Wrongsizing State Tax Revenue

The State's budget impasse may be near a conclusion but the real issues with the long term budget structure are not going away.

I've been barking about the massive failure of the tax reforms enacted in 2005 and 2007 for some time now. Those changes instituted under the guise of reform may have been politically expedient buy have contributed to the historic crash in State tax receipts.

The latest confirmation comes from an official analysis conducted by Office of Budget & Management. Careful examination reveals just how badly the reforms have buried Ohio government in a sea of red ink. Consider the findings released in this weeks GONGWER NEws Service (s/r) report for July 9th:

Agency spokesman John Kohlstrand said the annual drop is by far the largest in years for which the state has easily researched data, as he personally looked up numbers dating back more than 50 years.

"Nothing remotely like this has happened in the past half century," he said. "Certainly, it is a historic drop."

While not a surprise to officials given the dismal performance of the personal income tax and other revenue sources in the later months of FY 2009, the final year-to-date numbers were dragged deeper into the red by a month that saw Ohio's coffers take in nearly 24% less in tax collections than in June 2008.

State budget administrators have said the biggest factors in the drop are the economic anemia and the tax restructuring of 2005, which reduced income tax rates across the board by 21%, cut or eliminated certain business taxes and made other changes.

The economic impacts became clearer with the close of tax filing season, after which Gov. Ted Strickland's administration revised its already dampened financial projections and later announced the state faced a roughly $1 billion deficit for FY 2009. That hole was filled with the drainage of the Budget Stabilization Fund, which now stands at 89 cents.

Last fiscal year was the third in a row in which the state collected less tax revenue that the year before - a streak that's also considered a record. Mr. Kohlstrand said the agency could only find three other years dating back to 1957 in which such declines occurred.

The changes in fact did not ameliorate the impact of the recession as predicted by the supply side faithful and anti-tax geniuses that had insisted this would be the case. Why not? Tax cuts work in every situation.

It seems event the magic elixir of unbridled tax cuts didn't do the job of protecting the rust belt capital from the effects of the Great Recession. Maybe a more moderate and you know, sensible regime of changes would have left us a more sustainable budget structure.

This latest budget and future budgets will not be made right until someone has the courage to patch the flawed tax reforms of General Assemblies past.

The Fifteen Minute Budget Solution

Lawmakers in the Ohio General Assembly are just about done freaking out about the number $3.2 billion. Do you know how far 3.2 billion Tim Grendells stacked on top of each other would reach? Once the legislators have regained their footing they will have about fifteen days to reduce the projected shortfall in the FY2010 budget by that amount, seems like a daunting task. I sure hope that doesn't effect my life.

The gigantic budgetary gap caused in part by a cliff diving economy and a budget analysis apparatus instructed to keep things rosy will have to be closed within a short amount of time. The General Assembly conference committee has until the end of the month to get a balanced and realistic budget to the governor. How does a such a massive undertaking get completed on time? I am suggesting that rather than fifteen days the whole thing can be solved and wrapped in neat bow in fifteen minutes. Sounds facetious and politically improbable doesn't it?

Yes to Cuts

There will invariably have to be deeper cuts to programs and staffing. Perhaps the idea of an enforceable and State-wide earl retirement program could achieve savings within the two year horizon of the FY2010 budget. Mandatory furloughs are also in order. The State Treasurer and Attorney General have announced a steep two week furlough program all employees. Holy Mary Taylor and Jennifer Brunner are also "considering" a furlough measure for their respective offices.

Staffing takes up a large portion of administrative budgets in government entities. The need to further reduce staffing through layoffs will have to be considered. This will impact delivery of
services. The remainder of the cuts will have to be to programs. Everyone has their pet projects so agreeing on additional program will not be easy.

Jim Sigel's piece in today's Dispatch points out the difficult nature of whittling down the State budget to a discretionary core of programs ripe for cuts. Still, more reductions will have to be attained to meet the target. Those will most likely be done in a back room away from prying eyes of media and advocates.

