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Businesses, critics react to Kasich plan to cut income taxes

Of the major reforms Gov. John Kasich proposed in February for his two-year budget, an income tax cut seems the most likely to gain the approval of state lawmakers.

Kasich’s budget plan calls for a new education funding formula, expanding Medicaid and generating a $1.4 billion tax cut over two years paid for with increased sales tax revenues and higher taxes on oil and gas extracted from Ohio soil. But House Republicans indicated last month that taxing oil and gas and expanding sales tax to services would not be included in their plan, which they plan to unveil this week.

Kasich proposed a 20 percent, across-the-board, income tax cut over three years and a 50 percent income tax cut for pass-through entities and businesses filing as individuals. Kasich proposed paying for the two-year $4.4 billion revenue loss by applying sales tax to more goods and services and increasing severance taxes.

An income tax cut, even without the other tax changes, would be a win for the administration, Tax Commissioner Joe Testa told the Dayton Daily News. Testa said the 50 percent cut is targeted to return capital to small businesses so they can reinvest in their businesses.

“There is more than one way to approach it,” Testa said. “We think we have a good way, a fair way, a balanced way.”

Some economists disagree, saying the cost of a tax cut is better spent on state services, and income tax cuts have not led to more business growth.

“(Income tax cuts) are always sold as the magical elixir that fixes everything and it never pans out that way,” said Michael Mazerov of the Center on Budget and Policy Priorities, a national left of center think tank that analyzes tax issues.

Mazerov said companies rarely move or choose to expand out of state, but consider factors such as nearby professional contacts and infrastructure. He said revenue lost from income tax cuts would be better put to use on education and infrastructure improvements.

“In the long run, having that educated workforce is going to have a bigger economic impact than tax breaks,” Mazerov said.

Partnerships, S corps, LLCs and farms are generally taxed on income “passed through” to the individual. The proposed business tax cut would allow these businesses to forgo tax on 50 percent of their income up to $750,000. Individuals who file the maximum pass-through income would save $20,552 on their tax bill in 2013 and $17,775 each year the 20 percent cut is fully phased in.

Ohio’s business income tax cut would cost $647.5 million in the first year and $624.8 million in the second, according to revenue estimates by the Ohio Department of Taxation. About 20 percent of the savings would go to out-of-state businesses.

About 717,000 Ohio resident taxpayers — about 14 percent of income tax filers — would receive the deduction, based on 2009 tax data. For example, two brothers who own a lucrative house painting business and split $1 million profits would each be able to deduct $250,000.

Cindy Woodward, president of Early Express Services, said her Dayton printing and mailing company would benefit greatly from the tax cuts — Early Express generates about $1 million in sales each year.

Woodward said she doesn’t need to expand her 16-person workforce right now, but the money could be used to hire labor in the future or to help purchase new machinery, which can cost her hundreds of thousands of dollars.

“I don’t plan on going to Hawaii with it and whatever I do with it will support the economy,” Woodward said. “If I buy equipment, I just supported someone else’s job who made it.”

There’s nothing in the plan that requires taxpayers getting the break to reinvest in their businesses. About 477,000 of the affected taxpayers — more than half — filed as sole proprietors in 2009. The Ohio Department of Taxation does not know how many of those sole proprietors employ other people, but nationally, 85 percent of small proprietors have zero employees.

Larry Dosser, owner of Mound Laser in Miamisburg, said business owners would be silly to spend tax savings on anything besides their businesses. Dosser said he could use even a small amount to help pay to fund internships or train some of his 50 employees in high-tech skills that aren’t taught in Ohio colleges and universities.

Mazerov said only a few small businesses become big job creators and income tax cuts do little to make that happen.

“Spreading hundreds of millions of tax cuts around is not the way to stimulate the growth of these entrepreneurial businesses,” Mazerov said. “States are not equipped to identify next Facebooks and Googles. The state needs to set the environment.”

A study conducted by Mazerov shows three of the six states that slashed income tax rates since 2000 experienced economic growth. Ohio, which phased in a 21 percent income tax cut beginning in 2005, was one of the states that decreased their share of national personal income and gross domestic product.

The Kasich administration’s budget plan projects growth to remain slower than the national average in 2015.

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