What Our Municipal Income Taxes Can Tell Us About Smart Economic Development

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Throughout this electoral season, municipal candidates are asked many questions about how we will revitalize our business districts and develop our local economy. Meanwhile, in recent years, our city’s Economic Development department has focused much of its attention on building mixed-use development—mainly retail on the first floor and apartments on the upper floors.

Businesses near these in-construction and proposed developments overwhelmingly support these projects, arguing that the new residents who move into this new housing will grow their businesses while also bringing increased income tax revenue for Cleveland Heights. But I have been wondering:

Is our city’s Economic Development department’s dominant focus on building more retail spaces and rental housing the best approach to developing our local economy?

Do we want to attract new residents?

Yes, we absolutely do. Particularly if we want to continue to receive large federal funding packages (as we are getting from the American Rescue Plan), we don’t want to lose our classification as an entitlement city, which is a city with a population over 50,000. Although our population has been under 50,000 for about 20 years (shhhh! Don’t tell Washington, DC!), we should do what we can to move our numbers back up.*

This is particularly pressing as we face major infrastructure expenses just around the corner as we begin to comply with our consent decree with the EPA. As Congress and the Biden administration push through more legislation as part of the Build Back Better agenda, more federal funds will become available for repairing and modernizing our nation’s infrastructure. And we need as much of that money as we can get to cover the expenses to remediate and expand our sewer system so we can minimize how much our residents need to pay through increased sewer bills and perhaps other taxation.

Is getting more people to live in Cleveland Heights the most effective way to increase our city’s revenue from income taxes?

Actually, no. Increasing the number of people working in Cleveland Heights will give us the biggest bang for our buck. Let’s look at how Ohio municipalities collect taxes to see what this might tell us about smart economic development for Cleveland Heights.

In Ohio, municipal income taxes are collected for the city where you work, usually by deducting from employees’ paychecks. And if you work in one city and live in another, you may or may not owe additional income tax to the city where you live.

This is because cities have the option to give their residents a “residence tax credit” if they work in and, therefore, pay income taxes to another municipality. Some cities (like South Euclid and East Cleveland) offer no residence tax credit, some (like Cleveland Heights, Shaker Heights, and Lyndhurst) offer a 50% tax credit, and some (like Beachwood, Solon, Euclid, and University Heights) a 100% credit.

Cleveland Heights has a tax rate of 2.25%, with a residential tax credit factor of 50%.

Let’s say, for the sake of example, that you live in Cleveland Heights and work in Beachwood and that you have taxable income of $50,000. Throughout the year, municipal tax for Beachwood is deducted from your paycheck. Beachwood’s income tax rate is 2%, so over the course of the year, you pay $1,000 to Beachwood.

When it’s time to file your taxes, you owe a residential income tax to Cleveland Heights, which has an income tax rate of 2.25%. On $50,000 of taxable income, this amounts to $1,125. However, Cleveland Heights has a 50% residence tax credit, which allows you to reduce what you owe to Cleveland Heights by 50% of what you have already paid to the city where you work. This means you would owe Cleveland Heights $1,125 – $500 = $625.

In this hypothetical example, of the $1,625 you paid in municipal income taxes ($1,000 to Beachwood and $625 to Cleveland Heights), only about 38% went to the city you call home to help pay for the services needed to provide you and your family with the quality of life you want.

What does this mean for our city’s revenues and budget?

Let’s continue with the Cleveland Heights–Beachwood comparison.

In 2019, the median household income for Cleveland Heights was $57,768, and for Beachwood it was $89,190. So it stands to reason that Beachwood would collect more in dollar amount per household than Cleveland Heights. But while Beachwood’s average household income was 54% more than that of Cleveland Heights, the amount of income tax revenue collected divided by the number of households was actually about 424% more than that of Cleveland Heights.

For 2019Income tax revenueHouseholdsMedian household incomeAverage tax revenue per household
Cleveland Heights$29,553,13819,074$57,768$1,550
Beachwood$38,531,7584,746$89,190$8,119

Let’s remember that Beachwood’s income tax rate (2%) is LOWER than that of Cleveland Heights (2.25%). And while Cleveland Heights gives its residents a 50% tax credit, Beachwood gives its residents a 100% tax credit.

The reason for this exceptional difference in our city’s income tax revenue is that there are a lot of JOBS in Beachwood. And Cleveland Heights is, as we say, a “bedroom community”—meaning we have more residents than jobs.

Sure, we can shrug our shoulders and accept that we’re a “bedroom community.” But with our 11 commercial districts, our creative and enterprising residents, and the many people who run small businesses within their homes, we have the perfect conditions for building a dynamic, resilient local economy made up of small and medium-sized businesses. This will not only offer the goods and services our residents require and desire, but will also create more jobs here.

