Business cut aids high-income owners
When talking about who is helped by Ohio’s controversial tax deduction for businesses, Republicans often paint the picture of small, hardworking mom-and-pop operations.
“The people I see benefiting from this in my hometown own small restaurants downtown, coffee shops, florists, dry cleaners — folks like that,” Sen. Matt Huffman, R-Lima, told his colleagues Wednesday night.
Senate Finance Committee Chairman Scott Oelslager, R-Canton, added: “They go to work every day, turn on a light in their stores, factories and farms, and hope somebody comes in and buys their product. We have lifted the spirits of these people.”
But a new analysis by the Ohio Legislative Service Commission indicates that as much as $450 million a year of those business-tax cuts benefit a slice of high-income Ohioans who represent only 0.5 percent of the state workforce and just 5 percent of those claiming the deduction.
Of the $1.1 billion a year that the business-tax cuts are costing the state, between 34 percent and 41 percent of the benefit is going to people who are making more than $250,000 a year, according to the analysis.
Originally billed as a “small business” deduction, the cut was created in a lesser version in 2013 and then escalated to its current form in 2015. Owners of pass-through entities — limited-liability corporations, partnerships and the like — pay no state income tax on their first $250,000 of income and get a 40 percent tax cut on income of more than $250,000 by paying at a rate of 3 percent instead of 5 percent.
“Small? There’s nothing small about it,” state Rep. David Leland, D-Columbus, said of the tax cut. “It’s shocking that one-half of a percent of the people who are filing tax returns in Ohio are getting the lion’s share of this.”
The new analysis, completed at Leland’s request, estimates that between $377 million and $450 million of the benefit from the tax cut is going to Ohioans who are claiming at least $250,000 a year in profits from eligible businesses.
A separate analysis last year by the National Bureau of Economic Research
determined that 66 percent of income from pass-through entities flows to the wealthiest 1 percent of Americans. It also found that the businesses pay less in federal tax than traditional corporations do.
In Ohio, 29,000 of tax filers earned more than $250,000 in 2015, compared with 605,000 who claimed the pass-through exemption and the 5.4 million who filed a tax return.
The hefty exemption is being scrutinized as lawmakers struggle to cobble together a tight budget for 2018 and 2019. Revenue in this fiscal year has fallen almost $1 billion short of projections, leaving the legislature scraping for money to address the state’s opioid crisis, fund schools, pay for health care and meet other challenges.
Democrats have pounced on the message that the tax cut on business income has failed to live up to its promises while Ohio’s job growth has lagged the national average since the cut was enacted.
A similar measure in Kansas was the centerpiece of tax cuts that recently were reversed by that state’s legislature in the face of a chronic budget crisis. In Ohio, Senate Democrats proposed ending the tax cut either to spend the resulting revenue on programs including Medicaid and K-12 education, or to provide tax cuts targeted largely at lower- and middle-income Ohioans.
The deduction is “nothing but a giveaway that is hurting our state, and we should do away with it now before it does more damage,” said Sen. Charleta B. Tavares, D-Columbus. “The loophole only benefits those that are already in the top income brackets.”
Gov. John Kasich, an early proponent of the cut, and Republican legislative leaders continue to fiercely defend it. Kasich tweeted Thursday: “Can you believe some are calling for Ohio to raise taxes? Not going to happen. Not on my watch.”
But some Republicans have begun to question whether
it might be time to consider scaling back the business-tax cut.
GOP defenders made their voices heard during the Senate budget debate Wednesday night. Eliminating the cut would be telling business owners: “The problem is, you’re not paying enough in taxes,” Huffman said.
“If we take away these income-tax cuts for these small businesses … you’re going to have to explain to them why that was important,” he said. “In the last six years, spending in the state has increased from $52 billion to $64 billion. That’s a lot higher than the rate of inflation.”
Much of that spending increase is on Medicaid, including an expansion pushed by Kasich.
Oelslager said eliminating the tax break would amount to a $2.2 billion tax increase for businesses over two years at a time when the state of New York is running ads in Ohio touting the improved business climate there, including lower taxes.
“We believe hardworking Ohio families need to keep more of their earnings, and people running a business need to be able to grow their business,” Oelslager said.
Leland has consistently voted against the cut even though he benefits from it personally. He said that supporters of the cut need to be clear that if they keep it, they will be giving a tax break of as much as $900 million over the two-year budget to a tiny sliver of Ohioans, the poorest of whom are making $250,000 a year.
“If that’s the idea, they need to tell everybody,” he said. “If not, we need to make adjustments.”
State Budget Director Tim Keen has stressed that the cost of the business-tax deduction continues to come in below estimates, so it is not driving Ohio’s tax-revenue shortfall.