This can’t be what state lawmakers intended, higher-income households in Ohio taking advantage of tax credits designed to assist poorer residents. Yet that is what Policy Matters Ohio reports in an analysis released last week. What makes things worse is that these households are in position to claim the credits because they benefit from the ill-conceived business income deduction for owners of limited liability companies, S corporations and partnerships known as pass-through entities.
Recall that in 2013, Republicans in charge of the Statehouse approved the business income deduction, which since has been expanded. Advocates pitched the idea as a tool to help businesses expand and create jobs. The pass-through concept refers to business income flowing to the individual for tax purposes. The deduction is generous, allowing an owner to avoid taxes on the first $250,000 in profits and then pay at a reduced 3 percent rate on any remaining income.
What Policy Matters reveals is that thousands of taxpayers haven’t stopped there in reducing their tax burden. They have used their reduced liability to claim a handful of means-tested credits and exemptions.
How? Consider a taxpayer with $150,000 in business income and $30,000 in wages from a job. Apply the business income deduction, and the amount of taxable income is a fraction of the whole. The sum opens the door, depending on the circumstances, to such relief as the child care and dependent care credit, which starts at income below $40,000, or the joint filing credit, also aimed at those with lower incomes.
Policy Matters explains how some business owners can take advantage of the homestead exemption, which allows for avoiding local property taxes on up to $25,000 of the value of a house. The exemption applies to those with taxable income of $32,200 or less. Thus, a property owner with $282,000 in income, $250,000 coming from a business, would qualify for the relief.
As Policy Matters notes, the state doesn’t track such claims of the homestead exemption. The report does provide detail about the number of taxpayers claiming both a business income deduction of $100,000 or more and mean-tested credits. For instance, 30,546 taxpayers tapped the joint filing credit in 2016, at a cost to the state of $1.8 million.