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What the Ohio Senate Should Do with the Biennial Budget

Daniel J. Dew, Rea S. Hederman Jr., and Greg R. Lawson May 22, 2017

Now that the Ohio House of Representatives has approved its version of the state’s biennial budget, it falls to the Senate to improve House Bill 49 and address the missed opportunities for significant reform. To help the Senate improve the budget and keep Ohio on the road to success, The Buckeye Institute offers the following suggestions.

Spending

The Ohio Senate should look for additional spending cuts and restraint in order to offset the illusory savings proposed by the House of Representatives.

The House of Representative’s budget appears to reduce Governor Kasich’s budget proposal by a massive $12.8 billion over the fiscal years (FY) 2018-19. Unfortunately, much of the apparent reduction is illusory or unlikely to be realized.                                                                                

First, $944 million of so-called “savings” comes from an account that simply collects municipal income tax, on a pass-through basis, which will be redistributed back to local governments. In other words, these are not state funds to begin with and the House’s adjustment will not reduce overall government spending or taxes.

Second, the House version calls for significant reductions in Medicaid spending that, in our view, are unlikely to materialize. The House appropriates $5.6 billion less than the governor proposed for FY18, and $5.8 billion less for FY19. In addition, to check Medicaid spending the House requires Controlling Board approval every six months in order to increase Medicaid spending. Prior to releasing these funds, the Controlling Board must be assured that the Kasich Administration is making progress on several reforms to Medicaid, including seeking the Healthy Ohio and State Innovation waiver.

Although these reductions—and the Controlling Board’s required approval—are steps in the right direction, we expect the state will still spend a significant amount of these “saved” dollars because the House’s Medicaid budget is intentionally underfunded.

Given the illusory and uncertain nature of these budget cuts, further reductions in state spending must be found to keep Ohio’s budget in the black and allow for meaningful tax reform. The Buckeye Institute’s 2017 Piglet Book provides recommendations for spending cuts to assist the Senate in its budget deliberations. 

    Phase down the property tax rollback on all taxpayers by one to two percent. Currently, the state pays 10 percent of property taxes for all Ohioans, and if you live in your home the state pays and additional 2.5 percent. A one percent reduction could yield tens of millions in savings over the biennium. At two percent, the savings could eclipse $100 million. Since the property tax rollback program was adopted when Ohio began imposing an income tax, the amount of money spent on the program should be cut as Ohio’s income tax declines. The Senate also should consider means testing the rollback beyond our suggested phased in reduction.

•    Maintain the House’s elimination of the Ohioana Library subsidies.

•    Eliminate the $1.1 million appropriation in each fiscal year for the Ohio Grape Industries marketing program.     

•    Further reduce the House’s subsidies for the Ohio Arts Council. A 50 percent cut in each fiscal year would yield $12.7 million in savings.

    Remove ALL earmarks introduced by the House. For example:

o    $200,000 for iBELIEVE Foundation

o    $100,000 for the Cleantech component of the Ohio-Israel Agricultural Initiative o    $128,500 for the Ottawa County Business Advisory Council’s Career Development Roadmap Program

o    $1 million for Accelerate Great Schools public-private partnership

o    $500,000 for the Childhood League Center

o    $300,000 for a pilot program testing if cognitive artificial intelligence can improve student performance

o    $100,000 for the Ohio ProStart school restaurant program

o    $200,000 for the Supporting Partnerships to Assure Ready Kids (SPARK) program in Ohio

o    $500,000 for Lumos Innovation

o    $1.4 million for various co-op internships at state universities

Earmarks added by the House can be found in the Legislative Service Commission comparison document that highlights differences between the House and Executive budget proposals.

Taxes

The Ohio Senate should adopt a small, across the board income tax cut and should ensure that no new tax shifting is introduced. They should also ensure that any reform to the municipal net-profits tax does not force Ohio businesses to shoulder the administrative burden of the worst local tax structure in the nation.

