On April 25, the Ohio House Finance Committee unveiled its first round of amendments (download PDF) to the Governor’s proposed biennial operating budget, House Bill 49.  Even with a few bright spots, the House’s first attempt is not nearly as bold as the 2015 budget, it does not make the necessary spending cuts that leadership recently acknowledged, and it will soon be lamented for missing an opportunity to achieve real reform.  

Overview

First, the good news.  House Bill 49 rightly eliminates most—but not all—of the “tax shifting” that permeated the Governor’s proposal.  The bill also retains the basic contours of the Governor’s school funding proposal, including better mechanisms for allowing state money to follow the student.  The House also re-asserts the General Assembly’s control over federal dollars by reining in Ohio’s Controlling Board.  And finally, the House largely adopts the Governor’s proposed criminal justice reforms that will keep low-level, non-violent offenders from state prisons.

Now, the bad news.  The Governor and legislative leadership recently warned that Ohio needed to reduce spending by roughly $800 million.  The spending cuts in House Bill 49 fall well short of that mark.  Much of the proposal’s $2.5 billion of “savings” can be attributed to accounting tricks and fiscal slight-of-hand, and such “on paper savings” don’t amount to significant real savings.  

The House budget, for example, does little to give the state a better grip on Medicaid spending—the “Pac-Man” of Ohio’s budget—and the last biennial budget offered better Medicaid reforms than this one.  Thus, the House misses an opportunity to make the kind of meaningful spending cuts that will make it easier for Ohio to pursue fundamental tax reforms.

The Governor’s proposal begins to reform Ohio’s arcane municipal income tax structure—the House guts that proposal, and then litters the budget with a trail of dubious licensing fee increases.  The last House budget recognized Ohio’s urgent need to reform her labor laws in order to compete with her reform-minded neighbors—but not this budget.  No real tax or labor reforms here, just more opportunities missed. 

Fortunately, the current House Bill 49 is not the final word on the matter.  The House plans to move the budget next week, leaving a limited—but possible—opportunity for cooler heads to prevail and better policies to be included.  With such hope in mind, a fuller analysis of key features of House Bill 49 follows.  

Eliminates Most Tax Shifting

We generally support tax proposals designed to move Ohio from an income-tax structure to more of a consumption-tax state.  But we have long-standing concerns about making that shift too quickly.  In our view, any sound, structural tax reform must first be preceded by lower government spending to help resist the inevitable temptation to balance the budget and pay for tax reform by increasing taxes.

We therefore commend the House for eliminating much of the “tax shifting” that effectively allows the government to pick “winners” and “losers” in the market.  The House budget, for example, does not include a new tax on vapor, or a severance tax hike, or a tobacco tax increase.  Well done.  The House also eliminated the Governor’s plan to expand the sales tax to include most services—with the unfortunate exception of extending the state sales tax to online travel agencies. 

Municipal Income Tax Reform

One of the Governor’s better ideas in the FY 2018-2019 budget proposed moving to centralize the tax collection process for businesses across the state.  Ohio’s municipal income tax structure is among the nation’s worst and most burdensome—and, as we have argued repeatedly, simplifying this byzantine system is long overdue. 

Unfortunately, the House’s substitute budget eviscerates the Governor’s reform and then proceeds to charge taxpayers for trying to file a single state tax form—essentially taxing the taxpayer as he attempts to pay his taxes.  Insult, meet injury.

We suggest either returning to the Governor’s proposal or centralizing tax collections in a single location without levying any additional administrative fees for filing taxes.

Budget “Savings” and Spending Restraint

House Bill 49 purports to cut an additional $2.5 billion from the Governor’s proposal over the next two years, with nearly $923 million of those “savings” coming from reductions in the General Revenue Fund.  Thus, the House budget appears to remain in stride with inflation. 

Many of the so-called spending cuts, however, may be more illusory than they at first appear.  The House budget claims to save more than $1 billion from Medicaid, for example, but it remains unclear whether these are real savings or merely deft accounting tricks. 

Similarly, $944 million of the $2.5 billion “savings” are attributed to reducing the amount the state spends as fiduciary for collecting municipal income net profits taxes.  House Bill 49 does reduce the overall appropriations for this function, but this hardly qualifies as “state spending” when these are local tax dollars that the state simply collects and then redistributes to the appropriate localities.

To be sure, the House budget does take some laudable steps forward to restrain spending.  The House froze, for instance, the State Share of Instruction, which subsidizes Ohio Institutions of Higher Learning; and eliminated unnecessary subsidies for the Ohioana Library Association.  Such subsidies give public institutions less incentive to economize, reduce costs, increase quality, and otherwise behave like rational actors in a free marketplace. 

