A deduction that allows many small businesses to take the first quarter-million dollars of their income tax-free was cut back significantly in the House version of the budget. But Senators may not vote to keep that tax break.
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 – which his accountant had suggested not taking in the past, but then filed an adjustment for the last three tax years to include it.
“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 has 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, and House leaders have said that’s money that 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. 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,” Dolan said.
The tax cut was passed in 2013 and was phased in.
Zach Schiller with the progressive research group Policy Matters Ohio has 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.
And the amount of money it cost the state was also a concern for its opponents. In 2017, when it was fully phased in, it was blamed as Ohio was suffering a $900 million short shortfall in the budget, though its defenders said there was no evidence to point to the deduction as the reason.
And Democrats have long said it’s a problem. In February, House Minority Leader Emilia Sykes said during the budget process, she wanted a hard look at it.
“That costs us about a billion dollars a year. And there is an opportunity for us to revisit that," Sykes said.
And Democrats got a 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, Sen. Matt 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 percent 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. So maybe we let this play out a little bit longer,” Dolan said.
Lohmann has heard the complaints that it 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. 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,” said Lohmann.
It’s estimated that 86 percent of those who claim the tax break now would still be able to with the change.
And while businesses have said 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 percent of income earners in the state - though the Ohio Department of Taxation disputes this.