Solutions To Ohio’s $8 Billion Budget Gap Should Be Focus Of Ohio Assembly Election Campaigns

Ohio’s current budget was funded with $8 billion worth of one-time windfalls (see the chart below) — like Federal Stimulus money. Ohio’s new State Assembly — to be elected November 4 — will need to find $8 billion to close this budget gap. This represents 20% of the budget and finding such a huge amount of money will be an enormous challenge for Ohio’s elected representatives.

The Center for Community Solutions, has produced an impressive 50 page white paper analyzing Ohio’s budget challenge. The paper is ominously entitled, “Thinking the Unthinkable,” and, the problem is, “thinking” is not a task easily accommodated in the usual bumper sticker sized allotment of public attention.

Candidates for public office don’t want to deal with reality. It’s not seen as a good election strategy.

Ohio’s $8 billion budget challenge is unprecedented in Ohio’s history, but, the web-sites of the candidates from Montgomery County, seeking election to Ohio’s Assembly, ignore this reality. Balancing the budget will be the biggest task facing the new Assembly, but none of the local incumbents, and none of the challengers, on any of their web-sites, mention a word of this budget tsunami headed our way.

If our democracy had any substance, it seems to me, citizens would demand that candidates to the Assembly present some rational point of view about the looming budget crisis. In a functioning democracy, every candidate seeking election to Ohio’s Assembly would be called upon to demonstrate that he or she has a grasp of the information presented in this Community Solutions report, and would be expected to present a rational and carefully thought out point of view about the matter.

This Community Solution report is dedicated to the memory of Richard Sheridan who passed away at age 72 this past year. Sheridan was long considered the foremost expert on the Ohio budget process and DaytonOS, in its short history, has referenced Sheridan’s work a number of times. (See here, here, and here.)

The Community Solutions report is full of graphs and tables and in future posts I will revisit the information in this report again. As a start, the graph, shown above,  is compelling and one that deserves to be particularly highlighted and discussed. It shows that Ohio’s tax system at present is regressive: those with lower incomes pay higher percentages of their incomes in state and local taxes and those with higher incomes pay lower percentages.  If Ohio seeks to be a progressive state, shouldn’t it have a progressive tax system?

The Center for Community Solutions suggests a three part strategy to solving Ohio’s budget crisis:

• tax increases,
• reductions in tax expenditures, and
• reductions in programmatic expenditures.

Excerpts For the Report:

• While the term ‘tax expenditures’ may be unfamiliar, their existence and significance are quite familiar indeed. More generally, and pejoratively, described as ‘loopholes’ or ‘tax breaks,’ they may be defined as a loss of tax revenue attributable to an exemption, deduction, preference, or other exclusion from tax law.
• In Ohio, the relative burden of state and local taxes paid by businesses has steadily declined since 1975, from 40 percent to 26 percent in 2010. This trend was reinforced by the business, personal income, and sales tax changes adopted five years ago in H.B. 66, and subsequent modifications enacted during 2009 in H.B. 318. (It is worth noting, too, that these tax changes also shifted a significant portion of taxes paid by individuals and families from the progressive income tax to the regressive sales tax.)
• While incomes for most Americans have stagnated for three decades, those of Ohioans have generally stagnated at lower levels, reducing the capacity of the middle class in particular to bear additional tax burdens.
• The wealthiest fifth of taxpayers have enjoyed soaring incomes for over 20 years. While progressive federal taxes have also made them by far the largest contributors to the overall costs of government, the regressive effects of combined state and local taxes in Ohio take a larger share of middle class incomes than the wealthy.
• Business taxes, as a proportion of state tax revenue, have been in steady decline for several decades; the long-range implications in this regard of the 2005 tax overhaul are as yet unclear.
• State personal income and business tax changes during the middle of the last decade (The 2005 Tax Reduction Act) have contributed significantly to the structural deficit.  (About $2 billion per year or $4 billion per per biannual budget).
• Returning to the former upper bracket rate of 7.5 percent for those whose incomes have outpaced the vast majority of Ohioans, would affect just over 2 percent of taxpayers, while raising $448 million annually. (This top rate, and all rates, were reduced 17% by the 2005 Tax Reduction Act, and are still scheduled to be reduced 4.1% more.)
• The imbalance between business and individual taxes also might be addressed in a revenue package. Currently, the rate on the CAT is set too low to reimburse schools and local governments for the full amount of lost tangible property tax revenue. The resulting drain on the General Revenue Fund during the next biennium is estimated to be $322 to $438 million, far short of even beginning to replace lost revenue from the former corpo- rate franchise tax. Each 1/100 of 1 percent increase in the CAT would annually raise approximately $50 million. An increase of 0.08 percent would yield about $400 million annually, enough to cover the estimated cost of GRF subsidies to schools and local governments for loss of tangible personal property tax revenue, and return ap- proximately $200 million per year to the GRF. Table 5 outlines some options for increasing tax revenue.