Ohio Gov. John Kasich (R) wants to mimic a tax cut experiment that has already brought fiscal calamity and public service cuts to a state 600 miles west of his.
Kasich describes his $696 million tax cut as a helping hand to small businesses. But the design of the cut would put the bulk of that benefit into the hands of just a few high-income business entities with a handful of employees while providing just a few hundred dollars each to the vast majority of the people who would benefit, according to an analysis by the Cleveland Plain Dealer. For nine out of every 10 companies that would benefit from the Kasich cut, the total yearly savings would be $364 or even less.
For the remaining 10 percent of companies affected, savings could be as high as $8,000 a year, a number that Kasich administration officials acknowledge is far too low to create even a single job per company. Instead of pitching the cut as a direct job creator, the officials are marketing it as an “every little bit helps” move for hardworking entrepreneurs.
The problem with such a move is that it doesn’t effectively target actual small-scale business enterprises that hire people and generate economic activity. The kinds of small businesses that politicians usually talk about would also benefit from the move, but the way the cut is designed means it would also be available to many business entities that are organized under small business sections of the tax code, but which do not operate as traditional commercial enterprises. Savvy individuals can structure their personal revenue streams under the business tax code using what are called “pass-through entities,” and then take advantage of preferential tax treatment like what Kasich is proposing.
Three-quarters of all tax entities organized as “small businesses” employ no one other than the owner. Just 11 percent of all taxpayers who report business income are small business owners with actual employees.
None of that national data stopped Kansas Gov. Sam Brownback (R) from using a similar exemption for pass-through entities as a key piece of his massive tax cuts in recent years. But where that proposal was “uncharted territory” when Brownback initiated it, in the words of the New York Times’ Josh Barro, Kasich is making this move with plenty of evidence available that it does more harm than good. In Kansas, the results have been devastating. A worse-than-projected drop in state revenues is putting the state in serious budget jeopardy. While Brownback promoted the cuts in the name of job creation, the state’s economy is barely growing, and its job market lags far behind the national average.
Kasich’s version of the idea is slightly more moderate than Brownback’s, though that’s a bit like saying that sushi is less fishy than an aquarium. Kasich’s proposal is capped at $2 million of gross business receipts, while Brownback’s eliminated taxes on all pass-throughs without any cap. Kasich also balances off part of the budget impact of eliminating pass-through taxes for a million entities by raising business taxes on larger companies in the state, which should soften the impact on the state budget. But Kasich also wants to raise the state sales tax rate, a regressive move that hurts low- and moderate-income people far more than the wealthy.
Similarities and contrasts with Brownback’s recent catastrophe aside, the broader trade-off in public priorities that underlies Kasich’s proposal has parallels in other states where GOP governors are looking to make a splash. In Louisiana, Arizona, Wisconsin, and elsewhere, heads of state are proposing 2015 budgets that would shrink the pool of money available for public services in order to put more money into wealthy interests’ pockets. Wisconsin Gov. Scott Walker (R) has proposed to use public resources to finance a new NBA stadium for the billionaire owners of the Milwaukee Bucks, alongside huge cuts to the state’s public universities. Louisiana Gov. Bobby Jindal (R) wants to cut hundreds of millions of dollars from the state’s higher education system while refusing to shrink the state’s generous tax breaks to industry amid broader budget trouble. And in Arizona, Gov. David Ducey (R) has proposed almost $400 million in public spending cuts while also asking taxpayers to spend $5 million building a new for-profit, privately owned prison.