Legislators need to plug hole in tax system
Posted November 17, 2020 in Press Releases
Ohio should decouple from U.S. tax breaks for affluent business owners
If Ohio legislators don’t act soon, federal tax breaks for wealthy investors will ripple through the state’s personal income tax and cause tens of millions of dollars in losses for the state’s already wobbly budget. That’s the conclusion of a report Policy Matters Ohio issued today.
The Ohio Department of Taxation estimates the cost at $158.2 million in the current fiscal year and another $49.2 million next fiscal year. “That’s money that instead should be going to keeping the budget in balance, covering the costs of the pandemic and expanding opportunities for all Ohioans,” said report author and Policy Matters research director Zach Schiller.
Under the CARES Act approved last March, Congress suspended restrictions on the ability of businesses and their owners to use business losses to reduce tax liability that had been put in place by the Tax Cuts and Jobs Act of 2017. Congress’s Joint Committee on Taxation estimated almost 82% of the gains nationally would go to 43,000 taxpayers with incomes over $1 million, who on average would get an extra $1.6 million. For example, a business owner who pays themselves a high salary could then report a loss for the business, and use it to take advantage of this new tax break. The CARES Act also included other related provisions relaxing restrictions on the use of losses to offset profits in past and future years. Moreover, it made all of these provisions retroactive to 2018 and 2019, so millions of dollars in refunds will be paid out for losses that have nothing to do with COVID-19.
Since the Ohio General Assembly passed a bill last March conforming to these CARES Act provisions, loosening these limits will directly affect how much the state collects in personal income tax over the next couple of years. Yet when it acted, the General Assembly did not have estimates of what it would cost.
Decoupling from the federal law will prevent these deductions now, when the state can least afford them, but not permanently. That may be one reason why five states -- Colorado, Georgia, Hawaii, New York and North Carolina – already have decoupled.
“Ohio can ill afford to give tens of millions of dollars away for these tax breaks now,” Schiller said. “Ohio lawmakers weren’t fully aware of the consequences when they acted in March. They should now follow the lead of these states and decouple immediately. Otherwise, a tiny fraction of Ohio’s wealthiest 1% will get a windfall they don’t need, siphoning desperately needed public resources from the rest of us.”