Earlier this week, Republicans in the Kansas legislature overrode Gov. Sam Brownback's veto of tax increases designed to essentially repeal Brownback's massive tax cuts that failed to generate the promised job growth to pay them. Brownback's tax plans resulting in a massive hole in the state budget and was part of Brownback's "march to zero" total repeal of any and all state income taxes.
Among the tax changes the legislature made this week was a complete repeal of Brownback's exemption of "small business owners" from paying any state income tax at all. Now, you hear politicians use the term "small business owners" all the time, but there's really no set definition of it. What Republicans normally mean is privately held corporations or limited liability companies with a small number of shareholders (or in LLCs, they're called members). So while their language is meant for you to think of "Mom and Pop" stores, it's really a tax cut for private company shareholders.
In 2010, John Kasich, like Brownback, ran on a central platform of repealing Ohio's income tax, something he still readily admits is his goal. So, over the years, Kasich has passed income tax cuts year after year all the while seeking to pay for them with increases in regressive taxes like the sale tax. In 2013, Governor Kasich proposed a "small business" (aka "private shareholder") tax cut by cutting the income tax liability for such income earnings in HALF. Kasich promised that this would help small businesses save money and spur job growth. While it was projected to cost the state hundreds of millions of dollars in lost state revenues, smalll business owners, themselves, admitted it wouldn't cause them to hire anyone and would put very little money in their pocket because of the sales taxes Kasich sought to pay for them:
About 80 percent of Ohio's small-business owners potentially affected by Gov. John Kasich's proposal to slash income taxes would save $400 or less per year.
[F]or most small-business owners, like Mary Costanzo, owner of Revelations Salon & Spa in Lakewood, the individual tax savings would be a trifle, not a treasure.
Revelations, with 32 employees, has a net income of about $35,000 each year, Costanzo said. Kasich's tax cut would lead to a savings of about $650.
"Honestly, the cut is not going to do anything for me," Costanzo said, adding that with Kasich's proposal to begin taxing services like hair cuts, Revelations may ultimately take a hit.
Costanzo anticipates her salon, which is slated for $1 million in sales this year, will see about a 16 percent drop in visits if the sales tax base is expanded. Kasich has proposed lowering the 5.5 percent state sales tax to 5 percent, but applying it to a broad range of services.
"I think it's good for the state but, for my business, I think it might hurt it," Costanzo said.
James Ingalls, Costanzo's husband and a self-employed attorney, also is unlikely to see his coffers lined under the planIngalls' net income varies each year from about $20,000 to $70,000 depending on case loads, Costanzo said. He would save, at best, about $1,600 each year, and his services would become taxable under the plan.
Now, over the years since the legislature passed a form of Kasich's tax cut (they did reject Kasich's plan to impose the sale tax on legal services and other services), its become obvious that it has failed to generate the promised job growth. So, what has Governor Kasich and the Republican state legislature's response? Why increase the size of this tax cut, of course, in a sort of "Spinal Tap Turn it Up to Eleven" economic tax theory.
When a business earns a profit, the owners can basically do a combination of two things: 1) expand operations (by expanding payroll, inventory, equipment, etc.) or 2) pay themselves in the form of a dividend as a return on their investment and reward for the economic risks they have undertaken. Kasich's tax cut is only implicated under the latter. So when a business owner is looking at their profits, they can either assume more risks and expand the business, or take a draw knowing that Governor Kasich has made it exempt from the state income tax for the first $250,000, with anything above that taxed at a lower 3% rate than the 5% rate wage income is taxed.
So, what do you think happened?
Well, claims under the tax cut surged to nearly DOUBLE the amount it was projected to cost the state, the state now has an estimate $400 million deficit it needs to resolve, and job growth in Ohio has trailed the national average. In fact, Ohio's unemployment rate is presently .6% higher than the national rate and we've only netted 35,900 in the past twelve months after losing 5,700 in April, the most recent jobs report available.
Keep in mind, Ohio enacted this tax cut FULLY aware the problems it was already causing Kansas' budget since enacting it. But now, it's slowly dawning on Republicans that this might finally be the mythtical tax cut that even they realize goes too far and does more harm than good.
In other words, we were right and they were wrong.
So now, the Republicans in the legislature, like the legislators in Kanas are starting to realize that a repeal of this massive tax giveaway to business owners would go incredibly far in fixing the hole in the state budget in the most painless way possible. But they're now facing another political headache over Kasich's failed tax expirement to make Ohio like Kansas.
Today, the Columbus Dispatch reported that while only 14% of tax filers in Ohio have claimed this break, nearly half of the current state legislature appears eligible to have enjoyed this tax break. And when asked if they've been taking advantage of this budget busting tax break for wealthy business owners, the Republicans have gotten a major case of "it's none of your business."
Here's what rumored Republican State Auditor candidate Keith Faber, who helped usher its passage as Senate President at the time, had to say when the Dispatch asked if he had claimed this massive business executive tax cut:
“I’m not going to respond to that,” said Rep. Keith Faber, R-Celina, who oversaw passage of the cuts as Senate president, when asked whether he had voted out of self-interest. “It’s absurd. It’s a pretty insulting question.”
Well, what did the spokesman of the Speaker of House have to say?
"This information is confidential under both federal and state law."
So a spokesman of the Speaker says it's none of your business whether the top official in state legislature personally benefits from a massive tax cut he supported and is now blowing a major hole in the state budget that Republicans are looking to cut funding for Ohio schools and local governments to cover?
Again, this is a tax cut that is costing us hundreds of millions in lost revenue, doesn't give the intended beneficiaries enough benefit to affect job growth (in fact it could be argue it creates a negative incentive), and the state is facing a budget hole that eliminating this special tax treatment and return to treating it the same as other income would fix. The Brownback-Kasich plan is a failure. If we don't recognize that and address it as Kansas has done, maybe someone needs to ask-- "what's the matter with Ohio?"