By Alexandra Forter Sirota & Brenna Erford Burch
Budget & Tax Center
- The $50,000 business income tax deduction created by the General Assembly in 2011 was intended to support small business and job creation, but it is unlikely to do so – at what may be an even higher cost to the state than was originally forecasted.
- Contrary to stated claims, this deduction is not targeted specifically to employers or small businesses, and while it is costly in terms of revenue lost, even at its maximum value of $3,875 it is unlikely to spur new hiring or enable significant capital investment.
- A recent Treasury study of the characteristics of businesses eligible for this deduction found that only 49 percent of non-passive, positive-income-reporting partners and S corporation shareholders were also employers. The same study also found that small businesses reported just 17 percent of total and net business income, and only 1 in 5 met the IRS definition of an employer.
- An independent micro-simulation model-based estimate of the cost of the deduction performed by the Institute for Taxation and Economic Policy (ITEP) that accounts for the interaction between tax schedules – unlike the official tabular data estimate – shows a possible high-end cost of the deduction of $552 million, which is $216 million more than was estimated in 2011.
- The deduction disproportionately benefits high-income businesses and individuals. The micro-simulation model showed that 70 percent of the tax cut goes to the top 20 percent of taxpayers with some net positive business income, with the remaining 30 percent of the tax cut spread out amongst 80 percent of taxpayers.