homeowners and agricultural property owners – the LSC predicts the elimination of the 10% rollback will offset tax decreases from the lowered assessment rate, to the tune of $929 million in increased tax revenue for the state.

Tom Faulkner, treasurer of Clark-Shawnee Local Schools in Clark County, predicts the small, semi-rural 1,700-student district will lose $277,851 each year, while taxpayers will pay nearly $500,000 more. Clark County’s eight school districts will lose a combined $1.9 million year-over-year, Faulkner said in written testimony.

"School districts across the state will be required to make immediate cuts to staffing, programming and services," Faulkner wrote. "HB 1 will impact our students today and our communities in the future, at the cost of local taxpayers."

Other school district administrators submitted similarly bleak calculations to the Ways and Means Committee: Gahanna-Jefferson Public Schools will lose between $4 million and $7 million each year. Cleveland schools will lose anywhere from $4 million to $37 million in the next two years, depending on whether tax reduction factors apply. Mentor Exempted Village Schools, which treasurer Bill Wade said relies on local property taxes for more than 75% of its budget, will lose upward of $5 million annually.

Greg Lawson, a research fellow at free-market think tank The Buckeye Institute, testified Wednesday that it is essential to "unwind" the income tax from the property tax rollback to recruit people to live and stay in Ohio. He said the legislature can ease local governments into the tax change through one-time payments from the state’s general fund, emphasizing that the state spends "an awful amount of money" to reimburse districts for lost revenue from rollbacks.

“Those subsidies, in a lot of ways, sort of obfuscate some of the things that local decision-makers are doing,” Lawson said, referring to state reimbursement to districts.

The bill declares that the state will help local governments through the transition by reappropriating funds, but the legislation itself makes no such appropriations. Mathews said that was intentional -- he wants the bill to work through committee so lawmakers understand the full financial scope before committing to a number.

If the bill passes without appropriations, they would have to be written into the state budget – the one that Columbus Board Member Brown said fails to prioritize public schools. 

"We want to fulfill Ohio’s constitutional mandate to fund a thorough and efficient public school system, and it’s just that simple," Brown said.