As the state’s budget shortfall approaches a billion dollars, a tax cut adopted four years ago is getting close attention. The small business tax cut promoted by Republican leaders has saved business owners money – but has gained a lot of criticism in the process.
The small business tax cut is targeted at partnerships, sole proprietorships, LLCs and S corporations because they report revenue as personal income. It was a 50% tax cut when it was first passed in 2013, but by 2015 it was phased in to a 100% deduction of the first quarter million dollars in income. Gov. John Kasich praised the idea just before signing the budget two years ago. “The actions that we’re taking on small business, we think, are absolutely critical. And at the same time, we have a structural balance in our budget,” Kasich said at the time.
Lawmakers touted the tax cut as a way to create jobs, though the Ohio Department of Taxation reported that almost no small businesses would bring in enough savings from that tax cut to hire a full-time worker at minimum wage.
Fast forward to the current fiscal year. Tax revenues are now $841 million below estimates, having been short for ten of the last eleven months. And that shortfall has been led by the personal income tax.
Budget director Tim Keen says the state will end this fiscal year on June 30 in the black because of underspending, primarily in Medicaid. As for what’s causing the shortfall, Keen said tax refunds have been more than expected, but that tax cuts, including the small business tax cut, have all been budgeted for and are not to blame for the deficit. “The tax gains of Ohioans has never exceeded, in the three years that we’ve done this, the estimates that we put in place,” Keen said. “So there is, I have seen no evidence to indicate to me that the small business tax cut is the cause of the revenue shortfall that we’re seeing.” Keen’s budget office sent out a document from the Ohio Department of Taxation showing that while that tax cut will have cost the state nearly $1.1 billion in 2016, it was estimated to cost $1.17 billion.
The liberal leaning group Policy Matters Ohio has been concerned about income tax cuts for some time. Research director Zach Schiller said the small business tax cut may not be the reason for the revenue shortfall, but lawmakers should consider scrapping it anyway. “This tax break, which did not exist only four years ago, is costing us a billion dollars a year without any visible result from the standpoint of increased jobs or increased hiring by new businesses in Ohio,” Schiller said. And he added that federal data shows the number of employees added in Ohio in the most recent full fiscal year, which ended last June, was lower than the number just before the small business income tax cut was enacted.
Even Greg Lawson with the conservative Buckeye Institute has reservations about this tax cut. “We do like getting rid of the income tax, but it has to be sustainable,” Lawson said. “And we would probably prefer to see across-the-board cuts rather than these specific large-scale ones.”
A similar but larger small business tax break passed in Kansas in 2012. The state has been wrestling with forecasts of a $900 million deficit, and lawmakers there repealed the tax cut and overrode Republican Gov. Sam Brownback’s veto earlier this month.
Concerned that Ohio might face a similar crisis, Democrats have now called for the small business tax cut to be suspended. Sen. Michael Skindell (D-Lakewood) said it’s creating tax breaks for people who have no intention of hiring new workers at the expense of the state. “Last tax season and this past tax season, the accountants are advising their clients to reorganize themselves in a way so that they can avoid paying any state income taxes whatsoever,” Skindell said.
What is interesting is that this fiscal year has brought the state’s two best months ever for new business filings with the Secretary of State’s office. May set an all-time record of more than 12,800 new business filings – a jump of 18% over the previous year. The Secretary of State’s office notes it’s cut the costs to file, and that doing so does not guarantee a company will begin operations, be profitable or create jobs.