Senate unveils version of State Operating Budget, LLC Loophole mostly restored

Ohio

COLUMBUS, Ohio (WKBN) – With less than three weeks to go before a budget deadline is reached, the Ohio Senate Finance Committee accepted its substitute bill for the State Operating Budget Tuesday afternoon. 

The substitute is the byproduct of weeks of work by republicans to allocate billions of dollars in tax revenue into the programs and services the people of Ohio need and depend on for help. 

“This is the most important piece of legislation that we will consider in this two-year cycle,” said Senate President Larry Obhof at a news conference after the substitute budget was accepted by the committee. 

The substitute bill makes massive changes to the budget, cutting things out that the Ohio House of Representatives put in. It adds in new things that neither the House nor the governor had proposed, as well as agrees with either the House, the governor, or both on a number of other expenditures.  

One of the biggest changes was in taxation. 

The Ohio House took the Business Income Deduction (BID) and trimmed it back. 

The deduction, introduced a few years ago, was meant to spur job growth and the economy, but critics have not seen that happening. 

The BID has come to be commonly referred to as the LLC Loophole because it allows someone to start an LLC and claim the first $250,000 of “business” income as tax-free and not pay the state a dime in taxes. 

Meanwhile, others get to foot the bill for state programs and services through our tax dollars. 

Currently, the LLC Loophole also carries a flat 3% tax on all income above and beyond $250,000, which is actually lower than the normal personal income tax bracket equivalent.

Critics of the deduction say wealthy individuals who have created their own LLC, with an employee count of none, are not taking the money they save from not paying taxes and reinvesting it in their business. Instead, they are lining their pockets with it. 

The Democrats at the Statehouse have been hollering about this for years, and now some republicans are listening or perhaps hearing it from their constituents and decided $250,000 is a bit high. 

They trimmed the program back to only the first $100,000 being tax-free, made changes to the eligibility requirement and removed the 3% flat cap on taxes, immediately making them subject to higher tax brackets. 

It was estimated that 85% of the individuals that used the deduction would still have benefited from it at that level. 

Additionally, the House decided to make anyone who makes less than $22,250 exempt from having to pay state income taxes while reducing the marginal tax rate for everyone in the remaining 5 tax brackets by 6.6%.

The Senate rolled almost all of that back completely on Tuesday. 

First, republicans in the Senate nixed the reduction of the BID from $250,000 to $100,000, so that a person making just north of $200,000 will still not be paying state income taxes, while some are dragging in 34,500 at their nine to five will. 

Second, instead of removing the 3% flat tax cap immediately, they left it in place for the first year of the biennial budget and in 2020, it is removed. 

Third, they left the changes to eligibility for the BID (aka LLC Loophole) made by the House untouched. 

Fourth, they played with tax rates and years to make it so only those making $21,750 or less will not have to pay state income taxes until 2021 when it would revert to normal tax bracket levels. 

Finally, instead of cutting marginal tax rates for the rest of us by 6.6% period, full stop, end of sentence. Senate republicans decided to go with a 4% cut in the first year, followed by another 4% cut in the second year (for a total of 8% over current law). 

A fiscal analysis of this tax plan for the House version showed an overall revenue loss for the state at just over $100 million dollars for both years of the biennium (roughly $216 million total). 

The Senate version reduces the amount of revenue the state has to work with by $340 million and $380 million in the two-year cycle for a total of $720 million dollars in lost revenue. 

That is $720 million that will not be able to be used on the services and programs that are supposed to be helping Ohioans. As Senate President Larry Obhof explained, these were the reason lawmakers were sent to the Statehouse in the first place. 

And yet, it is also $720 million dollars that private individuals with LLC businesses will have available to them to do with as they please. They could use it to grow their business by hiring employees, if they don’t have any yet; or giving them raises if they do.  

They could buy expensive equipment, like a luxury car as a corporate vehicle, or fine office furniture for their home-office as a business expense. Clients sometimes need to sit, so chairs are needed. It has to look nice to make a good impression, and that adds up.

For some, all of that is worth not having $720 million to use on state programs and services.

They could also just pocket the money saved by the deduction if that tickles their fancy. 

Taxation is but one of the many, many things in the State Operating Budget.  

With a 663-page document to sift through, we will continue to look for other areas the Senate, the House, and the governor are either at odds over or in agreement with.

Meanwhile, the public is being given an opportunity to weigh in on the budget. For the next few days the Senate will entertain those who come down to the Statehouse to have their voice be heard. 

Then, they will make any final changes they decide are necessary to the budget before passing it out of committee and sending it to the floor of the Senate. From there, it will pass and be sent back to the House, which will inevitably reject the changes, forcing a committee to be formed to negotiate their differences. 

When they finally work it all out, both chambers will vote on it again and ship it off to the governor for his signature by June 30.

He gets the final say on all items, and if he sees something he doesn’t like he can cut it out of the budget. This would trigger a mechanism that would allow the lawmakers to try to override such a veto.

Republicans have the numbers to potentially override the governor — barely in the House, but the numbers are there. 

As for the LLC Loophole, DeWine sided with Obhof recently on the importance of the deduction.  

Right now, the odds don’t look good for the House of Representatives getting the way they initially hoped on this one. 

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