Both the Ohio House and Senate appeared ready to narrow an ineffective and wasteful tax deduction for business income. As part of its two-year state budget plan, the House proposed slashing the $1.2-billion-a-year tax break by roughly one-half. The Senate called for a reduction of nearly one-third.
Yet when lawmakers sent the final budget plan to Gov. Mike DeWine, the conference committee completing its work 17 days after the initial deadline, the tax break had survived almost entirely intact. What happened to the apparent consensus about shrinking its size?
Conference committees, especially the budget kind, are all about compromise. The give-and-take often involves more than bridging differences on a single matter. A chamber may concede in one area to gain elsewhere, say, in health care, another part of the budget in which the House and Senate took divergent paths.
Recall that the governor urged lawmakers to forgo any action on the tax break, which exempts the first $250,000 in “pass through” income from taxation. Pass-through income covers business profits that flow to the owner and are taxed as individual income. The tax break includes another element. Any such income above $250,000 is taxed at 3 percent, or less than the 4.9 percent applied to others.
The House approved lowering the tax-free threshold to $100,000 and ending the favorable 3 percent rate. The Senate agreed with the latter, and left the income threshold untouched.
In the end, the budget plan signed by the governor keeps the $250,000 and the 3 percent. It also contains a new wrinkle that makes the tax break worse, or at least highlights why it deserves to be axed entirely.
Republican legislative leaders decided to tax all the lawyers and lobbyists. The new budget declares that lawyers and lobbyists with pass-through income no longer qualify for the tax break.
That may sound appealing. The two professions hardly rank at the top of popularity lists. Those legislative leaders looking to salvage something of their original consensus can claim a step forward, right?
Scott Oelslager, the House Finance Committee chairman, acknowledged as much, telling reporters the exclusion of lawyers and lobbyists was a bid to address concerns about whether the tax break is delivering the job creation the Republican majorities promised. He cited the two professions as areas “where we got a lot of negative feedback” about the tax break.
The Ohio State Bar Association was quick to cudgel the exclusion, arguing, correctly, in a letter urging the governor to veto the provision that this episode amounts to making tax policy “on the fly without a full understanding of the benefits or consequences.” There was no testimony about the change, let alone adequate vetting or thoughtful basis for singling out the two professions.
State Sen. Matt Huffman, an attorney and a Lima Republican, warned that businesses with an in-house counsel would be excluded. He added that out-of-state attorneys working here still would benefit from the break. Consider the irony, as the bar association did, that lawmakers rely heavily on attorneys for guidance.
The work of lobbyists actually enjoys constitutional protection, the First Amendment holding that Congress “shall make no law … abridging … the right … to petition the Government for a redress of grievances.”
That isn’t a case for avoiding taxation. Rather, this episode echoes how poorly conceived the pass-through deduction has been from its start in 2013.
Proponents have yet to show that the tax break has added to job creation and economic growth — while diminishing resources for leading priorities, from early education to public works. Most with such business income have no employees, and do not intend to add workers. Policy Matters Ohio notes that in 2016-17, Ohio had more than 1 million pass-through businesses. Fewer than 250,000 companies paid the unemployment tax.
Then, there is the unfairness in play, two accountants, say, each performing the same job and receiving similar compensation yet one working for a pass-through business and paying far less in taxes. Larry Householder, the House speaker, adds that Ohioans already get a deduction for new hires.
Householder launched the effort to pare back the tax break. He vows to keep trying, and now he has lawyers and lobbyists making a fuss, arguing for their own cause yet exposing one really bad break for the state.
Douglas is the Beacon Journal/Ohio.com editorial page editor. He can be reached at firstname.lastname@example.org.