1. State Income Tax Reduction 
   House Bill 1 (HB 1) proposes an estimated $2 billion reduction in Ohio’s state income tax. The income tax would be changed from the current graduated rate structure which has been in place since the income tax’s inception in 1972 to a flat rate structure with a single rate of 2.75%.
2. Elimination of the 10% Rollback on Residential and Agricultural Property Taxes
   HB 1 also proposes the elimination of a property tax relief program, commonly referred to as the “10% rollback,” on residential and agricultural property (this is officially known as the “non-business tax credit”). The 10% rollback, which was instituted in 1972 at the same time that the state income tax was created, currently saves residential and agricultural taxpayers $1.221 billion in local property taxes as the state pays this amount to schools and local governments. $805 million of the rollback total is for taxes paid to K-12 school districts and JVSDs with the remaining $416 million split cross Ohio’s municipalities, townships, counties, libraries and other local government agencies with levy authority, including children’s services, elderly services, development disability, and alcohol, drug and mental health agencies. Elimination of the 10% rollback will mean that that local property taxpayers, instead of the state, will pay this tax. 
3. Reduction in the Assessment Percentage on Residential & Agricultural Property from 35% to 31.5%
   Because the 10% rollback means that the state pays roughly 10% of each residential and agricultural taxpayer’s property taxes^[1], elimination of the rollback will automatically increase every residential and agricultural taxpayer’s property taxes by the amount of their rollback. In order to offset this automatic increase in residential and agricultural property taxes, HB 1 includes a provision which reduces the assessment percentage on residential agricultural property from 35% to 31.5% (a 10% decrease). Ohio tax law has established that the taxable value of their property (also known as the “assessed value”) is only 35% of the value placed on real property by each of the 88 county auditors. This percentage has been 35% since the early 1970s and applies to both residential and agricultural property as well as business and commercial property.

Reducing the assessment percentage from 35% to 31.5% on residential and agricultural property is intended to offset the elimination of the 10% rollback by reducing the amount of taxes owed on all “fixed rate” property tax levies in place across the state. School operating and permanent improvement levies, that were approved by the voters for a specific millage amount, are fixed rate levies. Bond levies, emergency levies, and substitute levies are referred to as “fixed sum” levies because voters approve a specific dollar amount rather than a specific tax rate for these levies.

Reducing the taxable value of residential and agricultural property by lowering the assessment percentage to 31.5% will reduce the amount of taxes owed on fixed rate levies because the millage rate in place is now multiplied by a lower property valuation than when the assessment rate was 35%. “Inside mills” (the 10 mills of “unvoted” property taxation delineated in Article XII Section 2 of the Ohio Constitution) also function as fixed rate levies. However, bond, emergency and substitute levies will have their millage rate automatically adjust upward in order to continue to raise the voted dollar amount despite the decrease in that taxable value of property.

The result is that schools and local government with no bond or emergency levies stand to lose 10% of the property tax revenue from residential and agricultural property as result of the decrease in the assessment percentage. This will decrease the level of local services they are able to provide. Local governments with a bond levy or schools with an emergency or bond levy will have that tax revenue remain constant, however the taxpayers in these localities will experience a tax increase as result.

The impact of the lowering the assessment percentage from 35% to 31.5% depends on whether or not Ohio’s property tax limitation commonly known as HB 920 applies under the circumstances. This issue is discussed in more detail below. However, there are only two possible outcomes; 1) Schools and local governments will lose local revenue for all inside millage and fixed rate levies, compromising their ability to provide local services, or 2) property taxpayers will experience an increase in taxes that will be roughly the same as that which would have occurred as a result of the elimination of the 10% rollback discussed above.  

