State Budgets

The Inside Story on the Ohio Budget Debate

Ohio’s state budget debate went down to the wire this year, with Governor John Kasich signing the budget bill with little time left on the clock. But even with the budget complete, the Ohio fiscal debate continues. To learn more about the goings on in Columbus this year, I spoke with Greg Lawson of the Buckeye Institute. Greg is the Statehouse Liaison and Policy Analyst at Buckeye, an Ohio think tank that researches and promotes free-market solutions for the state.

SBS: How does this year’s budget debate compare to previous sessions?

Greg Lawson, Buckeye Institute: This budget season has been more contentious than in the past, although they’re often contentious. But this year, Medicaid expansion was in the budget, at first, along with significant increases to the sales tax base, both proposed by Governor John Kasich. Medicaid expansion is, of course, a contentious issue, and the sales tax expansion was particularly upsetting to the business community given that it came a bit out of the dark at them.

But the Governor had also proposed a significant tax cut package, and a smaller version of that passed. It was much smaller than originally planned. All of these issues set the stage for a lot of debate over the budget.

Since Medicaid expansion was in the budget until the Governors veto, it was extremely contentious. There are ongoing issues with Medicaid now, including separate reform legislation that will be coming out in the near future. There is even talk that there will be executive action without a vote of the legislature.

What do you think about the compromises made on Governor Kasich’s tax policy goals?

A lot of compromises were made, resulting in a very mixed bag, as we see it. On the positive side, there is no question that this year’s budget took a step, albeit a small step, on the path towards consumption based tax system. We’re also glad that the income and business tax cuts were part of this year’s budget. The small business cut was significant–there is a 50 percent deduction on the first $250,000 of business income.

The Tax Foundation finds the business cut to be a bit gimmicky, and there are some legitimate reasons to think it may not yield as big a pop economically as advertised. But along with the income tax cut, this did help us overall make a relevant, if insufficient, cut in the state taxes. To get us there, the legislature, unfortunately, raised the sales tax, with only a limited sales tax base expansion. Coupled with the piggyback taxes that localities are allowed to add on top of the state sales tax, the local sales tax level can now go as high as eight or even nine percent on some areas. This is a big problem when compared with our contiguous neighboring states that have lower sales tax rates. We’re not happy that the state opted to skip a significant increase to the sales tax base and only increased the rate.

Additionally, the tax reforms failed to address the progressiveness of the tax brackets, leaving us with nine brackets.

We can understand why some compromises had to be made this year on the state income tax. But if this is all that happens in tax reform over the next two to four years, then it simply won’t be enough to make a real positive change in Ohio. We’re hoping to have this debate again and will encourage more income tax cuts.

The other major portion of the tax plan were the changes in the state property taxes. There was a reversal in the policy signed by Governor Ted Strickland regarding the homestead rebate, though this largely only returns things to the way they were until the late 2000s. The legislature and Governor Kasich agreed this year to make the rebate a means-tested program, rather than offering it to all senior citizens in Ohio. Additionally, the state has been subsidizing 12.5 percent of every new levy passed in the state for years, thus making the true cost to local taxpayers opaque.  Now, local governments will have to ask taxpayers to bear the burden for the entire cost of tax increases. It is not surprising local officials would want to keep the removal of the property tax rollback as quiet as possible.  We think it should be as open as possible. Over time, this could be a net positive if enough people, in a grassroots movement, put the pressure on local government to make sure that they are not just continuing to expand.

What were some of the high points in this year’s budget?

We were very happy to see that Governor Kasich made it a priority to expand the school choice program in Ohio. This is a really smart move, and we’re fully supportive of it.

In your perfect budget, what other reforms would you have supported?

It’s disappointing that Ohio has not gotten a grip on spending and continues to overspend every year. We wanted to see more cuts to government spending, overall. Just look at one of the increases– the state budgeted $700 million more on primary and secondary education. We’re working on a study about this, and what we’ve found is that the increased funds don’t result in better education outcomes. A lot of that money winds up getting wrapped up in collective bargaining contracts. This increased funding is just supporting the local school systems because they have long complained about a lack of funding. Politically, it’s a smart decision, but from a policy standpoint, it’s very disappointing that this happened.

Do you think there should be a restriction on including “policy” in the state budget?

This is really just something that happens. In Ohio, and presumably, in other states as well, the state budget is the biggest bill the legislature will pass. Because of that, the bill becomes a Christmas tree. Sometimes, the policy bills that find their way into the budget have been vetted and just haven’t gotten through, so the sponsor feel that the budget is the best time to put them in front of the legislature.

What really upsets people is when a policy bill isn’t vetted and shows up at the last minute. In an ideal world, that would not be done. But I think a lot of states do it.  That means that when looking at the budget, you need to stay on your toes and watch it carefully. The budget package could be changed at the last minute. In Ohio, the budget debate was a three to four month process, and literally, the whole thing changed, significantly, with five days to go. That’s why you need to watch it like a hawk.

We would prefer that these bills are properly vetted and not inserted in the dark of night, but that’s just the nature of the budget process.

Looking into your crystal ball—Do you think the third year of income tax cuts in this year’s budget will survive the next budget debate?

It all comes down to the election. If Gov. Kasich is reelected, I have no doubt the tax cuts will stay in place. As a matter of fact, we would hope that the cuts would go even deeper. The Governor has made comments in the press that he would like to see the state income tax rate be dropped to under five percent. To his credit, he’s been very vocal about this.

That said, if he loses, I think its going to be very open-ended. There will be quite a battle to keep it in effect, and it’s doubtful that any other cuts would happen. Kasich’s likely opponent has already said that he would reverse the cuts and stop the cutting trend. Although the Governor is now considered the favorite, if he doesn’t win, all bets are off.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

+ State Budgets In Depth