COLUMBUS — When talking about Ohio’s controversial business tax deduction, Republicans often paint the picture of hard-working, small-business, mom-and-pop-type 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 are benefiting a wealthy slice of wage earners 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 the business tax cuts are costing the state, between 34 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 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 the first $250,000 of income and get a 40-percent cut on income over $250,000 by paying 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 paid less in federal tax than traditional corporations.
Just 29,000 Ohio tax filers earned more than $250,000 in 2015, compared to 605,000 who claimed the pass-through exemption and the 5.4 million who file tax returns.
The hefty exemption is being scrutinized as lawmakers struggle to cobble together a tight 2018-2019 budget.
Revenues for the year have fallen almost $1 billion short of projections, leaving the legislature scraping for funds 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 business-income tax cut has failed to live up to its promises, as Ohio’s job growth has lagged the national average since the cut was enacted.
A similar measure was the centerpiece of cuts that were recently reversed by the Kansas legislature in the face of a chronic budget crisis. Senate Democrats proposed ending the tax cuts in Ohio to either spend on programs including Medicaid and K-12 education, or use for 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.”
An early proponent of the cut, Gov. John Kasich and Republican legislative leaders continue to fiercely defend it.
Kasich tweeted late Thursday morning: “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 it back.
GOP defenders made their voices heard during the Senate budget debate Wednesday night.
Eliminating it means 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 increase is from Medicaid, including an expansion.
Oelslager said eliminating the tax breaks would amount to a $2.2 billion business tax increase 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 hard-working Ohio families need to keep more of their earnings and people running a business need to be able to grow their business,” he 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 is 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.
