A deduction that allows many small businesses to take the first $250,000 of their income tax-free was cut back significantly in the Ohio House version of the budget. But senators may not vote to keep the change.
Peter Lohmann runs a property management company in Columbus, employing 12 people. He said he got a big refund this year courtesy of the small business tax deduction for sole proprietorships, partnerships and LLCs. His accountant had suggested not taking it in the past, but then filed an adjustment for the last three tax years to include the deduction.
“Were it not for this deduction, I would be paying essentially the same rate as a Fortune 500 company that was headquartered here in Ohio—actually, probably even a higher rate, because they would probably get all kinds of other deductions that we don’t have access to,” Lohmann said.
Lohmann isn’t pleased that the House pulled that income threshold from the first $250,000 in income tax-free back to the first $100,000. It’s estimated that could bring in $193 million in revenue, which House leaders say can go to children’s initiatives, education and other investments.
But Senate Finance Chair Matt Dolan said he’s not ready to make that change.
“We're going to probably look to see, is that loophole real and can we correct it? Because I understand it is a tax increase,” Dolan says. “And it's a tax increase on the very people that we want to help and that is the mechanic the pizza shop, the salon, the small manufacturers.”
The tax cut was passed in 2013, then phased into effect.
Zach Schiller with the progressive research group Policy Matters Ohio said the deduction hasn’t created job growth and that most business owners who claim the deduction don’t get enough from it to create even one job.
“To me, I see it as it’s like flying an airplane over the state of Ohio and throwing money over the side," Schiller said.
Speaker Larry Householder hinted at that when he talked about why the House budget cut the income threshold back to $100,000.
“We think that when you get above that number, it starts to stray a little bit, and we’re probably taking care of some folks that are putting it in the bank or putting it in their pocket," Householder said.
The cost to the state also concerned opponents. The tax break took some blame for Ohio’s $900 million budget shortfall in 2017, when the deduction was fully phased in. Its defenders, though, said there was no evidence to point to it as the reason.
Democrats have long said it’s a problem. In February, House Minority Leader Emilia Sykes said she wanted to take a hard look at it during the budget process.
“That costs us about $1 billion a year,” Sykes said. “And there is an opportunity for us to revisit that.”
They got their change in the House budget, which passed overwhelmingly, with only two Democrats among the nine votes against it.
But as he looks at the budget, Dolan said he’s not convinced it needs to be altered—especially since new numbers from the Office of Budget and Management show income tax collections are up nearly 4% for the tax year.
“If it's costing the state all this money, how come we have a great surplus? So, make sure when you pay attention – things are working you don't necessarily need to make drastic changes because they're working,” Dolan said. “So maybe we let this play out a little bit longer.”
Lohmann heard the complaints that the deduction benefits mostly people who aren’t using it to create jobs. But he says it’s still helping small businesses owners across the state.
“They’re just people who happen to own a business in the neighborhood,” Lohmann said. “Some of them are doing fine. Some of them are actually making worse than they would if they just went and got a normal job. I do think it’s a little bit unfair that we’re lumping in this small business owner tax deduction with a lot of the big write-offs that make headlines that people take issue with.”
It’s estimated that 86% of businesses that claim the tax break now would still be eligible under the change.
While businesses say it’s not fair to call the deduction a giveaway to the rich, it’s been estimated that nearly all those who claim that deduction are in the top 10% of income earners in the state—though the Ohio Department of Taxation disputes this.