Yesterday, Governor Kasich rolled out the rest of his second biennium budget.  One of the major components of it (and the focus of yesterday’s stacked deck “town hall”) was on tax reform, which is Republican for “massive tax cuts for the rich.”

After all, here’s how Kasich’s Office of Budget and Management described it in the “Reform Book” (pg. 37):

image In other words, let’s move from a progressive tax policy to a regressive consumption tax.  Noticeably absent from Kasich’s talk about taxes was his campaign promise to enact a plan to repeal Ohio’s income tax, which is a good thing.

The first component of the reform is a 20% across the board income tax cuts, and a sales tax with a .5% cut but a massive expansion of items subject to the sales tax.  In 2005, Governor Bob Taft proposed tax cut reform that required a a 21% income cut and a broader based sales tax that his budget expert confidentially predicted would lead to massive job creation in the State.

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In case you forgot, it didn’t work out so well.

Funny story about that 2005 tax reform budget.  Tim Keen was the head of Taft’s Office of Budget of Management at the time, just as he is Kasich’s.  Has a sequel ever worked out better than the original?

But because the income tax is progressive, a twenty 20% cut to rates doesn’t mean an equal reduction in everyone’s tax rates.  Don’t believe us, it’s right here in this chart from the Kasich Administration (pg. 40):

image If you subtract the new rate after the cut to the current rate, you’ll see that Kasich’s tax reform lowers the lowest marginal rate by less than .12%.  However, the top margin rate is reduced by nearly 1.19%.  That means the top margin rates will see a reduction in the rate that is  almost ten times larger that the lowest marginal rates will see a reduction in their rates.

But wait, there’s more.    Then there’s the “small business” tax cut, which isn’t a small business tax cut at all.  In fact, any business not organized so it’s taxed as a corporation, but instead as a “pass through” entity (S corporations, LLCs, partnerships, and sole proprietorships) get a massive tax cut, whether they are a small business or not.

Again, according to the Kasich Administration’s own budget documents, individuals who own equity in such entities will be able deduct 50% of their share of the profits.  Kasich calls it a “small business tax cut” because he caps the share of profits that can be deducted per owner at $750,000.  But as a result, the more owners a “pass through” business has, the higher the profits can be before hitting the cap.

To understand just how big this tax cut is when compared to Kasich’s other tax cut, here’s how the Kasich Administration itself explained the fiscal impact of the two cuts when working together:

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An LLC with a net profit of $1.5 million and three owners see a 65% reduction in their tax burden when you combine the 20% tax cut.  By allowing an owner, partner, or S corp shareholder to deduct 50% of their share of the profits, it also allows some even more tax savings by bumping them into a lower tax bracket.  It also can be claimed by out-of-state residents.

So business owners get a tax cut that can be more than three times larger than the twenty percent cut, which itself gives larger rate cuts to the top income earners.

However, Kasich tried to make this populist sounding by calling this a “small business” tax cut and also by saying he’s expanding the sales tax to include services provided by attorneys, accountants and other professional services.  But those taxes aren’t paid by those professionals, it’s just collected by them from their clients.  So this isn’t a tax on attorneys.   It’s a tax on attorneys’ clients.

Given that most large law firms  aren’t corporations, but partnerships or LLCs, that means the partners are going to get a massive tax cut while their clients will see their bills go up 5% because of the new sales tax.  That’s actually a tax on small businesses who use use legal services going to pay for the large income tax cuts that benefit the partners.

Here’s an illustration of just how this isn’t a small business tax cut.  A major law firm in Ohio with 100 partners would need to have profits over $75 million before they hit Kasich’s cap on the tax cut (at $75 million, $37.5 million would pass to the partners without being subject to state income tax.)  However, Al the Locksmith, who is in business on his own, can only get a profit of $750k before he hits the cap.  And when he seeks legal advice about his business, he has to pay a 5% state sales tax on his bill (which he would not incur under current law.)  How’s that a small business tax cut?

Kasich’s budget explains that by giving this tax cut, he expects these businesses will use the tax savings to hire more people.  But that’s an assumption with no data to support it.  It’s also counter-intuitive.  After all, profits are incurred after a business has expanded its payroll as much as it feels comfortable.  However, if an owner of a business can decrease his tax burden by increasing his profits by NOT hiring someone, then they will likely do so.  That’s precisely what Kasich’s “small business” tax cut will encourage businesses to do—to try to get their profits to hit the cap before they consider hiring more workers.  Kasich’s actually creating an artificial incentive for businesses NOT to hire.

Furthermore, according to Kasich’s own Department of Jobs and Family Services, service producing industries created 70,100 of the 90,700 of the new jobs Ohio gained over the past twelve months in 2012.  Does Kasich really think it’s a great idea to put a massive tax increase on consumers of the industry that created over 77% of the new jobs in Ohio law year?

 

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