Euclid Faces Two Income Tax Controversies

While April saw the 2019 tax season come to a close, the subject of taxes is one of the hottest topics in Euclid due to two separate, yet connected issues.

Income Tax Collection and Management

A hotly debated issue in Euclid over the past several months involves the potential to switch from having the City of Euclid manage its own tax collection process to outsourcing the service to RITA (Regional Income Tax Agency).

Led by former Mayor Bill Cervenik in 2005, Euclid created its own tax department and managed the tax collection process internally.  Prior to that, this service was performed by the CCA (Central Collection Agency).  Currently, the department has three full time employees and three part time employees.

City Council debated and ultimately decided to outsource the tax collection process to RITA.  The reasoning for switching to RITA is based on the expectation that RITA will be able to collect more taxes due to having more sophisticated systems and access to data that Euclid’s tax department cannot obtain as easily.  However, the switch to RITA was not well-received by some members of council and a group of active citizens who worry about the cost/payback of using RITA, potential for loss of personal service provided by Euclid, and the loss of jobs within the City.  As a result, the group collected enough signatures to put an issue on the November ballot that will allow residents to vote on the potential switch to RITA.

School Shared Tax

While the debate about RITA was taking place, another more complicated and potentially volatile issue was quietly raised.  The City administration, in its opinion, discovered that it was inaccurately paying the Euclid City Schools its portion of the shared income tax.

Euclid is the only municipality in Ohio with a part of its income tax  shared between the city and the school system.  Passed in 1994, a tax of .85% is split between the City and Euclid City Schools.  While the guidelines for what the City and schools get from the tax is clearly outlined in an agreement signed by the City and the schools; what is not clear is how the shared tax is calculated taking into account the City’s income tax credit.Based on the ambiguity of the shared income tax as it relatesto the City’s tax credit policy, the amount the City has been paying the schools has potentially been wrong since the tax’s inception.

In summary, when a Euclid resident works in another city, they are given credit on their Euclid taxes for any tax they paid to another city.  If a Euclid resident worked in Cleveland, which for years had a 2% income tax, they only paid the additional .85% to the City of Euclid.  When Euclid passed the shared income tax, no cities in Ohio had a tax rate higher than 2%.  Lately, several cities including Cleveland, have raised their income tax to a higher level.  This increase in Cleveland impacts both how much Euclid collects and how the shared income tax is calculated.  Compare this to a taxpayer who works and lives in Euclid.  There is no tax credit issue for this taxpayer and the calculation should be straightforward, yet different from the person who works in Cleveland.

Over the past 24 years, the calculation of the shared tax appears to have been pegged at a seemingly random or approximate percentage whereas the rate should be calculated on an individual basis for each tax paying resident.  This oversight has resulted in years of potential overpayment or underpayment by the City to the schools.  Right now, Mayor Holzheimer-Gail’s administration and Euclid City Schools are debating the proper calculation method for the shared income tax and its impact to both past and future payments.  This issue has significant cost implications with the potential that it could find its way to the courts.

City vs. Schools and Income Tax Collection

A final complication to the tax issues facing Euclid is the need to calculate the school tax on an individual taxpayer basis.  If this approach turns out to be the most appropriate way to properly divide the .85% tax, some wonder if the Euclid tax department could manage this process effectively or will an organization like RITA be needed to ensure proper management.  With Euclid voters set to decide on the use of RITA or keeping Euclid’s tax collection as is, this issue becomes potentially more important due to the complexities of the tax calculation process.

As outlined above, these issues are complex, interrelated, and will impact residents and the city schools now and in the future.  Each of these issues will be explored in greater detail in the coming issues of The Observer.