Ohio passes property tax reform as abolition effort proceeds

When Ohio Gov. Mike DeWine signed five property tax reform bills into law on Dec. 19, there was hope in Columbus that it would appease voters who might have backed a citizen-led push to abolish property taxes in the state.

"These bills are a major step in reforming property taxes in Ohio," DeWine said in a statement upon signing the legislation. "While these bills are not perfect, they do provide meaningful relief to Ohioans in all corners of the state, while also protecting the critical services that are provided to all of us through the funding generated by property taxes."

Fueling the property tax reform debate in Ohio has been an effort by citizens' groups to get a property tax abolition measure on the statewide ballot come November.

Leaders of the Committee to Abolish Ohio Property Taxes did not respond to a request for comment. But they have indicated that the legislation signed by DeWine is not enough to deter them from seeking a constitutional amendment, according to News 5 Cleveland.

As signed by DeWine, House Bill 124 changes the property tax sales assessment ratio study process, giving county auditors more say over valuations. HB 129 includes fixed-sum levies in the calculation of school districts' millage floors.

HB 186 cuts school district property tax revenue for districts that are at the 20-mill floor by limiting increases to the rate of inflation. (The 20-mill floor is the state's minimum amount of spending on public schools, per the Ohio Capital Journal.) It also changes residential property tax reductions and changes the process for certifying property tax abstracts.

HB 309 changes the law around county budget commissions and property taxes, giving commissions power to cut levies approved by voters.

And HB 335 limits revenue increases from inside millage levies due to reappraisals. (Ohio allows an inside millage through which local governments can levy up to 10 mills, or 1%, in property taxes. Beyond that, they have to seek voter approval for property tax levies, or outside millage.)

Limiting revenue-raising flexibility is credit negative for local governments, said Coley Anderson, VP-senior analyst at Moody's Ratings.

"Ohio's recent property tax reforms will reduce local governments' financial flexibility by limiting future property tax growth, altering the calculation of the 20?mill floor, and expanding the authority of county budget commissions over school levies," he said by email.

The reforms will not have a material effect on the state's finances or credit profile, said Rob Marker, associate director at S&P Global Ratings. But S&P's most recent Ohio school district means and medians report suggests "adverse sentiment in approving local property tax measures could present budgetary challenges" for school districts, which Marker said could be accelerated by the reforms.

"For Ohio municipalities and school districts, we will closely monitor the effects to property tax revenue on a case-by-case basis, taking into consideration tax base growth trends, as well as the financial flexibility and tools management teams have at their disposal," he said by email, noting that local governments' ability to operate within existing levy structures and community support for renewals or new levies "could become more difficult."

If further reforms or citizen-led initiatives constrain local revenue-raising authority further, he said, S&P will be looking at specific management responses and the degree to which an entity has community support to raise revenue.

"A couple of the bills counteract one another," said Zach Schiller, research director at Policy Matters Ohio, a nonprofit think tank with progressive leanings.

HB 186, he said, reduces school district revenue over a three year period for districts that are at the 20-mill floor. HB 129 sets a new calculation for the 20-mill floor, including for school levies that hadn't previously been included.

"So it will knock a substantial number of districts off the floor," he said. "They won't be benefiting from HB 186? The Legislative Service Commission concluded the net effect of the two bills together was just over $1 billion, a good deal less than the two separately."

Schiller said the think tank's main criticism of the property tax reform legislation is that it's a blunt tool that doesn't direct tax relief to the Ohioans who need it most.

"It is not as focused as it ought to be, and they've been unwilling to support a more targeted approach, and I think that's a mistake," he said, noting that legislators had ruled out a circuit breaker tied to income level or a homestead exemption for poorer seniors.

"HB 186, the largest of the five (bills), provides a tax cut to residents of Indian Hill, which is by most accounts the richest community in Ohio, and does not to East Cleveland, the poorest community in Ohio," he said, stressing that a more surgical approach would target relief to those who need it within each community.

Certain other changes were inconsistent, Schiller argued. HB 309, for example, authorized county budget commissions to reduce levies, with certain restrictions.

"This showed real hypocrisy, because (for) the other bills, one of the main things said by the proponents was, 'We can't have unvoted tax increases'? They then turned around and said, we're going to kick voters in the teeth by allowing these officials to override what the voters themselves have decided," he said.

"Their interest is not in the voters; their interest is in cutting taxes and reducing the size of government," he added. "Let's not disguise it as 'what the voters really want.'"

A spokesman for DeWine did not respond to a request for comment.

The final property tax reform legislation won support from the Ohio Business Roundtable, the County Auditor's Association, Ohio Realtors, the County Commissioner's Association of Ohio and the County Treasurers Association of Ohio.

There were some last-minute changes that Policy Matters Ohio supported, as well. For example, the General Assembly had initially been unwilling to spend any of the state's money, preferring to have local governments foot the bill for property tax reform. Yet it ultimately amended HB 186 to provide about $460 million of reimbursements to school districts by cutting a summer sales tax holiday during which sales tax is suspended on most items under $500, back to three days in 2026 from two weeks.

Meanwhile, scheduled cuts to income tax rates remain in place.

But representatives of Ohio school districts flagged other problematic changes. Jeff Wensing, president of the Ohio Education Association, said in Oct. 1 testimony before the Ways and Means Committee that changes to HB 186 created "a new form of phantom revenue" by failing to include the school funding adjustment.

It also put contracts at risk by adding a lookback provision for tax years 2023 and 2024, he said, resulting in a nearly $950 million cut for school districts. The lookback provision appears to have remained in the final version of the bill.

Under the amended bill, some school systems will have their carryover balances halved or drawn down entirely, jeopardizing their bond ratings, Paul Imhoff of the Buckeye Association of School Administrators testified.

"Danbury Local Schools in Ottawa County will experience a $1.89 million revenue reduction in the first year, despite their carryover balance totaling $1.4 million," he said in his testimony. "Other districts see drastic impacts, like Scioto Valley Local Schools in Pike County where 64% of its balance will be wiped away."

As things stand, the legislation will take substantial resources away from schools and local taxing jurisdictions, Policy Matters' Schiller said.

"Ohio, which already has an extraordinary number of school levies, will see that number grow even more," he said.

Also, he said, school districts now have to include in the ballot language for any levy information on the amount of reserves that they have, raising the prospect that voters will look at the raw numbers and not factor in the reserve cushion that school districts need to maintain their credit ratings, among other things.

This legislation was likely Ohio lawmakers' best shot at derailing the property tax abolition push, and Schiller said as Policy Matters sees it, they haven't succeeded.

Anderson of Moody's suggested school districts and local governments would have to make major cuts or find replacement revenues to avoid downgrades if Ohio abolishes property taxes.

"Property taxes are a key revenue source for operations and debt service for many Ohio local governments ? including school districts, library systems, cities, and counties," he said. "An elimination of an entity's ability to generate property tax revenue would represent a major shift from the current operating environment and would be viewed as credit negative unless paired with a credible plan to replace this revenue or to reduce expenditures in a commensurate manner."

Ohio's state government is rated triple-A across the board.