The next biennial budget in Ohio has a billion-dollar hole in it thanks to the federal prohibition on a complex Medicaid financing scheme previously, and unwisely, embraced by Ohio. Local policymakers are also facing a fiscal challenge in light of this prohibition. 

Since Ohio counties can charge a “piggyback” local sales tax on top of the state sales tax, local governments have been raising hundreds of millions of new dollars as a result of the Medicaid expansion. But with the sales tax on Medicaid managed care organizations now disallowed, the state estimates that counties and transit authorities will face a hit of nearly $400 million.  

No doubt there will be full-throated calls for additional taxes at the local level. Public transportation advocates are likely to be particularly vocal since the sales tax is often used as a revenue stream for transit authorities. 

Those calls should be resisted.  

The Buckeye Institute has long maintained that Ohio has an inefficient system of local governments. This leads to the duplication of services and frequent inefficiencies that cost taxpayers. Instead of the usual calls for higher taxes, now is an opportunity to find greater savings that will benefit taxpayers and continue to improve Ohio’s economic climate.

Our call, echoed by the Kasich Administration, for a greater sharing of services needs to be heeded by local officials.

Auditor of State Dave Yost has been leading the way with solutions by promoting his SkinnyOhio and ShareOhio web pages where locals can learn where they can share equipment.

There are sure to be calls by local governments to again increase distributions from the Local Government Fund (LGF) in the wake of the loss of Medicaid sales tax dollars.

These calls should be resisted too.

The Buckeye Institute has argued for an end to revenue sharing where Columbus uses state tax dollars as a subsidy to local governments through the LGF. 

As articulated in my 2014 report on the subject,

Ultimately, the long-term fiscal health of the state’s local governments will be determined by Ohio’s economic growth, not by perpetual state subsidies or the redistributive preferences embodied in revenue sharing. By slowly beginning to reform Ohio’s revenue sharing system, Ohio policymakers are embracing a new approach to government spending that will empower local taxpayers to assert greater control over local decisions and facilitate local governments re-thinking how they operate.

Locals should have prepared for this contingency instead of hoping the federal government would never do what the federal government promised it would do. However, given that sales tax growth has been a bright spot for counties as the state has pulled out of the Great Recession, the loss of the new Medicaid sales tax dollars comes as a legitimate hit. Rather than simply increasing LGF distributions to make up for the reduction in revenue, state and local leaders should sit down and re-examine how the remaining LGF can be better targeted to communities in need but see no significant net increase in the LGF overall. 

Under no circumstance should this turn into a giveaway; otherwise, the incentive to embrace further reforms at the local level will decrease.

There will be no easy or “silver bullet” solutions to the challenges raised by the looming shortfall in local sales tax revenue. Yet by working creatively across governmental jurisdictions, Ohio leaders can turn this into a long-term victory.