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State Tax Reform Comes Home to Roost
As the economy continue to soften in Ohio the State is expecting to see alarming decreases in tax revenue. This comes as no surprise to observers of the State budget and local governments in general. What goes on at the State level may seem distant but it will have an effect on local governments. The State is getting ready to make deeper cuts in early 2009 and the pain will certainly trickle down to the county and municipal levels.
Reporting in last week's Columbus Dispatch highlighted the budget-sinking drop of revenue into the State's coffers. Tax revenue decreasing from one year to the next had only happened once in fifty years until 2006. They are now expecting to see a consecutive yearly drop three years running. The State will again have to make budget cuts to current the biennial budget in order to avoid depleting its cash reserves. This move does not include the massive reductions in spending that will have to be made once the new budget process starts in spring of next year.
The recessionary trends in Ohio's economy have definitely contributed to the downturn in tax revenue. Blame must also be assigned to the large scale reduction (21%) in the state income tax passed in 2005. While revamping of Ohio's aged property and corporate tax structure was needed, the cuts to the income tax rates have proven to be reckless. Bill Harris was quoted in the Dispatch article supporting the belief that the income tax cuts have ameliorated the negative impacts of the the sour economy.
Too bad history is not on the Senate president's side. As mentioned above the State had not seen consecutive drops in tax revenue in fifty years, until 2006. Hmm, 2006 would have been the first year the tax rate cuts and other "reforms" went into effect. Funny how dropping tax rates doesn't result in an increase in tax collections as claimed by the reformers. Surely in that fifty year time frame there were at least five or six recessionary periods. Even with the downturns over that half century, tax collections under the old tax regime had not resulted in a year over year decrease in collections.
At this point the administration doesn't have many options in the way of revenue enhancements. The window to freeze the fifth and final phase-in of the income tax reduction has passed. Governor Strickland has mentioned repeatedly that he will not touch the third rail of Ohio politics and consider raising any taxes, whatsoever. The State will be limited to two other options to bring the budget in line with current resources; cutting programs or creative financing. Reducing program spending includes cutting staff and cutting assistance to local governments such as counties, cities and schools. The Local Government Fund which is fed from State general revenue could be looking at once unthinkable levels of reduction. This step alone will have a serious impact on the mission critical programs of the locals.
The creative financing route entails tapping the rainy day fund or securitizing assets. The administration has been ambivalent about spending down the cash reserves in the rainy day fund. That option would only work in the short term as the burn rate for that cash would be very fast. The State already converted a larget asset, the tobacco settlement fund, into cash last year. Other than that fund there aren't many big time assets laying around to be converted into cash. Free money doesn't present itsle that often. The short of it is that cutting programs is the only tenable option for achieving the bulk of the savings needed.
The revenue from tax collections ebbs and flows with the cyclical economic patterns of boom and bust, nothing new. Reforming the tax system was not a bad idea but the shortsighted way that reform was implemented has put the State in an downward spiraling bind that will have far reaching impacts. The peril of H.B. 66 is that it accomplished political objectives than actually placing Ohio's finances on a path of long term stability.
At this rate that new "tax reform" proposal floating around the halls of the Buckeye Institute may be ready for the dustbin of history.
Reporting in last week's Columbus Dispatch highlighted the budget-sinking drop of revenue into the State's coffers. Tax revenue decreasing from one year to the next had only happened once in fifty years until 2006. They are now expecting to see a consecutive yearly drop three years running. The State will again have to make budget cuts to current the biennial budget in order to avoid depleting its cash reserves. This move does not include the massive reductions in spending that will have to be made once the new budget process starts in spring of next year.
The recessionary trends in Ohio's economy have definitely contributed to the downturn in tax revenue. Blame must also be assigned to the large scale reduction (21%) in the state income tax passed in 2005. While revamping of Ohio's aged property and corporate tax structure was needed, the cuts to the income tax rates have proven to be reckless. Bill Harris was quoted in the Dispatch article supporting the belief that the income tax cuts have ameliorated the negative impacts of the the sour economy.
Too bad history is not on the Senate president's side. As mentioned above the State had not seen consecutive drops in tax revenue in fifty years, until 2006. Hmm, 2006 would have been the first year the tax rate cuts and other "reforms" went into effect. Funny how dropping tax rates doesn't result in an increase in tax collections as claimed by the reformers. Surely in that fifty year time frame there were at least five or six recessionary periods. Even with the downturns over that half century, tax collections under the old tax regime had not resulted in a year over year decrease in collections.
At this point the administration doesn't have many options in the way of revenue enhancements. The window to freeze the fifth and final phase-in of the income tax reduction has passed. Governor Strickland has mentioned repeatedly that he will not touch the third rail of Ohio politics and consider raising any taxes, whatsoever. The State will be limited to two other options to bring the budget in line with current resources; cutting programs or creative financing. Reducing program spending includes cutting staff and cutting assistance to local governments such as counties, cities and schools. The Local Government Fund which is fed from State general revenue could be looking at once unthinkable levels of reduction. This step alone will have a serious impact on the mission critical programs of the locals.
The creative financing route entails tapping the rainy day fund or securitizing assets. The administration has been ambivalent about spending down the cash reserves in the rainy day fund. That option would only work in the short term as the burn rate for that cash would be very fast. The State already converted a larget asset, the tobacco settlement fund, into cash last year. Other than that fund there aren't many big time assets laying around to be converted into cash. Free money doesn't present itsle that often. The short of it is that cutting programs is the only tenable option for achieving the bulk of the savings needed.
The revenue from tax collections ebbs and flows with the cyclical economic patterns of boom and bust, nothing new. Reforming the tax system was not a bad idea but the shortsighted way that reform was implemented has put the State in an downward spiraling bind that will have far reaching impacts. The peril of H.B. 66 is that it accomplished political objectives than actually placing Ohio's finances on a path of long term stability.
At this rate that new "tax reform" proposal floating around the halls of the Buckeye Institute may be ready for the dustbin of history.
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