Hours before the expiration of the 17-day temporary budget extension passed on June 30, the legislature finally agreed on a compromise version of HB 166, the state’s biennial budget. One of the main issues holding up agreement between the House and the Senate was whether or not to raise taxes on small business owners.
In the end, the small business tax hike was largely avoided. This is a significant victory for small businesses and Ohio’s economic competitiveness.
When the budget came out of the House in early May, it contained a plan to raise taxes on small business owners by $528 million per year by reducing the amount of business income a pass-through business can deduct from $250,000 to $1000,000 and eliminating the flat 3% tax rate on any remaining business income. The business income deduction (BID) was created in 2013, in order to incentivize small business owners to reinvest in their companies.
The Senate-passed version, finalized in June, restored the deduction level to $250,000 but also would have eliminated the flat 3% tax rate. Neither the House nor the Senate was initially willing to compromise on this difference, thus contributing to the missing of the deadline to complete the budget before the fiscal year officially ended at midnight on June 30.
As the negotiations dragged on over the past two weeks, both sides held firm. Ultimately, Gov. Mike DeWine helped break the impasse by insisting that there be no changes to the BID. His leadership was instrumental in preserving the BID.
There was, however, one last minute change to the BID. The legislature did exclude lawyers and lobbyists from claiming the deduction. Because this happened so late in the process and without any opportunity for the Ohio Chamber to review and provide feedback. We are still evaluating the impact of the exclusion.
The final version of HB 166 resolved all the other differences that existed between the House and Senate, and passed the House earlier today by a vote of 75-17 and the Senate by a vote of 29-1. Gov. Mike DeWine must sign it before the budget extension expires later tonight, which he has indicated he will do – though he is also expected to use his line-item veto authority to remove provisions to which his administration objects.
The budget contains numerous other changes that will help impact Ohio’s business climate, but the BID was the most consequential. Several of these changes were also points of difference between the House and Senate, and the Ohio Chamber is still in the process of determining whether or not the other issues impacting employers were resolved – like the BID was – in a favorable way.