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1 Scott Drenkard, Suggestions for Improvement in the Ohio FY 2016-17 Budget 1 (2015)

handle is hein.taxfoundation/suimohbu0001 and id is 1 raw text is: 1325 G Street N.W., Suite 950 Washington, DC 20005 202.464.6200 www.TaxFoundation.org Suggestions for Improvement in the Ohio FY 2016-17 Budget Scott Drenkard Economist & Manager of State Projects, Tax Foundation Committee on Ways & Means, Ohio House of Representatives March 4, 2015 Chairman McClain, Vice-Chairman Scherer, Ranking Member Cera, Members of the Committee: My name is Scott Drenkard, and I'm an economist and manager of state projects at the Tax Foundation. For those unfamiliar with us, we are a non-partisan, non-profit research organization that has monitored fiscal policy at the state and federal level since 1937. We have produced the Facts & Figures handbook since 1941, we calculate Tax Freedom Day each year, we produce the State Business Tax Climate Index, and we have a wealth of other data, rankings, and analysis at our website, www.TaxFoundation.org. I'm pleased to testify today on the fiscal year 2016-17 budget proposal as included in H.B. 64. While we take no position on legislation, I hope to share some of our research on these topics and insights from across the country. Excluding Pass-through Income from the Income Tax is Costly and Will Not Deliver on Economic Growth At the center of the Kasich budget is a proposal to further decrease all individual income tax brackets, bringing the top rate from the current 5.333 percent to 4.1 percent. I admire the stick-to-it-ness that the governor has displayed with regard to reducing the individual income tax rate over time. However, a costly error in recent proposals to reduce the income tax burden has been the inclusion of hefty deductions for pass-through businesses like LLCs, S-corps, and sole proprietors. In 2013, the deduction was set at 50 percent for income up to $250,000; then in 2014, the deduction was boosted to 75 percent of income, before reverting back to 50 percent at the start of this year. This year's proposal doubles down on this approach, excluding 100 percent of pass-through income from taxation up to $2 million in gross receipts. The idea for excluding small businesses from tax liability is to promote job creation and growth in the state, but the unintended consequence of this policy is that it allows wage earners to change their structure to avoid paying any income taxes. For example, if they enacted this policy where I live in Washington, D.C., I would just go to my employer, the Tax Foundation, and ask them to start paying me as a contractor, then file my individual income taxes 1