Ohio Lawmakers Approve Bill to Allow Teleworkers to Seek Commuter Tax Refunds

Ohio residents who worked from home during the Covid-19 pandemic could seek refunds for income taxes they paid to the cities where their workplaces are located, under a proposal approved this week by the state House.

The bill, approved 63-31 among mostly party lines, would allow people who live in one city but work for companies in another to seek a municipal tax refund if they work remotely for the entirety of 2021. Wages earned before this year would not be affected, because the 2020 tax year has concluded, according to the legislation.

The proposal seeks to undo part of a package of legislation passed in the early days of the pandemic, a piece of which permitted businesses to continue withholding tax from employees as if they were working from the office during the state’s mandated stay-at-home order. 

Supporters of the new measure noted that Gov. Mike DeWine lifted that order last May, but the tax legislation was never modified to reflect the shift, allowing municipalities to continue to collect taxes from workers who, in many cases, had not set foot in the cities for months.

“Our presumption was that this pandemic would cause a temporary shift to where people were working from home,” Rep. Kris Jordan, a Republican and one of the bill’s lead sponsors, said during debate on the House floor. “Fourteen days to flatten the curve turned into 440 days...all the while employees have been taxed by the municipality where they have neither lived in nor performed any work in for over a year. This is simply not fair.”

Opponents of the measure, all Democrats, disagreed, noting that thousands of residents continue to telework despite the absence of an official stay-at-home order. Depriving cities of that tax revenue, particularly after many have incorporated it into their financial planning, would leave many of them reeling, said Rep. Lisa Sobecki, a Democrat from Toledo.

“Changing the rules now would pull the rug out from underneath our cities,” she said. “Municipalities have said it would result in cuts to public services, so let’s just call it what it is—it’s defunding police and fire.”

The Greater Ohio Policy Center, a nonprofit that advocates for city-level investment, estimated that 85% of the state’s 300 small cities and villages overseen by the Regional Income Tax Agency would lose $105 million annually if emergency tax measures are repealed. A separate study projected that the state’s largest six cities receive 88% of their funding from income tax and could lose $306 million without revenue from commuters

But supporters disagreed, noting they had worked with city and municipal officials on the bill and that the proposal simply reverts the law to the status quo.

“This is entirely consistent with the way the law was...up until the start of the pandemic,” said Rep. Bill Seitz, a Republican from Green Township. “If you didn’t live in the city and you didn’t work in the city, you owed no tax to the city. That’s the way it was and that’s what we’re returning to.”

Seitz also noted that cities stand to reap hundreds of millions of dollars in federal relief money, making some estimates of lost revenue—based on what he called “a projection of how many employees might not come back”—a moot point.

“Cry me a river, cities,” he said. “What is your problem?”

Several local government organizations, including the Ohio Municipal League and the Ohio Mayors Alliance, opposed the measure. In a statement, Keary McCarthy, executive director of the mayors alliance, said the sunset provision at the end of the year “makes sense,” but that the bill as a whole “presents a serious challenge for many local communities and threatens to slow Ohio’s recovery from the pandemic.”

The bill heads next to the Senate.

Ongoing Debate at State Level

The issue of how to tax remote workers has been debated elsewhere, mostly at the state level in places where employees may live in one state but work in another. Typically, those employees have tax liability in both states but receive a tax credit from one, eliminating double taxation of their income. But seven states—Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania—have so-called “convenience of the employer” rules, meaning they impose taxes on employees based solely on the employer's location, according to the Tax Foundation.

Amid the pandemic, Massachusetts passed a convenience law as an emergency measure, which rankled commuters in nearby New Hampshire, which has no income tax. In October, New Hampshire filed a lawsuit against Massachusetts, alleging that the policy amounted to an “unconstitutional tax grab.”  

At least 14 states have since joined the suit, though it’s unclear if the Supreme Court will decide to take it up. Elizabeth Prelogar, the acting U.S. solicitor general, filed a brief on Tuesday arguing that New Hampshire’s complaint does not identify “the type of serious violation of sovereignty” that would require the court to settle a dispute between two states.

New Hampshire Gov. Chris Sununu, a Republican, was undeterred, saying on Twitter that he remained “confident that the Supreme Court will hear our case and that we will win."

Massachusetts’ policy will expire 90 days after its state of emergency is lifted on June 15.