4. Reduction in the Assessment Percentage on Business & Commercial Property from 35% to 31.5%
   While the intention of HB 1 seems to be to reduce the assessment percentage to 31.5% on residential and agricultural property in an attempt to offset the automatic increase in property taxes, which is the consequence of eliminating the 10% rollback, the legislation will almost certainly also result in a similar decrease in the assessment percentage on business and commercial property. The reason for this is a series of legal cases in the 1960s known as the “Park Investments cases.” The cases established that the assessment percentage on real property had to be the same across the state. Prior to the Park Investments rulings by the Ohio Supreme Court, it was common practice for county auditors to establish the taxable value of business and commercial property at a higher rate (typically 40-50%) than for residential and agricultural property (which was typically at 30%). As result, in the mid-1970s the Ohio legislature set a uniform assessment rate of 35% for all real property across the state. This 35% rate remains in place today.^[2]

As a result, HB 1’s lowering of the assessment percentage on residential and agricultural property to 31.5% will also lower the assessment percentage from 35% to 31.5% on business and commercial property. This reduction in the assessment percentage on business and commercial property will work in the exact same way as for residential and agricultural property, with property taxes decreasing on fixed rate levies and property tax rates increasing on fixed sum levies. One significant difference, however, is that the 10% rollback on business and commercial property was eliminated in 2005 as part of HB 66, legislation which also eliminated the business tangible personal property tax. As a result, HB 1’s reduction in the assessment percentage on business and commercial property will result in a clear tax decrease for business taxpayers (and accompanying loss of revenue for schools and local governments). In contrast, the reduction in the assessment percentage to 31.5% on residential and agricultural property will at best keep property taxes from increasing as a result of the elimination of the 10% rollback on residential and agricultural property. However, it would do so only by creating an accompanying loss of local tax revenue and an attendant reduction in local services.

5. The Role of House Bill 920
   As mentioned above, the impact of HB 1 is clouded by the presence of the property tax limitation commonly known in Ohio as HB 920. In 1976, after the setting of the 35% assessment percentage and following very rapid inflation in home prices, Ohio enacted HB 920, one of the most stringent property tax limitations in the country. The goal of House Bill 920 was to insulate homeowners from the effects of inflationary increases in their property. House Bill 920 aspired to accomplish this goal by introducing “tax reduction factors,” which were reductions in voted property tax rates designed to adjust the tax rate downward when property increased in value after property reappraisal (Ohio reappraises property every six years and employs a statistical update of property values at the three year interval between reappraisals). The idea is that if property values are reappraised at 10% higher, the property tax rates on fixed rate levies (explained above) would be adjusted downward by just enough so that no additional revenue was generated from these levies. These adjusted tax rates are referred to as “effective millage rates.”^[3]The HB 920 tax reduction factors are applied separately in each of Ohio’s 4,000+ taxing districts. Furthermore, as a result of change made to the Ohio Constitution in 1980, the HB 920 tax reduction factors are applied separately to residential and agricultural property from business and commercial property.

There are several exemptions from the provisions of HB 920:

1. A)   Inside millage is exempt from the HB 920 tax reduction as that millage is protected in the Ohio Constitution.
2. B)   Revenue growth is allowed from new construction. However, that is only true of the first year. After the first year, new construction is considered part of the existing tax base and is thereafter subject to the HB 920 millage rollbacks. Similarly, HB 920 allows tax revenue to decrease in the event of property demolition (which can be considered the opposite of new construction).
3. C)   The reduction factors cannot adjust so that effective millage is less than 20 mills for school districts. This is commonly referred to as the “20 mill floor.”
4. D)   Bond levies and school emergency levies are also exempted because the millage rates on those levies already adjust as necessary to assure that the voted-upon dollar amount is raised each year.
5. E)    HB 920 only applies to real property (land and buildings). It does not apply to public utility tangible personal property, which consists primarily of the value of public utility machinery and equipment.

A final point about HB 920 is that it also works in reverse. If property values after reappraisal are lower than they were previously then the HB 920 reduction factors will actually increase in order to ensure that property tax revenue from fixed rate levies does not decline. Again, property that has been demolished will not trigger the HB 920 reduction factors. A fundamentally important feature of HB 920 when property values decline is that it is not permissible for the effective tax rate to be adjusted higher than the actual voted rate of any levy.

The above discussion of the functioning of HB 920 is pertinent to the property tax provisions of HB 1. Will the reduction in the assessment percentage from 35% to 31.5% automatically trigger HB 920 to adjust property tax rates upward in order to make sure that fixed rate levies generate the same amount of tax revenue at 31.5% as they did at 35%?

