A tax story for tax day


Today is tax day -- the day our state and federal income tax filings are due. You may not know that the state income tax bill you have to pay is actually 4.2 percent higher than the tax rates that were in effect throughout almost the entire year of 2009. How can this be? Let's have a look and put this situation into some context.

Right before Christmas of last year a last-minute bill was passed into law in order to over-ride the existing law that set Ohio's state income tax rates for 2009 and beyond. This had the effect of increasing what state income tax payers owe for last year by 4.2 percent. But isn't that a retroactive tax increase?  You would think.  But interpretation of Ohio's income tax laws have held that withholding and estimated payments throughout a calendar year are just estimates, and that the tax year doesn't close until all income has been earned for the year. That keeps the window open for changing the rates -- up or down -- until the very last day of the year ends.
But the tax withholding tables for last year were not changed, because the year was already almost over. That means that, as we file our state income taxes for last year, we will either be writing a check to the state treasury for 4.2 percent more than withholding and estimated payments were based upon, or that our refund will be lower than was expected by 4.2 percent.
More negative news.  The withholding rates for 2010 have not been changed either.  They continue to be 4.2 lower than the tax rates in place for this year. Here is what the Ohio Department of Taxation has posted in its web site:

"Special note: The state income tax withholding tables have not changed for 2010. The tables issued effective Jan. 1, 2009 will continue to apply to 2010 and future years." [you can verify this: here ]

If readers are scratching their heads over this disparity, I would suggest that this inaction is meant to strengthen Governor Strickland's argument that the state income tax rates were not increased right before Christmas, they were just "frozen" at the 2008 rate for two years.  The trouble with that argument is that the 2008 rates were 4.2 percent higher than the ones in law for 2009 and beyond.  Those rates were changed on December 22, 2009 when HB 318, which was passed over my vocal opposition, went into effect.  This law over-rides the tax rates in law for 2009 and 2010 by saying that the 2008 rates will apply for those two years.  Then 4.2 percent lower rates, that were scheduled to be in effect for last year and this year, are supposed to take effect.
You can make your own decision on whether your state income taxes were raised by this action.
How and why did this whole controversy develop in the first place?  That story is the one I plan to tell in the next day or two, so stay tuned!