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State Budget Praised For Tax Cut Contains Surprise Increase

Lawmakers and Gov. John Kasich lauded the state budget for its tax cuts for small business owners. But it appears the first year of the budget may actually include a tax increase for many of them. Statehouse correspondent Karen Kasler reports.  

As with any document that’s several thousand pages long, the budget is really complicated. And with so many changes to state policy big and small in it, it may not be a surprise that one change in the law may end up with an effect that’s totally opposite to the goal.  Senate Republican leadership spokesman John Fortney said Senators put into the budget a 3% flat tax above $250,000 in business income. That’s what they passed along to the conference committee, whose members had only days to work out many differences in the House and Senate budgets. 

“The only thing that did change was that first year that came out of conference committee on the small business tax cut...was instead of exempting the first $250,000 in the first year, it was 75% of that amount,” said Fortney. “The 3% flat tax, the intent never changed. The 3% flat tax was always above that $250,000 mark in income.”

But the state tax department says when you do the math, it doesn’t come out to a tax cut in the first year of the budget for many small business, but a tax hike, and it’s a big one for some of them. The current tax rate scale has some businesses paying as little as a half a percent and as much as 5.3%. The budget replaces that scale with the flat 3% tax. And in the first year of the budget, businesses can deduct 75% of their first $250,000 in income – and next year can deduct all of that. So for this year, the tax rate for many small businesses will jump on the amount that they cannot deduct. All this is interesting to those at the liberal-leaning think tank Innovation Ohio. President Keary McCarthy said it’s clearly an error, but implies that it’s one that was waiting to happen. 
“When the legislature makes last-minute changes with hardly any public input, and you have an administration whose focus is elsewhere, mistakes like this happen,” said McCarthy. “And I think it’s unfortunate, particularly for smaller businesses who are going to see an estimate of about 200% tax increase next year.”

McCarthy says he hopes lawmakers will come back later this year and fix what he calls “this obvious mistake”. Fortney said small businesses paying more in the budget is not the intent of the tax changes so the language is under review, and a fix could be coming if it’s needed. “As with anything that deals with a lot of legal verbiage, a lot of legal-ese, and then you add in taxation numbers, there can be an anomaly in there,” Fortney said. “If there is one, then the legislative leaders, I’m sure, will be getting together and talk about what they need to do next.”

The tax department said in a statement – quoting here – ”Whenever there are changes to the tax code there are inevitably anomalous impacts.” But the statement also says the budget as is reduces income taxes by $1.9 billion overall.

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