The House also curtailed the Controlling Board’s unilateral authority to use more than $10 million of unexpected federal funds.  This reform empowers the General Assembly—and not the Controlling Board—when deciding which federal programs Ohio should join.  Had this measure been in place several years ago, Ohio most likely would not have participated in the disastrous Medicaid expansion that was joined against the will of the General Assembly.

We remain encouraged by the House’s tribute to fiscal restraint, but earmarks continue to burrow their way into the budget and more cost-cutting is needed in order to bring state spending down to responsible, sustainable levels.  See our Piglet Book for more examples of how Columbus can trim the fat.

Criminal Justice Reform

We applaud the House for affirming the Governor’s proposal to rehabilitate low-level offenders locally rather than in state-run facilities.  More than 95 percent of those who go to prison return to our communities.  Low-level offenders who serve time in state prisons often return even more hardened and more dangerous than when they began their sentence.  

Ohio must pursue policies that protect communities while keeping as many low-level offenders out of prison as safely possible.  As we have explained, community treatment is twice as effective at one-third the cost, making our communities safer and saving taxpayer money in the long run.

The Governor’s budget would require non-violent, non-sex offenders to be rehabilitated locally, and authorize the Department of Rehabilitation and Correction to grant counties money to offset the added costs of rehabilitation.  State judges participating in a pilot rehabilitation program support the Governor’s proposal, while the Ohio Judicial Conference and Prosecutors Association have opposed the measure.  House Bill 49 struck a compromise that will allow counties to send up to 15 percent of their non-violent, non-sex offenders to prison—a compromise that we believe will save money and make our communities safer.

Education Reform

House Bill 49 rightly embraces the contours of Governor Kasich’s education proposal.  That proposal begins unwinding the inherent problems of “caps” and “guarantees” that distort the accuracy of the Foundation Funding Formula (the designated amount spent on each public school student from the General Revenue Fund and lottery profits).  “Guarantees” allow districts with declining enrollment to maintain previous funding levels despite serving fewer students, and “caps” prevent districts with growing enrollment levels from receiving the formula’s full amount. 

Although we applaud the House’s effort here, we wish that it was not exceeding the Governor’s already respectable Foundation Funding by expanding “racino” gambling that may expose the state to expensive litigation.  Two cheers for education reform!

Medicaid Reform

We remain cautiously optimistic—or perhaps hopefully skeptical—that the House’s Medicaid spending cuts will actually materialize.  House Bill 49 allows Mr. Kasich’s Administration to seek a waiver from Washington to add several requirements—including work requirements—to the state’s expanded Medicaid population.  This is a reasonable, but insufficient first step toward reversing Ohio’s Medicaid expansion, and the bill’s loose language is riddled with loopholes that threaten to render the reforms ineffective.  Compounding our skepticism, the House failed to include the last budget’s Healthy Ohio waiver that the Obama Administration denied.  

Ohio policymakers should be taking full advantage of the current climate in Washington and pushing for innovative Medicaid “1332 waivers” to alleviate some of the onerous burdens of Medicaid by helping people get out of the program.  For the first time in years, the federal government wants to increase state flexibility in Medicaid programs, and House Bill 49 fails to take advantage of a golden opportunity to pursue bolder reforms that will pare back Medicaid.  Again—opportunity averted.

Health Care Transparency Reform

House Bill 49 regrettably waters-down some positive reforms designed to make health care more transparent.  Though not a cure for rising health care costs, transparency and patient access to more information can help the market and consumer preferences drive down costs.  Another opportunity needlessly wasted.

Licensing Reform

As we have argued, Ohio must address her burdensome occupational licensing scheme.  By consolidating several licensing boards and commissions, Governor Kasich and House Bill 49 have taken baby-steps toward helping workers achieve their full professional potential.  We continue to advocate administrative savings, and have championed lowering—rather than raising—licensing fees for prospective licensees.  The House budget also makes telemedicine services more available and expands occupational freedom for certified nurse practitioners by allowing them to help more patients receive medicine.  We see these reforms helping health care providers monitor and treat patients more efficiently and effectively, which will ultimately reduce health care costs.

Labor Reform

House Bill 49 lacks any meaningful labor reform.  Where previous budgets made at least some effort to amend Ohio laws on “project labor agreements” or making prevailing wages optional at the local level, this House budget is eerily silent.  Even relatively minor labor reforms can help ease burdens on businesses and local governments, thereby reducing costs and spurring economic growth.  Labor reform is an opportunity that the House can ill afford to miss.

Conclusion

Fortunately, House Bill 49 will not have the last say on these matters.  The full House must still vote on the budget before sending it to the Senate, which gives policymakers time and, ahem, opportunity to improve upon the current draft.

The Legislative Service Commission has compiled these resources for exploring the gritty details of the budget, including a comparison of House Bill 49 and the Governor’s initial proposal.

Piglet Book® is a registered trademark of Citizens Against Government Waste and is used with their permission.