From one perspective, the reduction in the assessment percentage is functionally similar to the reduction in property values that would occur if there was deflation and properties were reappraised at a value lower than they were earlier. (While property values are historically very stable and tend to move upward, the 2008-2009 recession did result in property value decreases.) From this perspective then HB 920 would automatically increase effective tax rates so that there was no revenue loss to schools and local governments. Thus, if HB 920 does apply, then residential and agricultural taxpayers would experience the very same increase in taxes (from the elimination of the 10% rollback) that the reduction in the assessment percentage to 31.5% was intended to prevent. In this case, business and commercial property taxpayers would also be in essentially the same position as they were prior to HB 1. The one exception is that the amount of revenue schools and local governments receive from inside millage will decrease as HB 920 cannot adjust inside millage upward.

The alternate perspective is that while the mathematical effect of lowering the assessment percentage is the exact same as if each county auditor reappraised property values 10% lower, the changing of the assessment percentage is a different thing than property reappraisal. If this perspective is taken, then the elimination of the 10% rollback and the reduction in the assessment percentage from 35% to 31.5% on both residential and agricultural as well as business and commercial property will have the effects outlined in sections 2, 3 and 4 above.

Once the implications are clear regarding whether or not the HB 920 reduction factor mechanism will be triggered by the reduction in the assessment percentage to 31.5%, the question becomes one of which of the two perspectives is correct? In this regard it is useful to consult both the actual wording relating to the HB 920 property tax provisions that are contained in Article XII, Section 2a of the Ohio constitution as well as a recent tax policy change that impacted the taxable value of real property in Ohio.

The wording of clause C(2) of Article XII Section 2a reads as follows (emphasis and [bracketed] comments added):

With respect to each voted tax authorized to be levied by each taxing district, the amount of taxes imposed by such tax against all land and improvements thereon in each class shall be reduced in order that the amount charged for collection against all land and improvements in that class in the current year, exclusive of land and improvements not taxed by the district in both the preceding year and in the current year [this refers to demolished property] and those not taxed in that class in the preceding year [this refers to new construction], equals the amount charged for collection against such land and improvements in the preceding year. 

Reading the boldfaced passages indicates that the constitutional directive, excluding new construction or property that has been demolished, is for the reduction factors to work in such a way that the amount of taxes charged in the current year be set equal to the amount of taxes charged in the preceding year. The language does not make any mention of valuation, nor does it allow for an alteration to adjust for taxes collected in the event the assessment percentage is changed. This wording appears to clearly articulate that the HB 920 mechanism should activate to adjust taxes upward to assure that taxes in the year when property is assessed at 31.5% be set equal to the taxes charged in the preceding year when property was assessed at 35%.

Additional insight, regarding whether or not HB 920 will be triggered by falling property values due to the assessment percentage decrease, comes from Ohio’s recent experience changing the Current Agricultural Use Valuation (CAUV) formula. The CAUV formula provides an alternate method for establishing the market value of agricultural property. Since the market value of such property can be influenced by its potential value as a shopping mall or residential subdivision the CAUV formula provides a method for valuing the land based on its value in agricultural use. The CAUV formula is quite complex (it is based in part on more than 2,000 soil types) and it was modified several years ago after a number of years of sharply rising CAUV values.

The new CAUV formula, which is being phased in over a six-year timeframe, has resulted in a year-by-year reduction in agricultural property values. While the CAUV formula calculations are made every year, they are implemented in each county at the time they go through reappraisal or statistical update. The new CAUV values are included in the residential and agricultural property tax duplicate in each taxing district alongside any changes (up or down) that might be occurring with residential property values. Once the new total valuation is reached, the HB 920 tax reduction factors are then implemented, and property tax rates get adjusted up and down depending on the overall change in total residential and agricultural values in each taxing district.

The implications of the CAUV formula change on the HB 1 property tax changes should be evident. A policy change in how agricultural property values are established was incorporated within the framework of HB 920 just as if the changes had occurred through the reappraisal process. This establishes a clear parallel for how a policy change such as reducing the assessment percentage would be handled as well.

