Question 2 would affect plenty of high earners who run small businesses, which has been a concern of opposition groups. But most small business owners earn too little to get hit with the tax hike, according to the latest federal tax data for Maine.
Business owners can “pass-through” business income to be taxed on their personal returns, a move that’s becoming increasingly popular among businesses large and small, according to a working paper published by the U.S. Treasury Department.
“We find that pass-through participation and pass-through income are especially concentrated among high-earners,” the paper stated, noting that households in the top 1 percent of earners are more than 50 times as likely to have partnership income than households in the bottom half.
The majority of small businesses in Maine report business income through their personal returns, according to Maine’s Department of Administrative and Financial Services.
The trend the Treasury Department noted appears in 2014 IRS data for Maine as well. About 92 percent of tax filers reporting business income on their personal returns made less than $200,000 in that year, according to the federal data, meaning the bulk of this “pass-through” group wouldn’t come up against the new tax.
The proposal would put a 3 percent surtax on income above $200,000, meaning it would come on top of the top marginal tax rate, which is now 7.15 percent. In effect, that would make the tax rate 10.15 percent on taxable income in excess of $200,000.
That would affect around 11,450 filers who reported income either through partnerships, S-corporations, or other business income, such as from sole proprietorships or limited liability corporations, a figure that includes some overlap for filers who reported both types of income.
The agency that houses Maine Revenue Services projected 11,000 of the 16,000 affected tax filers are “pass-through” corporations.
According to the IRS data, there’s a lot more at stake for filers reporting partnership and S-corporation than for other types of business income, including sole proprietors.
In total, about $1.1 billion in income came to filers reporting S-corporation or partnership income making over $200,000 total, compared with $295 million for other business income.
Somewhat unsurprisingly, the overall amount of reported pass-through income also jumps dramatically the higher one climbs in income categories.
In the under-$200,000 category, 30,440 filers reported an average of $10,500 per return. Over $1 million, 560 filers reported an average of $766,800 in such income.