Policy center offers ‘unthinkable’ solutions to looming budget crisis
Tuesday, Jun. 29, 2010
Just in time for the Budget Planning and Management Commission's first meeting, the Center for Community Solutions on Thursday released a white paper entitled "Thinking the Unthinkable: Finding Common Ground for Resolving Ohio's Fiscal Crisis."
The report includes an analysis of Ohio's current fiscal status and FY12-13 budget issues, and proposes two scenarios to reduce budget deficits for FY12-13.
According to the report, the CCS does not presume that the two scenarios are the only ways to resolve the anticipated state budget deficit, but the scenarios are "illustrative of the scope and policy changes required to erase the structural deficit during the next biennium." They represent a framework for reforming the structure of the state's budget to strengthen public services and investments to ensure Ohio's future prosperity.
The authors write, "The Center for Community Solutions (CCS) hopes above all else that it will contribute to moderation in tone and spirit, and pragmatism in the face of a crisis of the first order."
The authors of the report identify current budget realities facing Ohio in FY12-13, including a structural deficit that ranges from $6 to $7 billion, and propose that lawmakers use a three-part "balanced" approach that reflects the short-term impact on citizens and businesses and the future impact on Ohio's economy when developing the next biennial budget. The balanced approach includes "new tax revenue, reduced tax expenditures, and reduced programmatic expenditures," and is based on the following principles, taken directly from the report:
- Policy makers should balance the additional tax burden between individuals and businesses.
- Initiating regular oversight of tax exemptions, credits, deductions, and other breaks collectively known as tax expenditures will better assure the efficacy and fairness of this spending over the long term, and provide greater transparency to the budget process.
- The importance of investing in Ohio's youth can be addressed by sustaining through the next biennium SFY 2011 spending levels for early childhood development, libraries, and instructional, transportation, and student aid subsidies for primary and secondary, and higher education. Ohio's school districts, colleges, and universities should contribute their fair share to deficit reduction through other GRF subsidies.
- Cost cutting in human service programs, especially Medicaid, will be necessary to balance the budget.
- Reframing the Local Government Fund offers a way to both cut costs and assist local governments in achieving economies through collaboration and consolidation of services.
- Investing new resources to stabilize Ohio's behavioral health programs (mental health, alcohol, and drug addiction services), and commissioning work on the future of that system in light of national health reform, should be a top priority.
The report also includes an analysis of income and taxes, tax expenditures, and programmatic reductions that lawmakers and policy makers could consider as options for balancing the FY12-13 budget. The following is a summary of the recommendations from the Executive Summary of the report:
- The regressive effects of combined state and local taxes in Ohio take a larger share of middle-class incomes than the wealthy.
- The combined effects of state personal income and business tax changes have contributed to the structural deficit.
- Reinstating the upper bracket personal income tax rate of 7.5 percent would affect over 2 percent of taxpayers and raise $900 million.
- The regressive effects of Ohio's state and local taxes could be mitigated by adopting a refundable state Earned Income Tax Credit.
- Increasing the rate of the CAT by .08 percent could cover the estimated GRF subsidies to schools and local governments for the loss of the tangible personal property tax repealed in 2005, and raise $400 million over the biennium.
- An increase of one-half of one percent in the sales tax would raise about $ 1.3 billion over the biennium.
- Retaining one-fifth of the former income component of the corporate franchise tax could raise $250 million per year.
- Tax expenditures, which include deductions, credits, exemptions, etc. in state taxes, cost Ohio over $7 billion a year.
- There is little research to justify all tax expenditures.
- Long-term, the state would benefit by developing tools to evaluate and monitor these expenditures, much like the November, 2009, recommendations of the Ohio Society of CPAs regarding programmatic expenditures.
- Lawmakers should consider adopting a schedule for reviewing and "sunsetting" tax expenditures to ensure that "their efficacy is placed on equal footing with education, public safety, civil defense, human services, parks, natural resources, and other programmatic spending.
- Human services, which represent 46.3 percent of GRF outlays and 44.1 percent of total state spending, will "bear a significant share of reductions."
- Even with these proposed reductions, "The impact of including human services in state budget cuts would leave the vast majority of the safety net intact."
- Cuts of $1 billion or more per year could be made through a combination of reductions in Medicaid; state-funded human service line items; non-formula and non-federal match subsidies for primary and secondary education; non-formula, non-student aid, and non-federal match subsidies for higher education; general government GRF appropriations (except debt service); subsidies for property tax relief, including rollbacks; payments through the Local Government Fund; and prison populations.
Long-term Structural Problems
- Dysfunctional mix of state and local taxes;
- Faltering behavioral health system;
- Under-invested public health system;
- Unemployment Insurance Trust Fund debt;
- Replenishing the Budget Stabilization Fund.
The appendix of the report, starting on page 37, includes line items targeted for reductions of 10, 15, or 20 percent in FY12-13, including line items for primary, secondary, and higher education, based on the scenarios.
The proposed reductions in primary and secondary education could save between $62 and $125 million over the biennium. Excluded from reductions under primary and secondary education are line items for property tax relief, foundation funding, pupil transportation, special education enhancements, career-technical enhancements, public preschool, and lunch match.
The proposed reductions for higher education could save between $41 and $82 million over the biennium. Excluded for reductions under higher education are line items for the state share of instruction, Ohio College Opportunity Grant, War Orphans Scholarship, National Guard Scholarship, and adult education and workforce programs.
The report also recommends that property tax relief for homeowners be "means tested" based on income, wealth, and other factors. Property tax relief for homeowners includes the 10 percent rollback for all residential property owners, the 2.5 rollback for owner-occupied residences, and the Homestead Exemption. Adjusting property tax relief through means testing could save $230 million to $640 million over the biennium.
According to the report, the CCS will be posting on its website updates of data and a discussion board to "encourage and facilitate discussion of these and related topics, throughout the balance of the year."
Policy Matters Ohio
In related news, Policy Matters Ohio has collected information about several reports published over the previous years regarding Ohio's tax policies, tax structure, and state budget. These reports include information about the Commercial Activity Tax, tax expenditures, the consequences of eliminating the income tax, Ohio's income tax structure, the 2005 overhaul of Ohio's tax structure, and more.
The analysis of the CCS report and information about the Policy Matters compendium were provided by Joan Platz, education specialist for the League of Women Voters of Ohio, as part of her weekly Education Update. Subscribe to the update.