Over the last four years there has been much public debate about the benefits and costs associated with certain tax provisions in effect in Ohio. Our organization’s mission is to provide non-partisan, educational resources on public policy issues that may impact Ohio’s economy, job creation, and long-term competitiveness. Therefore, the Ohio Chamber of Commerce Research Foundation set out to investigate the economic impact of the Business Income Deduction and 3% flat rate on business income (known as the BID) as there has been no comprehensive, data-driven analysis of the BID to date. We contracted with Ernst & Young (EY) to conduct a study on the econometric effects of the BID, and the results of the analysis show there is a positive correlation between the enactment of the BID and a growth in economic activity and production in Ohio.

The BID, initially enacted in 2013 and updated to its current implementation for tax years 2016 and beyond, allows taxpayers filing an individual tax return with business income to deduct up to $125,000 of that business income (if single or married filing separately) or $250,000 of that business income (if married and filing jointly), with any remaining business income taxed at a 3% rate as opposed to the top individual marginal rate of nearly 4.8%. The stated goal of the BID was to allow business owners to retain more of their capital, allowing them to reinvest those dollars into their operations and spur economic activity. Thus, a method of assessing the impact of the BID is to investigate whether increased economic activity has occurred when compared to levels of economic activity prior to the enactment of the BID.

When controlling for other variables such as the economic and demographic characteristics of the state and taking into account other factors such as trends in the national economy, the analysis conducted by EY demonstrates that there was roughly $5.9 billion in increased economic activity in Ohio in 2018, when compared to an economic model in which the BID was not in effect. Further, these models suggest that the effect of the BID on Ohio’s economy supported nearly 60,000 jobs, including 14,000 jobs at businesses with less than 50 employees, and helped to keep 1,200 businesses from potentially closing.