And more jobs in Cleveland Heights will mean more tax revenue. Which will mean improved city services and public amenities. Which will mean a higher quality of life. Which will help us attract new residents and fill up not only our new housing but also our vacant houses throughout the city.

To be clear, I’m not suggesting we mimic exactly what Beachwood has done to develop their local economy. For multiple reasons, it wouldn’t work for us. Plus, I want Cleveland Heights to be Cleveland Heights.

What can we do to grow our local economy in a way that makes it dynamic and resilient?

If you like easy fixes and silver-bullet solutions, you won’t find them here. If we want our local economy to be . . .

Dynamic—a diverse range of high-quality businesses, including retail (everything from basic necessities to unique finds), food service (from quick but delectable to upscale dining), contractors (plumbers, electricians, etc.), professional services (accountants, attorneys, medical providers, marketing and communications, etc.), and more;

. . . and . . .

Resilient—lots of businesses means we’re not reliant on one or two employers for sustaining much of our economy, and the more local businesses we have, the more capital circulates in our local economy rather than being siphoned away to corporate headquarters in some far-off city;

. . . then we need to create a long-term strategy that involves our mayor’s office and city departments, our city council, our community development corporations (CDCs) and other area nonprofits, our special improvement districts (SIDs), our existing businesses, and other community partners working together—all through a coordinated effort led by a clear vision for our economic potential.

How can we build the thriving local economy we need?

This work begins by recognizing that Cleveland Heights is teeming with possibility. We must nurture and leverage our creativity, our strong sense of community, and our unique location and topography to grow our local economy in a way that reflects the best of what Cleveland Heights can do.

This work and coordination includes:

  • Our mayor should work with our Economic Development department to transition from focusing primarily on developing retail space and new housing to a robust strategy for economic gardening that will empower and assist our current businesses that want to grow and remain in Cleveland Heights, and will help local entrepreneurs start businesses with a strong foundation and plan for the future.
  • Our Economic Development department should work with our CDCs and area nonprofits to better align strategies, taking greater advantage of programs already available for placemaking, assistance for minority- and women-owned businesses, programs for micro-lending, and more.
  • Our Economic Development department should work with SIDs and business owners from every commercial district, as well as conduct quality community engagement with surrounding residents, to identify each district’s distinct needs, potential, and identity. It should then develop plans with each district for placemaking and branding/marketing, as well as accessing resources and encouraging businesses to work together to be more intentional in shaping their district’s growth trajectory.
  • Our city council should work with area business owners to better understand how our current codes, regulations, and policies are affecting their ability to prosper. Which programs should be expanded? What programs can we add? What municipal codes and regulations make it more difficult for small businesses to succeed? We can then pass legislation to amend our codes and create more programs to make our city as small-business-friendly as we can be.
  • Our city council and mayor should work to improve other vital infrastructure necessary for a successful local business ecosystem, including improved and more affordable broadband, better public transportation, increasing walkability and bike-ability, workforce development, and public safety.
  • Our mayor and city council should work together and with local nonprofits to attract more people to come here, focusing on investing in amenities such as recreational facilities, quality outdoor and community spaces, cultural offerings, public art, and so on.
  • Our city’s Communications department should advise and coordinate the marketing and communications strategies for everyone involved in this work—not just what the city is doing but also the CDCs, SIDS, commercial districts, individual businesses, area nonprofits, local artists, and more. There should be a unifying messaging tone as well as Cleveland Heights pride that comes through all marketing and communications for our local economic development work.

While all of this work begins with an aligned vision for the kind of local economy we want, our success depends upon collaboration, coordination, and cooperation. There is no room for rivalries or winner-take-all mindsets. It requires listening, compromise, and relationship-building.

We need leadership across our city ready to create a multi-faceted, long-term strategy for developing our local economy, and then we need to work together positively to make it happen.

Footnote:

* With the Great Lakes region increasingly touted as a “climate refuge” as living conditions become more and more threatening on the east and west coasts, we may start seeing an influx of new residents from these areas sooner than we imagine. This is one of the ways we need to prepare for climate change impacts—making sure we have quality housing available. This includes not only building new housing but also repairing and renovating our aging housing stock.

But it’s also important to note that our region is experiencing its own climate impacts, particularly increased precipitation and severity of storms. This not only makes the need to repair and expand our sewer infrastructure all the more pressing but also demands that we invest in green infrastructure wherever possible to help us manage stormwater. This includes everything from restoring wetlands to encouraging property owners to install rain gardens.

Sustainable development requires an understanding of multiple factors that will need accommodation. It means figuring out how to build density (which will also requires investments in improving walkability and public transportation) while simultaneously working with our natural environment rather than against it so that future generations here will not need to seek another “climate refuge.”