Balanced Budget Sets Stage for Historic Battle
Angst permeates the halls of the Statehouse these days. Most people know about the projected $4 billion deficit embedded in the next budget. What they may not know is that Ohio’s balanced budget requirement is setting the stage for a historic clash between two fundamentally different approaches to managing the state’s finances.
On one side are those who believe we need to raise taxes to shore up spending. The Taft Administration, for example, has proposed eliminating the deficit through a combination of $1 billion in spending cuts and $3 billion in revenue "enhancements". The key idea is tax "reform"-expanding the sales tax base to generate $1.1 billion.
This move, however, could be economically disastrous. Raising taxes in a stagnant economy will do little more than erode our state’s economic competitiveness. Ohio’s state and local tax burden ranks ninth highest in the nation according to the Tax Foundation and higher than our neighbors. The proposed tax increases are permanent, not temporary.
On the other side of the debate are those that believe the solution must come from reining in spending. State spending has increased by 48 percent over the past six years while inflation has increased by just 15.7 percent. The administration’s budget proposes spending increases of 4.9 percent during the next fiscal year and 4.8 percent the following year, more than double the projected inflation rate for those years. Recent trends really just continue past trends. State government’s share of the Ohio economy increased 25 percent during the 1990s.
It’s hard to tell which side will win this debate, but those favoring spending restraint may well have the upper hand. In the waning days of February, both the Ohio Senate and House of Representatives balked at the Governor’s proposal to increase taxes to address a looming deficit for this fiscal year. Many state legislators are now grappling with the hard problems of reforming complex programs such as Medicaid. Many even talk of sunsetting major state programs unless they are subject to serious reform.
The Ohio Constitution may also weigh in on the side of spending restraint. If the General Assembly can’t agree on a balanced budget, the Constitution mandates spending cuts, not tax increases.
At root is a basic question over whether state government should act more like a bureaucracy or a business. The bureaucratic approach suggests that our elected officials have determined which programs or services will be provided and then requires funding levels consistent with those spending goals. This logic leads, inevitably, to favoring tax increases to balance the budget.
The spending restraint side believes that state government spending should be adjusted based on our economic ability to pay. When the incomes of Ohio families and businesses fall, they cut back. Businesses can’t shore up revenues by raising prices when demand for their product falls.
Governments, like families and businesses, have certain functions that are necessary. Most families don’t stop buying food when their incomes fall, nor do most businesses shutter their doors when a recession hits. They tighten their belts, become more productive, and focus their resources on what is strategically important.
Balancing the budget could be as simple as freezing many agency budgets. Freezing basic aid and delaying the implementation of 10 other programs could save well over $500 million alone. These delays would hardly compromise the quality of elementary and secondary education (which benefited from a 48 percent increase in spending over the last five years). The governor has already proposed scaling back the overly generous Medicaid benefits conferred in the boom years and reducing eligibility for the nonpoor.
These temporary fixes, however, don’t address the basic spending drivers. Even if those favoring spending restraint win, the long-term struggle over how to restructure state spending has yet to begin. Only when the legislature is willing to look at school finance more rationally, fundamentally reform Medicaid, and subject all state agencies to performance-based budgeting will the state effectively manage its finances to avoid these kinds of fiscal "crises".
Samuel R. Staley, Ph.D. is a senior fellow at the Buckeye Institute and director of Urban and Land Use Policy at Reason Foundation in Los Angeles. An Ohio native and resident, he is co-author of the forthcoming book Mobility First: A New Vision for Transportation in a Globally Competitive Twenty-first Century (Rowman & Littlefield) and co-author of The Road More Traveled: Why the Congestion Crisis Matters More Than You Think, and What We Can Do About It (Rowman & Littlefield, 2006).
