House makes needed changes in tax break
Posted May 29, 2019 in Press Releases
Senate should further limit LLC loophole
A giant Ohio tax break first created in 2013 has failed to generate economic results and should be scrapped, Policy Matters Ohio said in a report released today. Short of that, limits imposed by the Ohio House on the $1 billion tax break often known as the LLC loophole should be preserved and expanded in the state budget.
Since the tax break was adopted, first-time hiring by new businesses has not increased. Growth of new businesses and small business jobs and payroll continue to lag behind the nation. Overall growth of Ohio jobs, income and output also has trailed the U.S., and is expected to continue doing so. “The results are in,” said Zach Schiller, Policy Matters Ohio research director and author of the report. “This tax break does not rev up small business or Ohio’s larger economy, and it’s costing dollars that are badly needed to invest in education and public services.”
S Corporations, partnerships, limited liability companies and sole proprietorships are known as “passthrough entities” because their profits are taxed under the individual income tax as they pass through to their owners. Today, most business owners do not have to pay Ohio income tax on the first $250,000 in passthrough income, and only pay a 3% tax rate on such income over and above that—a rate lower than the 4.997% top income tax rate in Ohio. The House budget bill trims the deduction to $100,000 and eliminates the special 3% rate.
According to the Institute on Taxation and Economic Policy, more than four-fifths of the additional taxes would be paid by those in the top 1% of the income spectrum. Virtually all of the rest would be paid by people in the next 4%, those making between $208,000 and $496,000. Altogether, ITEP found, just 1% of Ohio taxpayers would pay more under the main provisions of the House plan, including also reductions in rates and brackets.
Benefits from the business income tax break go heavily to the most affluent Ohioans — the 7.4% of tax filers using the deduction who claimed $200,000 or more a year received 43.4% of the deduction in 2017 – and that doesn’t include the additional tax break for those making over $250,000. Yet most of those who claim it benefit by less than $1,000 a year, and don’t employ anyone. In addition to the House reforms, Policy Matters proposed additional steps to ensure the tax break goes only to those who actually run businesses and hire workers.
“The House bill falls down by taking the funds from cutting the LLC Loophole – and more – and applying them to other tax cuts,” Schiller said. ”However, it has taken much-needed steps to rein in this costly, unproductive tax break. Now the Senate should finish the job by approving the House changes and adding more accountability to the business income deduction.”