Governor Ted Strickland made $733 million in budget cuts this year and it looks like that Ohio will continue to have big budget shortfalls. A study conducted by John Honeck, PH.D,. for Policy Matters Ohio and published in April of this year, “A Step Toward Fiscal Balance: Options for Ohio’s Income Tax,” says huge revenue shortfalls will continue to negatively impact Ohio’s capacity to meet its responsibility to its citizens or to plan for its future. The study says Ohio should raise state revenue by revising Ohio’s 2005 Tax Reduction Act (which reduced income tax by 4.2 % each year for five years for a total of 21%).

The study shows that freezing the state income tax at current levels (keeping the cuts already enacted by the 2005 law) and restoring the top rate that was in effect before the 2005 law was enacted would preserve $817 million in revenue in calendar 2009.

Honeck says, “Ohio State government has a responsibility to maintain a strong social safety net to help our residents through hard economic times, and to continue to invest in education and economic development to position Ohio for a better future.” He says, “A weakened revenue structure has negative implications for Ohio’s ability to meet rising demands for state services and invest in its future,” and cites the following:

• Demands on the state’s safety net will increase in the near-term due to the recession, even as state revenues suffer. Medicaid, a joint federal-state health insurance program, accounts for 18 percent of state-only GRF spending. From July through December 2007, caseloads were 19,000 higher than original estimates.
• Recessions are also a time when higher education enrollments go up. In this budget cycle, higher education became a priority again, and the legislature provided additional funding to enable a tuition freeze. Maintaining the tuition freeze in the face of rising enrollment will require even greater revenue commitments, let alone bringing tuition costs down to the national average.
• The current state budget provides small foundation formula increases that do not come close to solving the K-12 educational system’s unconstitutional over reliance on local property tax revenue.
• The state’s prison system is over 130 percent of capacity, having recently surpassed a level of 50,000 inmates. The recently-passed Adam Walsh Act and other legislation may lead to the incarceration of 2,000 to 3,000 more inmates aside from the effects of an economic downturn on crime.
• The Department of Youth Services recently entered into a legal settlement that will require additional spending of up to $30 million per year for juvenile offenders.

Honeck’s statistics point out that Ohio’s 2005 Tax Reduction Act worked to make Ohio’s tax code less progressive — it is a tax reduction that puts into reverse a progressive tax code that as income increases, tax, as a percentage of income, also increases. In the 2005 Reduction, the top 1% of incomes received 26% of the total tax reduction, a reduction on average of 1.2% of income. Incomes in the lowest 20%, with incomes less than $17,000, the reduction amounts to only 0.2 % of income.

One of Honeck’s suggestions is that the 2005 tax reduction law be modified so that the the tax reduction called for in the 2005 law for the top 2% of incomes (in excess of $200,000) be rescinded. Honeck says that this action alone would raise a total of $376 million in 2009. Excerpts from the report:

