As the Ohio Legislature wrapped up the Ohio FY 16-17 budget (HB 64) in June, they rushed to include a tax cut for business owners that was criticized by progressive and conservative economists as a poor strategy to create jobs, likely to lead to tax avoidance, and a major tax loophole. The tax cut will exempt business income from state income tax – up to $250,000. Income above that will be taxed at a flat 3% rate.
It is no surprise that in the rush to provide more tax cuts, they legislation was poorly drafted. In calendar year 2015 only 75% of business income will be tax free. That means the other 25% will be taxed at a 3% rate – raising taxes on most small businesses.
The legislature, through HB 326 and SB 208, will apply the progressive tax structure to that 25% of income through the current tax code. They unintentionally have shown the reality of what a flat tax means – massive tax cuts for the wealthiest Ohioans, while small businesses pay more.
If a flat tax is applied to all Ohio taxpayers, we can expect fewer resources invested in our schools and communities, higher taxes on most Ohioans and massive tax cuts for the wealthiest.