Municipal Funding
Ohio’s cities and villages rely on a diverse mix of revenue sources to fund essential services such as police and fire protection, street maintenance, parks, utilities, and other community services. Understanding how municipalities are funded is critical to understanding the fiscal challenges facing local governments and the importance of preserving local revenue authority.
MUNICIPAL INCOME TAX
For most Ohio municipalities, the municipal income tax is the single most important source of revenue and the backbone of local service delivery. Income taxes are levied on the earnings of individuals and businesses where municipal services and infrastructure are provided.
On average, approximately 70% of a typical municipality’s general fund revenue comes from the municipal income tax. Any income tax rate above 1% must be approved by local voters. More than two-thirds of Ohio municipalities use a municipal income tax.
Smaller communities often lack a strong income tax base, making them more dependent on other funding sources such as property taxes and state-shared revenues.
LOCAL GOVERNMENT FUND (LGF)
The Local Government Fund (LGF) is a key component of the partnership between the State of Ohio and its local governments. The LGF distributes a portion of the state’s General Revenue Fund to municipalities, counties, townships, and certain special districts to support basic operating expenses.
Currently, 1.7% of state General Revenue Fund collections are dedicated to the LGF, a level that remains far below the 3.68% share that existed prior to the state budget reductions enacted during the 2011 fiscal crisis. Approximately 2,300 political subdivisions receive LGF funding.
Because of their limited local tax capacity, smaller municipalities are generally more reliant on LGF distributions to fund essential services.
View our LGF white paper here.
PROPERTY TAX
Property taxes provide an additional, though generally smaller, revenue source for Ohio municipalities. Most property tax revenue in Ohio is directed to schools and townships, which limits the amount available to cities and villages.
Municipal property tax levies typically support the general fund or police and fire services, though some levies are dedicated to specific purposes such as street improvements, parks and recreation, cemeteries, street lighting, or senior services.
About one-third of municipalities do not levy an income tax, making property taxes especially critical in those communities. Nearly all of Ohio’s municipalities levy some form of property tax.
OTHER REVENUES
Utility Fees
Many municipalities operate public utilities such as water, sewer, or electric systems. Fees charged for these services are used to fund the operation, maintenance, and capital improvements of the utility systems.
Utility revenues are dedicated funds, meaning they can only be used for utility-related purposes and not for general municipal operations. These fees ensure that essential infrastructure remains safe, reliable, and financially sustainable.
Grants and Intergovernmental Aid
Municipalities also rely on state and federal grants to support specific projects and services. These funds are often used for infrastructure improvements, economic development initiatives, public safety investments, and community programs.
Grant funding is typically restricted to designated purposes and may be time-limited, making it an important but often unpredictable component of municipal finance.
Charges for Services
Cities and villages collect fees for certain non-utility services, including permits, licenses, recreation programs, and other community services. These charges are generally designed to help offset the cost of providing the specific service rather than to generate broad-based revenue.
Fines and Forfeitures
Revenue from traffic citations, court fines, and other penalties also contributes to municipal finances. These funds typically support the general fund or specific public safety-related purposes but represent a relatively small share of overall municipal revenue.
Host Community Cannabis Fund
When recreational marijuana use was made legal in Ohio through Issue 2 in 2023, the law designated that 36% of the net revenue from the state’s 10% adult-use marijuana excise tax would go toward municipalities and townships that have a dispensary within their jurisdiction.