The House wisely removed most of the tax shifting in the governor’s proposed budget. The Buckeye Institute has long advocated shifting to a consumption tax, but we continue to caution that expanding the sales tax or increasing the tax rate should be part of eliminating the income tax, not merely reducing it.

    A small income tax cut should be examined and would demonstrate the Senate’s commitment to pursuing pro-growth tax policies.         

    Ohio’s municipal tax structure remains a daunting labyrinth, especially for smaller businesses. The Buckeye Institute recommends returning to the Executive budget’s municipal income tax reform. If this proves a bridge too far for the Senate and the policy remains optional for businesses to file net-profits municipal income taxes, then the Senate should guarantee that taxpayers do not pay an administrative fee for filing net-profits taxes.

Medicaid and Health Care

The Ohio Senate should embrace the House language on Medicaid and state innovation waivers, and they should add deadlines for submitting state innovation waivers to the U.S. Department of Health and Human Services (HHS). Additionally, the Senate should include language that maintains the Kasich Administration’s flexibility for improving Ohio’s health care system.

The House budget wisely requires the Kasich Administration to resubmit the Healthy Ohio waiver to HHS, which is a move in the right direction.

Ohio’s 2015 budget instructed the Kasich Administration to seek a state innovation waiver granting some freedom from onerous regulations under the Affordable Care Act and the new Secretary of HHS has openly encouraged states to pursue innovation waivers. The Senate should expand on 2015’s waiver instructions and encourage the Kasich Administration to pursue waivers that will lower premiums. The Senate should include a reinsurance component similar to the waiver submitted by Alaska (and touted by HHS) that could reduce insurance premiums for Ohioans.

Education

The Senate should retain the basic outline of the current education budget but should NOT increase appropriations beyond those made by the House. A bolder Senate would return to the governor’s proposed appropriation levels and remove “safe harbor” provisions that unfairly restrict eligibility for EdChoice scholarships.

The House budget rightly embraces the basic outline 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.  

In addition, the Senate should eliminate or reform “safe harbor” provision that has denied parents school-choice options when their children are trapped in underperforming schools. Eliminating the safe harbor policy would make traditional schools more accountable by giving parents the choice of EdChoice scholarships for their children.

Controlling Board

The Ohio Senate should build upon the House’s effort to reassert legislative power over spending through reasonable reforms to the Controlling Board.

The House capped the amount of wind-fall money that could be obligated by the Controlling Board at $10 million, and the Senate should maintain the House’s cap. They should also eliminate the Controlling Board’s authority to raise occupational license fees by up to 50 percent, which is a road block to people trying to get good paying jobs. Or, at the very least, the Senate should lower the occupational licensing fee cap to 25 percent.

Occupational Licensing Reform

The Ohio Senate should eliminate or at least reduce licensing fees strewn throughout the House’s budget to remove state-imposed hurdles to gainful employment. 

The Senate should also include language from the 131st General Assembly’s SB 329 that would require the state to seek the “least restrictive form of regulation” for occupational licensing. This would make is clear that Ohio wants to maintain public safety without denying people the ability to get a job.

Criminal Justice Reform

The Ohio Senate should return to the Department of Rehabilitation and Correction’s budget proposal dealing with the TCAP program (Targeted Community Alternatives to Prison).  

The Buckeye Institute testified before the House on this issue and supports the policy that would rehabilitate low-level offenders in their communities. The Senate should return to Governor Kasich’s proposal or, at the very least, should maintain the proposal in the House budget.

Rehabilitating low-level offenders in the community is twice as effective as state incarceration at one-third the cost, and watering down the TCAP provisions even further would significantly dilute the policy’s potency.

Local Government Fund

The Senate should further reduce the Local Government Fund (LGF). 

The House appropriations call for $388.1 million in FY18 and $393.5 million in FY19. The Buckeye Institute has long suggested eliminating the LGF entirely, which would save more than $781 million over the coming biennium. At the very least, the Senate should return to the Executive proposal and direct LGF dollars to those communities with the greatest difficulty raising requisite revenues locally.