• Now is the time to begin examining the state’s options for raising revenue, both to avert a deficit and to invest in needed priorities. Policy Matters Ohio worked with the Institute on Taxation and Economic Policy (ITEP), a Washington, D.C., based research institute with a sophisticated model of state and federal taxation systems, to review some possibilities.
• One of the state’s key fiscal challenges is to reform the income tax, which is the single largest contributor to state revenue and is our most progressive tax because of its tiered rates. It is the tax that is most capable of growing long term with the economy, particularly in an era in which income gains are concentrated among the wealthiest households.
• We estimate that the cuts will reduce income tax revenues by approximately $2.22 billion in calendar year (CY) 2009 when compared to previous rates. Actual revenue losses may be higher because the estimates are based on 2007 income levels. This amount is greater than the basic annual operating subsidy provided to Ohio’s public colleges through the Board of Regents.
• The slowing economy reduces income tax receipts even further. Income tax revenues have been below original budget estimates for five months in a row, including a 6.3 percent shortfall in March.4 Through the first nine months of FY 2008, personal income tax receipts are 2.4 percent, or $149.5 million, below annual estimates.
• Continuing planned rate cuts in the current environment is irresponsible. We asked ITEP to model three possibilities: (1) freezing rates at 2008 levels, (2) restoring the original 7.5 percent top rate for the highest income families, and (3) and rolling back rates to 2007 levels. We recommend moving forward with the first two options immediately. The third option may be necessary if the state’s fiscal health continues to deteriorate. Raising the top rate back to 7.5 percent alone would raise approximately $376 million in annual revenue compared to today’s tax structure. The top rate applies to the highest income bracket, i.e., the share of a family’s taxable income above $200,000. If this action is taken, less than two percent of all Ohio families would experience an actual change in tax liability.
• Freezing income tax rates at 2008 levels by itself would preserve approximately $441 million in revenue. Combining this action with raising the top rate back to its previous level of 7.5 percent would boost revenue by approximately $817 million in CY 2009.
• In legislative testimony in February, Office of Budget and Management (OBM) Director J. Pari Sabety outlined three budget options based on projected economic activity – low growth, zero growth, and recession. The administration is acting on the low growth scenario, which creates the need for a budget correction of $733 million. These cuts will result in the reduction of thousands of state employment positions and cuts to programs, including the closure of two psychiatric hospitals.
• State government has been unwilling to craft a permanent solution to its fiscal problems. Our new tax system, which was put in place in 2005 (FY 2006), adds to the state’s budget challenges instead of solving them. According to OBM estimates, the 2005 tax changes, even when combined with savings from ending the state-subsidized commercial property tax rollback, create revenue losses on the order of two to three billion dollars each year depending on the baseline used for comparison.
• As we face the prospect of another recession, it’s time for the state to develop a realistic tax system that is adequate to meet the long-term needs of our population and is progressive – that is, it taxes people according to their ability to pay.
• The greatest savings (as a result of the 2005 Tax Reduction Act) both in terms of dollar amounts and as a percentage of income, will go to the wealthiest taxpayers. The top twenty percent of households will receive over 70 percent of the savings from the cuts, or $1.56 billion of the total $2.22 billion in tax savings. For the families in the lowest quintile, with incomes less than $17,000, the average savings is twenty dollars, or 0.2 percent of income.
• The top 1% of incomes — starting at $339,000 and averaging $890,000 — the average annual tax savings is $10,273. This amounts to 1.2 percent of their income, on average. The top 1% of incomes, overall, receive 26% of the total state tax reduction.
• The middle quintile comprises families with incomes between $29,000 and $47,000. The average income in this group is $38,000. These families will receive a tax cut of $187 on average, or about 0.5 percent of total income. This group will receive nine percent of the total $2.22 billion tax reduction in 2009, or about $208 million.
• An enhanced income tax is the cornerstone of a realistic budget strategy. At a minimum the Administration and the legislature should freeze income tax rates at their current 2008 levels. Otherwise, the final rate cut in 2009 will cost the state $441 million in total foregone annual revenue. The state also should restore the previous statutory rate of 7.5 percent to the top income bracket of over $200,000. This action would raise a total of $376 million in 2009. Together, these two actions would boost income tax revenue by approximately $817 million next calendar year.
• Less than 2 percent of all Ohio families would be affected by raising the top rate. The top one percent of Ohio families by income, who make at least $339,000 a year, would pay 92 percent of the increase. Only one-fifth of the families in the “Next 4%” by income would experience an increase (Table 3). Families affected by the increase would continue to receive the benefit of 2008 rates for the share of their income below $200,000.
• Raising the top rate affects those who are most able to pay and who are best situated to reduce their federal income taxes through itemization. State and local income taxes are deductible from federal income, so a state tax increase leads to a reduction in federal income taxes on wealthy families. Almost one quarter of the increase would be passed on to the federal government.
• This scenario increases the average state tax liability of the top one percent of families from $40,191 to $46,489. After the increase, total state tax liability would amount to 5.2 percent of the income of these families without taking into account federal deductions.
• Ohio’s state government has struggled to find adequate revenues in this decade. The current policy of cutting income taxes over five years in the face of slowing economic growth, and possibly a recession, weakens our revenue base precisely at a time when the state should ensure a strong safety net. When the cuts are fully phased in next year, income tax revenues will be reduced by approximately $2.22 billion from their baseline level. Over $1.5 billion of the revenue losses from the tax cut will be captured by Ohio families in the top 20 percent of the income scale. More than a quarter will go to the top one percent of families, who make more than $339,000 a year.
• Halting further cuts to the income tax and restoring the 7.5 percent rate for the top bracket is an immediate, necessary step to shoring up our revenue base. This policy brief focused on the income tax because it is the largest single contributor to the state’s General Revenue Fund. Other steps need to be taken as well, such as retaining the corporate franchise tax and closing tax loopholes.

Tuesday, Governor Ted Strickland was in Dayton hosting an “Education Forum.” At that forum, Strickland said, “Education is the central issue I face as governor.” Strickland’s inaugural address in 2007 was centered on education, and his 2008 State of the State address outlined six principles to guide education reform in Ohio. I didn’t attend, but, in order to make this report, I replayed the 87 minute video of this forum several times, seen here, and took extensive notes.

Holly Hollinsworth, the spokesperson for the forum, started the meeting by explaining, “The governor has created this series of forums all across the state to give citizens a chance share their thoughts, their ideas, their own experiences and to help Ohio reform and renew its education system. This is truly, and I think you’ll agree, a unique opportunity not just to react but to help build an education reform plan from the ground up.”

Governor Strickland then started with these remarks:
“I want to thank the good mayor who is with us today and I want to thank a number of legislators from both sides of the aisle who have taken time to be with us this afternoon … Every Ohioan has something very important at stake when we discuss education and we want to hear their voices, your voices, as we seek to improve ours schools in Ohio.

“Ohio’s system of education is not something that can be changed over night. I think it is going to take all of us, those of us in government, those of us in education, those in communities across this state of ours working together to get it done. That’s why we are holding these conversations throughout Ohio. This is the 4th of 12 … We want to give people a chance to tell me what they’ve seen and heard and even more important what they can imagine our schools becoming … With your help we will create a world class system of public education in Ohio.”

