ARP Funds Helping Cities Weather Revenue Reductions Due to Remote Work—For Now
May 19, 2022
The primary revenue source for nearly all Ohio cities is a local municipal income tax. Ohio is unique among states in this regard —the vast majority of U.S. states’ local tax structures rely significantly less on local income taxes to provide revenue for essential city services. Ohio’s municipal income tax is applied to both residents and non-resident commuters – individuals that work in one city but live in another. For many Ohio cities, a significant share of income tax revenue comes from these non-resident commuters. This issue is amplified in some large, land-locked Ohio cities like Cleveland and Cincinnati that have a particularly high percentage of workers who live outside the city. Additionally, many Ohio cities continue to struggle against the impacts of long-standing and deeply entrenched high rates of segregation, poverty, and inequity. For more information on this issue, see this report OMA published in October 2021.
In Cleveland, Cincinnati, and Dayton, for example, between 76 and 81 percent of the taxable workforce lives outside the city. If a large share of workers no longer commute into the city, and instead work from home in a different community, Ohio cities will face significant and ongoing revenue loss over the next decade and beyond. Our research shows that OMA member cities, on average, receive almost two thirds, or over 60 percent, of their revenue from income taxes. And contrary to what many state policy makers believe, cities do not spend their revenue on unnecessary “frills:” they spend most of their revenue on first responders and essential city government services like street maintenance.
The loss of a significant percentage of municipal income tax revenue is not something cities can simply “absorb” or work around. Ongoing revenue loss would mean cuts to crucial city services like police and fire departments. It would also mean far less funding for youth and senior programming, parks and recreational facilities and activities, and development incentives that create and maintain many of the jobs that are fueling the remote work tax issue.
This problem requires a long-term solution, and finding and advocating for that solution is something the Ohio Mayors Alliance is deeply committed to over the next couple of years. In the meantime, however, Ohio cities are relying heavily on the budget stabilization funds the American Rescue Plan has made available to them to maintain necessary investments in public safety and other basic city services. In Columbus, for example, ARP funds have made it possible to move ahead with hiring needed first responders despite potential looming revenue losses. In our 2021 ARP Report, OMA detailed over $371 million in potential lost revenue in our cities as a result of the COVID pandemic. We will know much more about the impacts of the pandemic and remote work on city budgets in the coming years. ARP funds give our cities some time—until the end of 2024—to analyze this issue further and develop potential solutions that protect Ohio cities’ fiscal health.