Keith Faber signaled early his preference for a tax cut targeted at small business in the new two-year state budget. On Tuesday, the Senate president and his Republican caucus delivered. They cast aside the House plan for a 7 percent cut in state income tax rates. Instead, they proposed a 50 percent exemption on the first $750,000 in small business profit. Faber touted the attention paid to “those 95 percent of the creators of jobs.”
The proposal partly follows the thinking of John Kasich. The governor has called for similar tax relief for small business, along with an overall 20 percent reduction in income tax rates. The Senate puts the cost of the business tax cut at $1.4 billion for the biennium. Will the idea result in a significant boost for job creation?
The hard analyses provide strong reasons to be doubtful. Policy Matters Ohio noted recently that the average small business owner would reap small savings, a tax reduction of roughly $850, or hardly a sum necessary to add jobs. The U.S. Treasury looked at small businesses and found that just 11 percent of taxpayers reporting business income were actual businesses with employees other than the owners.
In other words, many small businesses are solo operations, the owner unlikely to add positions.
Among the beneficiaries of the business tax cut would be larger businesses, passive investors with little role in decision-making and partnerships involving lawyers, accountants or other professionals. An invitation would exist to revamp the structure of a business to take advantage of the distinction between income and salary, risking distortions and loopholes. Two taxpayers with similar incomes could be treated much differently under the proposal.
No surprise that the big winners would be those at the highest income rungs. They already pay a smaller share of their income in state and local taxes than those in the middle quintile and at the bottom. Then, there is the practicality. Ohio has reduced taxes in recent years, income tax rates by 21 percent and the overall burden on businesses through the commercial activity tax. Yet the state has lagged behind the nation in small business job growth during that time.
Consider, too, that a further reduction in state tax revenues would come as schools are struggling to make ends meet, reducing staff levels and cutting programs. College tuition rates still are too high. The governor recently lamented the failure of the state to keep its promise of decades ago about supporting a community safety net for those suffering from severe mental illness.
Such investments are crucial to the quality of life in the state, not to mention its prospects for economic growth in the long term. In that way, can Ohio really afford to reduce tax rates yet again, especially when the return appears so iffy?