Ohio’s business income tax deduction, which lets tens of thousands of business owners avoid state income tax, also is apparently allowing wealthier taxpayers to qualify for tax credits designed for low-income residents.
Partnerships, sole proprietors, investors and other pass-through business owners in Ohio already receive more than $1.1 billion a year in tax cuts from the state’s $250,000 business income-tax deduction, plus a 40-percent tax cut on income above $250,000.
But a report from Policy Matters Ohio, a liberal think-tank and opponent of the tax break, says the structure also is allowing many to qualify for reductions never meant for them.
“The General Assembly created these limits to make sure these only went to people of limited means,” said Zach Schiller, Policy Matters research director. “To then say, 'No, this goes to people who make a lot more money,' it flies in the face of what the purpose of these credits is supposed to be.”
The Ohio Department of Taxation confirmed that the study used accurate state data and that the estimates "appear reasonable."
Policy Matters says that an Ohioan with two dependents, business income of $150,000 and nonbusiness income of $30,000 would have taxable income of just $23,250. That allows this person making $180,000 to take $60 in personal exemption credits that are supposed to go only to those making less than $30,000.
Policy Matters says more than 28,000 Ohioans with business income of at least $100,000 claimed the state’s $20 personal exemption in 2016.
More than 87,000 Ohioans earning $100,000 or more in business income claimed Ohio’s dependent exemption, many likely qualifying for a higher amount than they otherwise should. Those who lowered their total taxable income below $40,000 got a $2,250 dependent exemption, instead of the $1,750 they would normally get.
About 36,500 Ohioans with business income exceeding $100,000 qualified for the joint filing credit, another tax break that shrinks as income grows. About 1,100 of those filers claimed the child-care and dependent-care credit, which is limited to those with less than $40,000 in adjusted gross income, saving each an estimated $270.
More than 8,300 business owners claimed the $50 senior citizen credit and the retirement income credit, both of which require income of less than $100,000.
Policy Matters projects that wealthier business filers are benefiting to the tune of about $4.9 million per year, though it admits that a number of factors make it difficult to estimate the exact amount.
The think-tank notes that Ohioans earning up to $282,000 in business income also qualify for the homestead exemption, which shields up to $25,000 of the value of a home from local property tax. The exemption is designed for those with adjusted gross income of $32,200 or less.
"I'm not sure that was the spirit or intent of the [business deduction]," said Chris Ferruso, legislative director for the NFIB/Ohio, which represents small businesses. "We need to get a handle on whether this is a pervasive problem. Once we have that data, we can respond accordingly."
Ferruso said eligibility for low-income tax credits was not part of the business tax deduction debate. Schiller also suspects that few, if any, lawmakers realized the issue, and he’s not interested in casting blame.
“It was an unanticipated effect,” Schiller said. “We can fix it very easily.”
Policy Matters continues to advocate for eliminating the business tax exemption, noting that 43 percent of the deduction goes to the 7 percent of business filers who claimed at least $200,000 in income.
The NFIB/Ohio strongly opposes a repeal, and eliminating the tax break is highly unlikely under a GOP-dominated legislature.
“Is there potential for us to revise that from time to time? I’d say there probably is,” said Senate President Larry Obhof, R-Medina. “Are we going to ever get rid of the overall small-business tax cut? Absolutely not, not while I’m here.”
Policy Matters also suggested a less-controversial option to change the definition of income for the means-tested credits and exemptions so that it also includes the business income deduction.
Obhof said that issue had not been brought to his attention, but he’s willing to look at it.
“Obviously if we have something that, once we fully educate ourselves on it and we think it’s not working the way it’s supposed to, we might see if there’s any loopholes we need to close or changes that need to be made,” he said.