Chris Ferruso of the small-business group NFIB/?Ohio urged lawmakers last week not to scale back a tax break that allows those earning up to $250,000 in business income to pay zero state income tax, while also getting a 40% reduction for income over $250,000.
He said it’s inaccurate to call the pass-through tax deduction is a "giveaway to the rich" or say that Ohio’s tax system tips in favor of small business owners.
As he finished, Rep. Bob Cupp, R-Lima, told Ferruso that, according to state tax data, 86% of current filers would still pay no income tax under the House plan to roll back the deduction to $100,000.
"That may be accurate," Ferruso responded. "However, I would say what about those other 14% who are also enjoying this deduction and investing in their businesses?"
So who are those 14% earning more than $100,000 in business income who would start paying some state income tax under the House-passed, two-year state budget? Here’s what we know, per the Ohio Department of Taxation:
• Nearly all of them are among the top 10% of earners in the state, based on 2017 tax data.
• All could still deduct $100,000 from their taxable income under the House plan.
• About 87,000 filers, roughly 13% of all who took advantage of the business tax deduction, earned more than $250,000 in total taxable income, both from business and non-business sources. Nearly 40,000 earned more than a half-million dollars, and 3,227 earned more than $5 million.
• Of the nearly 44,000 filers who claimed at least $240,000 in income that qualified for the deduction, 34% do not live in the state.
• The number of out-of-state business owners and investors who avoid Ohio income tax through the deduction grows considerably as incomes get higher. Of those with $100,000 or less in business income, fewer than 5% are out of state.
• Those with $1 million in taxable business income are saving about $45,000 per year under the current system.
• A qualifying business owner with $300,000 in taxable income currently pays roughly the same amount of state income tax as someone with $60,000 in non-business income.
"We still recognize that small businesses are out there creating jobs," said Speaker Larry Householder, R-Glenford. "We were trying to get away from the exceptions we think are out there, the people who are taking advantage of it without creating jobs."
House Democrats, nearly all of whom voted for the budget, made rolling back the business tax deduction a priority this session.
The business deduction rollback was part of a tax package that included the elimination of income taxes for those earning less than $22,250, and reducing all income tax brackets by 6.6%. For someone with $75,000 in taxable income, the new tax cut would save about $160 per year.
Eliminating the business deduction, and the special 40% tax cut on business earnings over $250,000, are generating the most controversy, equating a $528 million per year tax increase on wealthier business owners.
Dave Supelak, a CPA representing the Greater Akron Chamber of Commerce, said many in his client base would "lose substantial benefit" if the lawmakers roll back the deduction. "The proposed changes do not support positive business."
In the past, supporters have said the tax deduction allows business owners to hire more people and purchase new equipment — claims that opponents found dubious, considering at $250,000 the savings is about $10,000.
Asked last week in a House committee what businesses are doing with the money, Supelak said, "It’s difficult to say the quantity of persons that it benefits, but generally it is increasing a level of pay to current staff."
Rep. Jay Edwards, R-Nelsonville, has challenged those defending the business tax breaks, including those who say it’s for small businesses. Edwards stresses that the break goes to owners of companies regardless of size, including sole proprietors who employ no one.
Business owners can just as easily spend the savings on a family vacation as on the actual business, he said.
"I’m all about small business. I come from small business," Edwards said. "But I think it’s something we really need to revise … so it is tied to employment, tied to keeping it within the business. Right now, it’s just a free $250,000 and there’s no requirement for employees."
Rep. Gary Scherer, R-Circleville, a licensed CPA, said he was "very comfortable" reducing the business tax deduction from $250,000, though he thinks $100,000 might be too low.
"Certainly a business income deduction of some sort for pass-through entities makes very logical sense in that those businesses pay both the CAT (commercial activities tax) and personal income tax on business income, as opposed to C-corporations, which only pay the CAT."
As the Senate considers the budget, Scherer said there are other alternatives to consider. He said it could limit use of the deduction by certain service professions, such as doctors, accountants and other service providers who are major job producers, or give pass-through businesses a credit against the CAT tax.
As with all across-the-board cuts, the wealthy would see the biggest dollar benefit. Someone with $1 million in taxable income would save about $3,100, growing to a $16,000 savings for someone earning $5 million.
Wendy Patton of the liberal Policy Matters Ohio nonprofit says the House budget contains much-needed spending boosts for education and children’s services.
"But it then missed a golden opportunity to make key investments the state needs by spending the additional revenue, and more, on an ill-advised, across-the-board income-tax cut that will do little for most of the poorest Ohioans," she said.