Opinion: Deduction is no 'giveaway to rich.' Cutting it would stymie small businesses
Clara Osterhage has been a small business owner for the past 27 years, and currently owns hair salons located throughout Ohio employing over 600 licensed hairstylists. She serves on the National Federation of Independent Business Ohio Leadership Council, which serves over 21,000 Ohio small businesses.
Small business is the backbone of the economy.
You frequently hear this adage from politicians and media, particularly during election season. Ohio is home to nearly a million small businesses. These small businesses employ nearly half of the private sector workforce and are responsible for nearly 50% of private sector payroll.
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Many working Ohioans were given their first paycheck from a small business. They are our friends, neighbors, and sponsors of little league teams in every corner of Ohio.
Elected officials can enact policies that help our smallest enterprises thrive or do just the opposite and stymie growth and innovation. Fortunately, Ohio has embraced the former.
Ohio overhauled its tax system in 2005, instituting the commercial activity tax. At the same time, personal income rates were reduced, and the tangible personal property tax was phased out — good policy for individuals and businesses of all sizes.
The package also included a phase-out of the corporate franchise tax, a tax paid by incorporated businesses for the privilege of doing business in Ohio. The eventual elimination of this tax benefited Ohio’s larger enterprises, but businesses structured as pass-through entities - nearly 80% of small businesses - were left to pay both personal income tax and the commercial activity tax.
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In 2016, the Ohio General Assembly recognized this disparity and fully phased in the business investor deduction. This allows pass-through entities to deduct the first $250,000 of business income from their state tax liability, meaning small businesses can utilize those resources to reinvest in their businesses.
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The business investor deduction sends a strong signal to entrepreneurs that Ohio policymakers believe in them and their ability to spur economic growth. In fact, before the economic headwinds coming out of Washington D.C., Ohio was seeing record numbers of new business start-ups year over year. When policymakers foster a climate supporting entrepreneurs, the ripple effects are incredible.
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While a popular target from interest groups who label the business investor deduction a giveaway to rich business owners with no economic benefit to Ohio, the reality is the return on investment for Ohio is nearly five-fold.
A study conducted by Ernst & Young demonstrated Ohio had a gain of $5.9 billion in economic activity compared to an economy without the business investor deduction in 2018. The study further concluded that Ohio had nearly 60,000 more employees and 1,200 fewer business closures as a result of the business investor deduction. Those figures sure seem to indicate Ohio has made a very wise investment.
Having the business investor deduction in place has allowed my pass-through business to grow in many ways over the past several years.
Having this deduction has changed our cash flow position such that we have been able to build and remodel locations, further increase wage and benefit offerings to our employees, and further engage in the communities that we are in.
Unfortunately, we are well aware of the crushing effects of inflation, the issues with supply chains, and increased wages that are gobbled up by record-high prices. As economic forecasts continue to hint at a possible recession, the worst thing to do to our small businesses is to increase taxes through the elimination of the business investor deduction. Small businesses need and expect stability and predictability, particularly when it comes to tax policy so they can plan for the future.
I encourage all policymakers to speak with their local business owners to understand just how impactful the business investor deduction continues to be to their operations.
It would be short-sighted to reduce or eliminate tax policy that benefits our small businesses.
It begs the fundamental question: Who is better positioned to grow Ohio’s economy - our small businesses or the government?
Clara Osterhage has been a small business owner for the past 27 years, and currently owns hair salons located throughout Ohio employing over 600 licensed hairstylists. She serves on the National Federation of Independent Business Ohio Leadership Council, which serves over 21,000 Ohio small businesses.
This article originally appeared on The Columbus Dispatch: Opinion: How does the business investor deduction help small businesses