6. Change to the 2.5% Homestead Rollback
   In addition to the changes described above, HB 1 will also modify the 2.5% rollback for owner occupied dwellings (commonly referred to as “homesteads”) which also dates back to 1972. The homestead rollback will be changed from 2.5% of a homeowner’s property taxes to a flat $125. In general, this change will benefit taxpayers whose current tax bills are less than $5,000 and reduce the rollback reimbursement for taxpayers whose bills are greater than $5,000. Importantly, the state will continue to pay the homestead rollback amount although there are currently no estimates as to whether the net cost will increase from the current level of $230 million or not.

Summary of HB 1 As it Effects Ohio’s Schools and Local Governments

1. HB 1 proposes an income tax cut which is estimated to reduce state General Revenue Fund (GRF) tax revenues by $2 billion.
2. HB 1 also proposes the elimination of the 10% rollback on residential and agricultural property. This change will reduce state GRF spending by $1.221 billion and means that local taxpayers must make up this revenue or else schools and local governments would no longer receive it.
3. Barring any other changes, the elimination of the rollback would automatically result in an unvoted tax increase of $1.221 billion for residential and agricultural taxpayers as the state’s failure to make these payments to Ohio’s schools and local governments would simply require they be made instead by the local taxpayers.
4. However, HB 1 also calls for a reduction in the assessment percentage on residential and agricultural property from 35% to 31.5%. This reduction is intended to offset the automatic increase in local taxes deriving from the elimination of the 10% rollback.
5. Because Ohio tax law requires that all real property be assessed at the same percentage, business and commercial property will also see its assessment percentage reduced from 35% to 31.5%.
6. The ultimate impact of the reduction in the assessment percentage depends on whether or not the HB 920 tax reduction factors will be triggered by the reduced property valuation resulting from the reduction in the assessment percentage to 31.5%.
7. If HB 920 does not apply, then schools and local governments will experience a reduction in tax revenue from both inside millage and from voted fixed rate levies (the vast majority of tax levies across the state). School emergency and bond levies and bond levies of other local governments will automatically adjust upward resulting in an increase in property taxes for residential and agricultural taxpayers. In addition, business and commercial property taxpayers would receive a tax reduction on inside millage and fixed rate levies which will reduce the revenue received by schools and local government. This reduction in both residential and agricultural as well as business and commercial property tax revenue will compromise the ability of Ohio schools and local governments to provide necessary local services.
8. A 10% reduction in school residential and agricultural property taxes for operating purposes would have been roughly $780 million in 2021. This figure does not include permanent improvement levies. Emergency levy millage was roughly 12% of total operating millage in 2022. In addition, a 10% reduction in business and commercial school property taxes for operating purposes would have been $264 million in 2021.
9. While aggregate local government property tax data is not currently available in an accessible format, understanding that schools account for roughly 65% of property taxes in Ohio implies that the local government residential and agricultural tax reduction is expected to be roughly $400 million, while the business and commercial tax reduction is estimated to be roughly $125 million.
10. If HB 920 does apply, then residential and agricultural property taxpayers will have their taxes automatically raised to offset the reduction in valuation created by the decrease in the assessment percentage to 31.5%.  In essence, HB 920 would undo the intended effect of the assessment percentage reduction. Business and commercial property taxpayers would similarly see their tax rates automatically increased and be in roughly the same position as they were prior to the assessment percentage decrease. Schools and local governments would experience a revenue loss on inside millage for both residential and agricultural as well as business and commercial property.
11. The specific fiscal impact on any school or local government and their taxpayers will depend on their mixture of inside millage, voted fixed rate levies, and emergency, substitute, and/or bond levies.

^[1] The exact percentage by which a taxpayer’s property taxes are reduced depends on the extent to which a new or replacement tax levy has been passed in that individual’s taxing district since 2014. Beginning in 2014, the rollback no longer applied to such levies, although it would continue to apply to any levies which have been renewed since then.

^[2] See the Policy Report, “Property Taxes for Funding Public Education: Ohio’s Unique Method for Controlling Tax Increases,” prepared by William Driscoll in January 2009 for the Education Tax Policy Institute (ETPI) and the KnowledgeWorks Foundation. (Note ETPI is now known as OEPI – the Ohio Education Policy Institute)

^[3] For those of you carefully reading this article, the answer to your unspoken question is, yes, HB 920 works in a way that the tax levies commonly referred to as “fixed rate levies” actually have variable rates. Nobody ever said Ohio’s property tax was easy to understand.