On June 12, the Ohio Senate unveiled its initial version of the state’s biennial operating budget, improving upon the House of Representatives’ version, House Bill 49. The Senate’s solid first effort goes further than the House in some key areas—including administrative agency cuts, Medicaid reductions, municipal tax reform, criminal justice, and healthcare—but more work remains to be done, especially with recurring revenue shortfalls looming on the horizon.

In our initial comments on the Senate version of the budget we commended the Senate for their work, but highlighted that “there remain[ed] plenty of areas that could use further trimming to create an even more sustainable budget, especially if revenues continue to lag.”

With that in mind, we offer the following observations as the Senate continues its budget deliberations.

Spending

The Senate draft reduces the House’s total appropriations over the biennium by $366 million. With appropriations of $60.7 billion in FY18 and $61.9 billion in FY19, state spending would dip below actual FY16 spending and projected FY17 spending. The Senate exceeds the House’s General Revenue Funds (GRF) cuts by an additional $423 million, wisely eliminating a fair number of earmarks. Many of the Senate’s proposed spending reductions are real—not illusory accounting gimmicks—and demonstrate more progress toward fiscal responsibility than we often see in the budget process.

Some of the Senate’s cost-savings are unlikely to materialize fully, particularly the proposed Medicaid cuts, but we applaud both chambers for requiring the Kasich Administration to obtain Controlling Board approval for expanded Medicaid spending. In addition, we remain encouraged that the Board’s approval is contingent upon the Administration seeking federal Medicaid reform waivers.

In addition to finding more administrative savings within state agencies, the Senate will also claw back millions of unspent dollars scattered throughout various line items throughout the budget. Some of the claw-backs may prove one-time savings that cannot be repeated in subsequent years, but the Senate’s effort are appreciated nonetheless.

The Senate slashes the Department of Education’s budget by $142.6 million over two fiscal years, but retains the House’s increases in foundation funding. Even more significantly, the Senate substantially revises the school funding formula in order to prevent most school districts, even those with significant enrollment declines, from receiving less funding. The revised funding formula will be paid for in part by lowering the caps on faster growing districts.

Taking a few pages out of our Piglet Book, the Senate version reduces appropriations for several line items, including the “Small Business and Export Assistance” by nearly $1.4 million over two years. 

And finally, the Senate wisely retains reforms that will limit the Controlling Board’s authority over unexpected federal windfalls, and will prevent the Board from circumventing the legislature.

Taxes

We applaud both chambers for maintaining previous tax cuts and reforms that are now beginning to deliver for Ohio. According to the Bureau of Economic Analysis, Ohio’s economy grew faster in 2016 than each of our neighbor states except Michigan. Despite this positive sign, several examples illustrate the work that remains to be done to make the tax code as simple and fair as possible for Ohio’s families and businesses.

Ohio’s tax code remains riddled with complex deductions and special exemptions that encourage individuals and businesses to restructure their transactions to gain tax benefits. Although tax deductions may support worthy causes, such as college savings and disability-expense accounts, reducing the size and number of deductions will make Ohio’s tax code more efficient, more fair, and may ultimately help Ohio transition from an income tax to a pro-growth consumption tax state.

Thus, we think that the Senate’s proposal which doubles the tax deductions available for college savings plans and disability-expense savings accounts from $2,000 to $4,000 per beneficiary takes a step in the wrong direction. We have similar concerns about special tax treatments that favor only certain sectors and industries, such as the “Rural Jobs Act,” which unfairly benefits insurance companies and financial institutions that invest in rural and “high growth” funds. Although spurring rural job-growth is a noble cause, we think it unlikely that these tax expenditures will succeed, and all businesses and families would see greater benefits with sustainable across-the-board tax cuts.

Instead of adding or expanding special tax exemptions, policymakers should look to reduce and eliminate deductions in order to finance an across-the-board income tax cut.  Reducing taxes across all tax brackets would continue to leverage the state’s recent economic gains and have a far greater impact on rural Ohio than special-interest tax breaks.

Municipal Income Tax

The Senate took a positive step that will allow businesses to file a single tax return, while not shifting administrative fees to taxpayers. This provision will save Ohio businesses from some of the administrative headaches associated with Ohio’s byzantine municipal income tax. Much more reform is needed, of course, but it is good to see a strong effort to fix a broken system that consistently hurts Ohioans.

Medicaid

The Senate has yet to embrace the Governor Kasich’s proposal to shift certain Medicaid populations, particularly the more expensive Aged, Blind, and Disabled category, into managed care in order to save money while providing better care. However, at least the Senate’s budget continues reforming Medicaid and makes some progress reining in Ohio’s fiscal “Pac-Man” by cutting more than $100 million from the Department of Medicaid over FY18 and FY19. 

The Senate’s intentional underfunding of Medicaid will help maintain legal guardrails on the program and encourage Healthy Ohio and other significant reforms through state innovation or 1332 waivers. As noted, the current Senate budget also wisely retains House provisions concerning Medicaid and the Controlling Board’s required authorization for expansion spending. These policies will likely reduce Medicaid costs and make it easier for Medicaid expansion recipients to move into affordable private insurance coverage.

Education

The Senate adopts some of the Administration’s proposal to begin shifting Ohio’s school funding formula away from guarantees and caps. Unfortunately, the Senate lowers the caps, and thus slows the state’s transition away from guarantees. 

The caps and guarantees in Ohio’s education funding distort 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. We think more robust efforts should be pursued through the budget process to resolve this systemic issue. 

We would also encourage policymakers to eliminate “safe harbors” for many school buildings. The legal safe harbor provisions effectively limit or prevent many students from receiving EdChoice scholarships as hundreds of buildings that should be eligible for those scholarships are never added to the eligibility list.

Criminal Justice

We commend the Senate for retaining the Target Community Alternatives to Prison (TCAP) program. Although the program will be voluntary for much of the state under the Senate’s budget, counties will quickly join the program as they see the benefits to public safety that come from community-based rehabilitation for low-level offenders.

Local Government

The Senate tweaks the distribution of the Local Government Fund to help various programs battling Ohio’s opiate addiction crisis, and also fine-tunes the formula for the Public Library Fund to receive an additional $9 million in GRF over the biennium.

The Buckeye Institute recommends phasing out the LGF altogether or at least implementing the Governor’s proposal to better target the LGF to those local governments that have limited capacities to raise operational funds.

Conclusion

The Ohio Senate deserves credit for the positive steps they have taken with first iteration of the budget, especially in light of reduced revenues. However, now is not the time to rest. The Buckeye Institute still recommends additional reductions, highlighted in our Piglet Book, to further improve Ohio’s fiscal situation and appropriately balance state priorities.

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