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The Buckeye Institute Releases Initial Assessment of Kasich’s Biennial Budget Proposals

Feb 07, 2017

COLUMBUS, OH--On Monday, Governor John Kasich introduced his proposed biennial budget for Ohio covering Fiscal Years (FY) 2018 and 2019. Fiscal Year 2018 begins July 1 this year.

The Buckeye Institute’s policy analysts, economists, and researchers have reviewed the series of budget documents and factsheets from the Kasich Administration that describe his proposed budget and the major policies advanced within it.

Our observations and conclusions below are summaries of our initial assessments of several large components of the proposed budget. These will of course be updated and refined as the Ohio General Assembly puts its own stamp on Kasich’s proposed budget, and we hope they do us all proud as they work through it. But, for now, just because we know most people (not you of course, but others) are a bit impatient, here is a brief first look at Buckeye’s analysis:

Spending

Historically, the General Revenue Fund (GRF) budget has received the lion’s share of attention during biennial budget debates; but to get the full fiscal picture, it is necessary to review overall spending which includes billions of dollars in non-GRF funds.

GRF spending in Gov. Kasich's budget proposal decreases by 5.1% in FY18, but increases by 2.3% in FY19, for a total GRF budget of nearly $67 billion over the course of the two years.

However, the total appropriations growth rate, including all funds, exceeds expected inflation and is projected to increase 4.4% in FY18 and 1.8% in FY19. These increases equal an overall spending package of $144.2 billion over both fiscal years. The biggest single driver of increased overall spending is Medicaid and its expansion. Costs for Medicaid will total $56.9 billion or 39.5% of all state spending.

The budget’s continued heavy reliance on federal dollars is a cause for serious concern. Federal dollars account for nearly 31% of all GRF and makes up a significant non-GRF source of Medicaid funding. With the significant uncertainty surrounding future federal policy coupled with spending changes that could occur in Washington, any reduction of federal funds to Ohio could blow a massive hole in Ohio’s total budget.

To better prepare for potential reductions in federal funds, the possibility of a recession, and, in general, to more adequately right-size Ohio's government, policymakers need to:

  • Go through the budget, line item by line item, and reduce appropriations that are well above historical spending patterns.
  • Stop funding programs through tax dollars that would be better funded by private business or philanthropy.

Taxes

Gov. Kasich’s proposed FY 2018-2019 biennial budget advances several tax policy changes. These changes:

1. Ease the burden of tax compliance by shrinking the number of tax brackets and simplifying tax filings for Ohio businesses.

Reducing the number of brackets should cause tax revenues to increase. Economists have found that a less complex tax code often reduces tax avoidance because having fewer brackets reduces the cost of compliance for businesses while simultaneously increasing the ease with which authorities can enforce the tax code.

2. Increase the state income-tax personal exemption for low- and middle-income Ohioans.

Increasing the state income-tax exemption for low- and middle-income families will have modest, positive effects on the incentive to work. However, this reform will also cause tax revenues to decrease because, as economic research has repeatedly shown, people in lower income brackets are less responsive to income tax reform than individuals who earn $100,000 or more. Self-employed individuals, women, and senior citizens tend to be more responsive to tax policy changes when deciding whether or not to work.

3. Steer Ohio toward a consumption-based tax system by broadening Ohio’s sales tax base to include certain discretionary services, such as cable TV subscriptions, elective surgical procedures, landscape and interior design, and travel agent services. This package also includes a one half percent increase in the state sales tax rate from 5.75% to 6.25%.

Broadening the sales tax will have a positive effect on tax collections. However, the increase comes at the expense of Ohio families and businesses. By effectively raising the price of some goods and services, sales taxes may have a small negative effect on economic activity. However, the state must raise tax revenue somehow, and sales taxes are generally less harmful to economic growth overall than taxes on work and investment. The application of the sales tax to specific industries should be closely examined, as should the impact the rate increase will have on border communities that abut neighboring states with lower sales tax rates.

These three tax reforms represent a sound general direction for policy.  However, government should not be in the business of penalizing nor rewarding select sectors, businesses, or industries—as happened with the Kasich Administration’s proposed severance tax increase and new taxes on the vaping industry.

To summarize, Ohio should pay for income tax reform and reductions through greater cuts to government spending in order to spur a larger positive economic impact. After factoring in other tax increases, the resulting net tax cut is estimated at a relatively small $39 million. The personal income tax reduction should be larger to avoid it becoming a tax shift than an actual cut.