A video tape showed interviews with various business and educational leaders around the state emphasizing the importance of education and ended with the governor’s comment at his State of the State: “Our schools must teach students to think past the limits of what has been done and imagine what can be done.”

The spokesperson, Holly Hollingsworth, encouraged the forum participants, “That is the message here today to think past the limits of what has been done and I’m asking all of you to think about what could be done that is different and new.”

Governor Strickland emphasized the importance of clarifying mission. He said, “Before we can start talking about all the details about how we are going to design a school or a lesson or anything, I think we need to begin with a firm mission for the school … I believe the Mission of our schools must be: To ensure that every child in Ohio has the opportunity to succeed — to succeed economically, to succeed in becoming as a well rounded person, and to succeed in becoming a productive citizen. And to do that, schools must create learning environments that foster and nurture creativity,and innovation and global competency.

“Let’s acknowledge at the beginning what we don’t know. We don’t know exactly what jobs will be in demand in 20 or 50 years from now. In fact some of the highest demand jobs today simply did not exist 20 years ago. We do know that a creative person — a person with analytical thinking skills, a person who has been challenged to learn independently — is a person who can adapt to any new setting and that is the person who can thrive in 2028.”

Strickland reviewed the six principles that he had developed during his State of the State address. He repeated a large section of that speech, in which he said,

“First, we cannot address our education challenges without strengthening our commitment to public education. As a practical matter, the vast majority of Ohio children are and always will be educated in the public school system.

“Second, a modern education must be directly linked to economic prosperity. Ohio cannot thrive without understanding that world class schools will produce a talented workforce, and a talented workforce will attract and create jobs.

“Third, we need to identify the great strengths of our schools. There are features in our education system that the rest of the world seeks to emulate, and we must build on these triumphs.

“We excel internationally in our ability to foster creativity and innovation. These skills fuel a lifetime of success, especially in an evolving global economy. Ohio schools produced the minds that created Superman, with his fictional X-Ray vision, and the mind that invented the MRI, giving doctors the very real ability to painlessly view inside the human body. Ohioans are visionaries, but practical as well. It wasn’t long after a pair of Ohioans invented the airplane that another Ohioan invented the parachute. Our schools must teach students to think past the limits of what’s been done, and imagine what could be done.

“Fourth, our best teachers can show us what works best in the classroom. We need to consult them and follow their lead. Great teachers can be a resource not only for their students but for their fellow educators. We should support these teachers by giving them the freedom to stay in the classroom and still be rewarded for sharing their expertise with their peers. We lose a lot of new teachers – as many as half of all new teachers leave the profession in the first 5 years – but we can help keep these talented people by giving them better access to senior colleagues.

“Fifth, we must strive to develop a specific, personalized education program that identifies how each individual student learns and use the teaching methods appropriate to that student’s needs and abilities. The great educator and philosopher John Dewey described this idea many years ago. He wrote that we must shift “the center of gravity” in schools. It’s a “revolution, not unlike that introduced by Copernicus when the astronomical center shifted from the Earth to the sun. In this case, the child becomes the sun around which the appliances of education revolve.”

“Sixth, testing and assessment will continue to answer accountability questions. But their most important role will be to guide personalized and individualized education through a comprehensive and ongoing understanding of a student’s capabilities and weaknesses and growth in the educational process. I will be guided by these principles as I draft my plan not only for funding, but also for reforming our schools.”

In the second part of the forum, Strickland brought up reform ideas that have been suggested to him. He started by saying: “This is our opportunity for us to think together and to think boldly — I want to think about transforming our schools. Now, we are not an artist looking at an almost finished painting and wondering where to put that last brush stroke in order to make it a little better. What we are is an artist looking at a blank slate and asking what is the best thing we can create here …

“Let me emphasize what we are talking about today are ideas, not proposals, ideas we need to give thought to. We know there are educational practices still used here in Ohio and across American that were created literally centuries years ago to meet he needs of a fully agrarian society, I think and we need to ask ourselves is there a better way to serve our Ohio school children today and certainly in the years to come.”

The governor said that a lot of ideas had been presented to him that he was studying. He outlined ideas having to do with using interdisciplinary approaches to teaching, hands on learning, longer school year and longer school day, a 21st Century Curriculum that emphasizes “major skills we need to impart, skills involving life, learning, and information skills,” internships for new teachers (following more the medical profession’s paradigm), a value added system of accountability for improving instruction and evaluating teachers, more authority for principals, school performance agreements, and a different grading system.

There were a lot of questions and comments from the participants and Strickland conducted the meeting quite competently, listening carefully and responding thoughtfully.

Strickland ended the program by saying, “I’m determined to work with you to try bring out the kind of results Ohio needs for our students and our people because our students have the capacity to change the world for good and we, quite frankly, should be capable of changing our schools to help them do just that.”