Costly tax break for small business does little for Ohio

It’s nice that Ohio lawmakers appear willing to consider tightening up loopholes that are allowing wealthy folks to take advantage of tax breaks meant for the poor. Legislators always should be prepared to address a law’s unintended consequences.

Still, with Ohio’s smallbusiness income-tax deduction, it’s the intended consequences that are the bigger concern. First passed in 2013 and expanded since then, the deduction was sold with the promise that it would spur small businesses to expand and take on more employees.

What happens in practice most of the time is that people in business for themselves who have no intention of hiring anyone — lawyers, accountants and other service providers — can earn up to $250,000 per year without paying a dime of income tax. On income above $250,000, they enjoy a 40 percent cut on the rate others pay.

It has cost the state treasury $1.1 billion in a time of tight budgets, without doing much to create new jobs.

If the tax break were structured more carefully, for example to apply only to businesses that have at least one employee who isn’t a family member or those that are starting up and poised to grow, it might make more sense.

As it is, though, the tax free pass makes no distinction between businesses that are or aren’t likely to hire new employees.

Many of those who have claimed the break have business incomes so low that the benefit is a few hundred dollars or less — not likely to enable significant investment, let alone support a new job. On the other end of the scale, sole proprietors long established in profitable businesses get an enormous tax break that serves no public purpose.

Making the smallbusiness break even less supportable is the fact that lawmakers themselves are far more likely to benefit from it than ordinary Ohioans. While statewide only about 14 percent of income earners claimed the benefit in 2016, nearly half of the General Assembly’s members, many of whom are lawyers, were eligible.

Meanwhile, the liberal think tank Policy Matters Ohio reports that because it can drastically reduce someone’s taxable income, the small-business break is allowing well-off earners to claim smalldollar breaks meant for the poorest.

For example, the report said, someone who earned $150,000 on her business plus $30,000 in other income and had two dependents would have a taxable income of only $23,250, qualifying her for a $60 personal-exemption credit from the state. That small benefit is intended only for people who earn less than $30,000 per year.

Others who had business incomes of $100,000 or more were able to claim child-care and dependentcare credits meant for those who earn less than $ 40,000.

Even the staunchest defenders of the small-business tax break, including Senate President Larry Obhof, R-Medina, and the Ohio affiliate of the National Federation for Independent Businesses (a small-business lobbying group), seem inclined to fix those loopholes.

Unfortunately, Obhof appears wedded to the tax break: “Are we going to ever get rid of the overall small-business tax cut? Absolutely not; not while I’m here.”

Supporting small businesses trying to expand and add jobs is a great idea. But Ohio’s law arbitrarily excuses some earners from their income-tax obligation, and that’s neither fair nor smart.

Supporters should show what Ohio is getting for $1.1 billion.