Municipal Income Tax

Among the bright spots of the proposed FY 2018-2019 biennial budget, Gov. Kasich tackles one of the state’s most pernicious problems--Ohio’s municipal income tax.

As The Buckeye Institute has long stated, Ohio's municipal income tax is one of the most complex and administratively burdensome taxes in the entire nation. Simplifying this entrapping byzantine maze--including Gov. Kasich’s budget proposal that would move toward a singular centralized collection process for businesses through the state--is long overdue and represents sound public policy.

The Buckeye Institute heartily applauds Gov. Kasich for advancing this much-needed and important reform for Ohio.

Medicaid

Medicaid remains the perennial Pac-Man of the state budget. Ohio continues to pick up additional financial burdens that will gobble up an increasing amount of state resources and crowd out other essential investments and priorities such as education and infrastructure.

Several cost-saving and personal responsibility provisions are positive. However, far more must be done to control costs.

With mystery swirling around Ohio’s long-term Medicaid budget due to anticipated changes coming from Washington, it is time for Ohio policymakers to craft comprehensive and innovative proposals, such as a state innovation waiver also known as a “1332” waiver. The Buckeye Institute is pleased to have produced the comprehensive research and guidebook showing how states can utilize these waivers and circumvent the most damaging aspects of Obamacare. This 1332 waiver would allow the state to begin creating a fully flexible Ohio model including implementing work requirements and even stronger personal responsibility from those in the Medicaid expansion population who are able to work.

Unfortunately, the plan to make up for the now-disallowed Medicaid Managed Care Organization (MCO) sales tax is significantly flawed. The plan is little more than a slight variation of the same shell game as the MCO sales tax. Further, subsequent presidential administrations could disallow it, which would create another large hole in the state budget.

Education

Overall, the Ohio Department of Education seeks 1.2% and 1.4% budget increases in FY18 and FY19 respectively. These are relatively modest overall increases and, taken as a whole, Gov. Kasich's education funding proposal is a welcome change from the past several budgets where spending increases significantly exceeded the rate of inflation.

Further, the governor’s proposal attempts, with small steps, to begin unwinding the inherent problems of “caps” and “guarantees,” which are increasingly distorting the accurate functioning of the Foundation Funding Formula (the designated amount spent on each public school student from the state’s general revenue funds 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 to receive the full dollar amount from the state as calculated by the funding formula.

Foundation Funding has increased 18% since FY12. Thus, flat funding would be an even better policy combined with the governor’s proposal to shift away from the caps and guarantees.

The governor’s budget proposal would allow for districts that have experienced enrollment drops of greater than 5% to receive less state aid--on a sliding scale--up to a maximum of 5%. This is a good first step to restoring the foundation formula to its originally designed purpose, though we should go much further to more accurately reflect actual enrollments.

Department of Rehabilitation and Correction

In the proposed FY 2018-2019 budget, Gov. John Kasich and Ohio Department of Rehabilitation and Correction (DRC) Director Gary Mohr call for more grants to local communities to rehabilitate instead of incarcerate low-level offenders. 

The budget proposal reflects a policy that The Buckeye Institute has promoted to bring a market-based approach to criminal justice reform. As Buckeye’s policy brief states, such a reform will increase public safety, ease crowding in Ohio’s prisons, and, eventually, save taxpayer dollars.

At the budget release, Gov. Kasich noted that 40% of those who go to Ohio’s prisons would be there less than a year. That is a huge issue because Ohio spends $1.7 billion annually on its prison system to lock up nearly 51,000 people. The primary way to combat the cost is through local community rehabilitation, which is less expensive than incarceration.

Currently, DRC has pilot programs in a handful of counties where DRC dollars are granted to the county in return for rehabilitating low-level offenders locally. If the county sends low-level offenders to prison, the county loses funding the next year.

The proposed budget calls for increasing community grants from $40.3 million in 2017 to $61.3 million in 2018 and to $81 million in 2019.

Ohio’s juvenile system has already implemented a similar program with resounding success. Those juveniles who complete rehabilitative programming commit less crime than those who are incarcerated, and Ohio saves money.

These programs allow low-level offenders to get the treatment they need and stay connected to their local community rather than being imprisoned alongside hardened and often violent criminals from whom the lower level offenders learn even more criminal behavior. More local rehabilitation options will also free up drug and alcohol treatment space for those in prison.

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Founded in 1989, The Buckeye Institute is an independent research and educational institution--a think tank--whose mission is to advance free-market public policy in the states.