As the budget process rolls on in the Ohio General Assembly, one of the main sticking points has become the Ohio business income tax deduction enacted just a few years ago. For tax years 2016 and onward, business owners could deduct the first $250,000 of “business income” earned in the ordinary course of their businesses and pay a flat 3 percent tax rate on income earned above that amount. The business deduction and other proposals to lower personal income tax rates have become a major issue as legislators work to enact the two-year budget bill.
The budget bill (House Bill 166) that the Ohio House of Representatives passed reduced the deduction to the first $100,000 of business income and repealed the preferential 3 percent tax rate on income above that threshold. The House bill also included a tax break for personal income tax rates, eliminating the bottom two tax brackets and reducing the other marginal rates by 6.6 percent.
Upon arrival in the Ohio Senate, these tax measures immediately took center stage in the budget debate. Business groups including the Ohio Chamber of Commerce and the National Federation of Independent Businesses pushed to restore the business tax deduction, while Policy Matters Ohio issued a study critical of the deduction.
The Senate unveiled its proposal for the business tax deduction on June 12, 2019. The Senate version would restore the deduction for the first $250,000 of business income, but would eliminate the preferential 3% tax rate for business income above that threshold, with the change taking effect Jan. 1, 2020. With respect to personal income tax rates, the Senate bill eliminates the bottom two tax brackets and cuts all remaining brackets by 4 percent for 2019 and 8 percent for 2020. The deduction and tax rate reductions are justified, in part, due to optimism about tax receipts due to higher than expected receipts for the current fiscal year through May.
Provided that the Senate passes something similar to its initial proposal, as discussed above, we can expect the business tax deduction and personal income tax rates to be a sticking point in the conference committee for the budget bill. House Speaker Larry Household said there may be a “difference in philosophy” between the House members and their Senate colleagues. Senate leaders, on the other hand, believe the deduction is a meaningful incentive to encourage businesses to hire employees and make capital investments in Ohio. We are following the developments on these issues as they occur.