Shocking Ohio tax break only fattens pockets of rich

While most Ohioans pitch in for each other by funding our kids’ education, public transit systems and programs that care for our aging neighbors, for nearly a decade, corporate-backed politicians have squandered billions of dollars by rewarding the rich for being rich.

The Business Income Deduction – also known as the LLC loophole – allows people who dress their income in a particular legal classification to avoid paying taxes on their first $250,000 of income and to pay a low flat tax rate above that.

The loophole is among Ohio’s most expensive tax breaks; it disproportionately rewards a small number of high-income individuals; its benefits to small business owners are marginal at best; and it has negligible overall economic impact.

It is high time that lawmakers admit they’ve been duped, the magnificent economic fabric promised by the Chamber of Commerce and others has not materialized. The LLC loophole has no clothes!

In our new report, Policy Matters Ohio shows that the LLC loophole takes about $1 billion per year from Ohio communities – money that could be expanding opportunity for Ohioans and giving us all the tools to succeed, no matter where we live or what we look like. It does this by allowing individuals who can establish pass-through entities (such as partnerships and certain LLCS) to label their income as “business income,” making it eligible for the handout.

However, anyone who looks can see through the transparent veil of “business income.”

There is no requirement that these individuals create jobs, contribute meaningfully to society, or even conduct anything akin to businesslike activity. If national statistics are any indication, they are doing none of these things.

According to researchers from the U.S. Department of Treasury, only 54% of the nation’s pass-through entities conduct “businesslike” activity. And, based on the same IRS statistics, 86% of pass-through entities do not create jobs for anyone but their owners. In fact, the growth of pass-through entities contributes significantly to inequality since they are disproportionately owned by older, white, men.

So, what lies beneath the LLC loophole’s invisible clothing? An outrageous misuse of collective resources with embarrassingly little economic impact other than fattening the pockets of those who are already well-off.

According to Department of Taxation data, the top 10% of those who claimed business income in tax year 2020 – claiming at least $160,000 of business income – received more than half the total value of the deduction. These 68,500 tax filings received an average tax cut of at least $8,000 each (a lot, but not nearly enough to hire a new employee), adding up to more than $551 million in forgone taxes in tax year 2020. This is without counting the additional benefits received by those paying the low flat tax rate on their income above $250,000.

Meanwhile, most business income claimants receive negligible benefits from the loophole. More than half (58.7%) of those who claimed business income in tax year 2020 –representing roughly 381,000 tax returns – claimed less than $20,000 and received less than 7.6% of the total value of the deduction. That means that the majority of those benefited by the loophole receive a tax break worth less than $1,000.

In addition, there is no clear relation between the loophole and increased job growth or economic progress in Ohio. The giveaway has not stopped Ohio’s falling share of national employment and of business establishments.

Ohio can be a place where people of all races, background and income level get a chance to share in our state’s prosperity. State lawmakers who share that vision should close the LLC loophole. The revenue generated could help strengthen Ohio’s social fabric, clothing our communities in great schools, beautiful parks and high-quality health care – things that serve our collective well-being, instead of transparent false promises.

Guillermo Bervejillo is the Policy Matters State Policy Fellow.