Many legislators qualify for business tax cuts they passed
When Ohio lawmakers approved generous cuts in, or outright elimination of, state income taxes for many businesses, what they didn’t tell you is that dozens of the legislators who voted on those reductions stood to personally benefit.
A Dispatch analysis shows that 49 percent of state lawmakers potentially saved money — some thousands of dollars — on income-tax breaks that only about 14 percent of all incomeearners statewide claimed.
The finding that almost half the legislature could cash in on
the tax breaks came from a Dispatch examination of their business interests as listed on annual financial disclosure statements. But to know exactly how many state senators and representatives took advantage of the tax breaks requires lawmakers to reveal what they put on their private income-tax forms — and the large majority of these public officials don’t want to tell the public whether they benefited.
The House already has voted to renew the business tax cuts this year as part of the two-year state budget that will take effect July 1, and the Senate will decide whether to do the same before the end of the month. The cuts began in the state budget approved in 2013, and were expanded in 2015.
For some, it’s past time to get rid of the $1.1 billion annual tax break. After years of budget woes and job growth that lagged the national average, the Kansas legislature ended its version of a pass-through tax cut on Tuesday. Ohio’s current budget struggles, and the lack of evidence the tax cuts produced the jobs that justified them, is pushing some to call for a reassessment.
“I voted against it — twice,” Rep. David Leland, D-Columbus, said of Ohio’s pass-through tax cut. “It discriminates against most people.”
Leland, a lawyer who uses the tax reduction, said it disproportionately benefits the wealthy while drawing resources away from essential state services. It cuts taxes on a type of business that has grown rapidly in recent decades and that some economists say is linked to the concentration of wealth among the richest Americans.
Supporters — and some opponents — of the businesstax deduction say lawmakers did not pass the cuts to enrich themselves. Some took umbrage at the mere suggestion that the cut was intended to feather their own nests.
“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.”
It’s a secret
Insulting or not, it’s important for the public to know how elected officials are affected by their own What is the Ohio business-income tax deduction?
A tax cut that proponents said would create jobs by helping Ohioans who file their business revenue as personal income. When implemented by the General Assembly and Gov. John Kasich in 2013, it exempted 50 percent of the first $250,000 of a person’s “pass-through” income from state income tax. In 2015, the cut was increased to exempt all of the first $250,000 of pass-through income from state income taxes. It also cut the rate for income above $250,000 from 5 percent to 3 percent.
What is a pass-through entity?
Sole proprietorships, partnerships, LLCs and S corporations. These entities are not subject to the federal corporate income tax.
What is a sole proprietorship?
An unincorporated business owned and run by a single individual with no distinction between the business and the owner.
What is a partnership? A single business where two or more people share ownership. What is an S Corp?
A corporation whose profits are not taxed, but passed through to its shareholders and then taxed as income.
What is an LLC?
A limited liability company combines the limited liability of a corporation with the tax efficiencies and flexibility of a partnership. Profits on an LLC are “passed through” to each owner, or “member.” policies, said a member of a watchdog group.
“For voters, it is helpful to know about the folks who are doing the budget and state tax policy — how do they benefit?” said Catherine Turcer of Common Cause Ohio.
Most lawmakers declined to respond to a Dispatch questionnaire asking whether they have personally benefited from the state’s business-tax cuts and how much they saved if they had.
“This information is confidential under both federal and state law,” said Brad Miller, press secretary for House Speaker Cliff Rosenberger, R-Clarksville, in an email response for House Republicans.
“Therefore, our members do not intend to provide information beyond the already detailed disclosure requirements for members of the General Assembly.”
John Fortney, press secretary for Senate Republicans, sounded a similar theme: “The items you have requested are not a public record.”
The financial-disclosure forms that lawmakers are required to file each year with the Joint Legislative Ethics Committee don’t spell out whether they’ve used the business-tax breaks. The filings also don’t require legislators to distinguish whether the businesses they own are eligible or not. But they give strong hints because lawmakers are required to disclose whether they receive rental income or have an ownership interest in the types of corporations that would be eligible for the tax break.
Under the tax cuts set up by the General Assembly, the first $250,000 of “passthrough” business income is tax-free — exempt from state income tax. Additional business income is taxed at 3 percent instead of the 5 percent state rate it was subject to previously.
The Dispatch review of disclosures from 2015 and 2016 indicates that 65 of 131 members (one House seat is vacant) could have taken advantage of the reductions. A dozen of those lawmakers told The Dispatch they did not use the tax break.
The potential use of the benefit tilts heavily toward Republicans who dominate the legislature; 48 might have taken advantage of the provision. In contrast, just five Democrats appeared to use the break.
Lawmakers who got the tax break
As an example of how the cut works, Faber holds a fiduciary interest in his law firm as well as some real-estate and investment corporations. Together they paid him at least $53,000 in addition to the $60,000 he received for serving in the legislature, according to his 2016 disclosure.
Faber said his own savings from the business tax cuts
were “fairly small.”
For other lawmakers, the tax breaks might have been larger.
Among the lawmakers potentially receiving the biggest breaks from the reductions is Sen. David Burke, R-Marysville. He reported receiving at least $375,000 in 2016 from a pharmacy he owns and rental income.
If Burke received the full business-tax deduction on all of that income, he would have paid about $3,000 in state income tax instead of the $15,000 he’d have been on the hook for without the legislative tax breaks — a savings of $12,000.
Also among those who potentially received the most generous tax break was Sen. Matt Dolan, R-Chagrin Falls. Of the almost $300,000 of potentially deductible income he reported for 2016, more than $100,000 came from his ownership interest in the Cleveland Indians.
Neither Dolan nor Burke responded to questionnaires or requests for comment for this story.
Sen. Bob Hackett, R-London, is a financial adviser who supports the business-income deduction. He listed more than $100,000 on his 2016 financial disclosure that is eligible for the break, but he said he supports the cut because it’s good public policy.
Hackett said he’s a lawmaker and no longer looking to grow his business, but, “if I was just a pure businessman, I would want (the deduction) to attract people.”
Sen. Michael Skindell, D-Lakewood, said the small break he got shows how tiny the benefits can be for the smallest businesses.
On his 2016 financial disclosure he lists less than $13,000 in income from his law firm and rental properties that could be eligible for the tax break.
“I did work through the calculations of my refund with the business-income deduction and without the business-income deduction for each 2015 and 2016 tax years,” Skindell said in an email. “In 2015, my refund was increased by $89. In 2016, my refund was increased by $143. The refunds were inadequate for me to hire a new employee to expand my legal business.”