In the end I don't see more than a few hundred million being cut from the existing lean budget proposal. This budget process will not be used as a de facto method for deconstructing State government into a model for Tea Party visionaries.

Yes to Creative Finance

Before moving on to revenue I should dedicate some space to what I call creative finance. No, that would not include investing in rare coins or drilling the shit out of the State parks. This category of budget fixes is reserved for creating new revenue sources or using financial tools to create new payment streams.

The most viable solutions in the near term are casino gambling and securitization of assets. Casino gambling has been bandied about for years and invariably gets voted down by the legions of puritans that inhabit Ohio's towns and villages. Creating the legal framework for casino gambling, one that focuses on gaming districts in a few select large urban centers could pay off. Siegel uses an estimate of $200 million over two years of ongoing revenue for this source.

We could dust off the plan to lease the Ohio turnpike. The last attempt to securitize this asset was championed by political loser and right-wing blowhard Ken Blackwell. Under the umbrella of a rational and carefully reviewed plan the State could realize a substantial revenue stream (billions) for a long-term lease agreement of the tollway.

Of course this would be a one time revenue stream and some of that money would have to be used to offset road improvements to the other highways in Ohio. The other caveat is the potential "tax increase" that Ohioans would face when the rates on the turnpike are increased by the private entity that operates the leased tollway.

Yes to Tax Increases

The last option is the most effective but least politically feasible of all budget fixes. The key members of the Senate, House and administration can meet at a local Applebees and agree to raise some tax rates. The numbers provided by Siegel make it clear that there is ample capacity to bridge the budget gap with tax rate increase alone. The tax increases could be kept in check if they are coupled with fixes from the spending cut and creative finance pots.

This move would require some very hard headed people to accept the premise that tax revenues have fallen to perilous levels in part because the tax reforms of 2005 were untenable and unrealistic. There will have to be some ratcheting up of income tax brackets in order to get the budget above water. The other change to tax rates will have to be the misunderstood CAT.

The commercial activities tax was implemented as part of the HB66 reforms as a low tax with a very broad base. The results on the CAT are still inconclusive but a slight increase to the already low rate would go a long way in increasing tax revenue. These changes may be enough to get us in balance while avoiding tinkering with the more regressive sales and property taxes.

There you have it, over $3 billion in fifteen minutes or less. Enjoy the potato skins gentlemen.

State Budget: Desperately Seeking Sources

Here's where we are with the revenue shell game being played within the State budget process.  The House version of the budget bill was passed last week and the Senate will take the next two months to craft a moderated and tax hike free version of the FY2010 state budget.

The issue of revenue was mitigated somewhat by replacing the administrations projections for tax revenue with the much friendlier estimates derived from the Legislative Service Commission.  Nothing has changed at the core of the budget outlook.  Ohio needs more revenue, preferably from increasing taxes.

Using some one time revenue sources and a newer parlor trick with State sponsored non-profits  being employed to dig up extra money for State agencies in the House Plan.  Willard covers the non profit plan here.  In the end tweaks and nuance can plug the budget hole for the temporarily but they will not erase a structural budget deficit.  

Sunday's Beacon editorial page joins my call to increase taxes, er, set them back to a responsible level:

The absence of stimulus cash. A structural deficit. A commitment to improving public education. Ohio needs a tax increase, one that can be crafted to enhance the state's prospects in the long run, one that reflects responsible stewardship of the state.

The latest battle cry from the reality challenged tax haters in the Ohio GOP is that the one-time revenue in the next biennial budget will lead to a tax hike.  Truth be told, it's the short sighted politically opportunistic tax reforms of 2005 that have gotten us to this low point in the revenue curve.  Think about that for a moment.

The Ohio Senate should meet us half way and address the structural deficit prevalent in the budget.  Find some more budget cuts that can reduce the level spending over the 2010-2011 budget period.  That's the easy part.  

The next step will require some of the more adult members (in both parties) of the Senate to step up and reset income tax rates to a realistic and sustainable level.  Let's face it, 2005 was a different time.  The days of ideological opposition to responsible tax rates is passing.  Let the tea baggers and Jon Kasich wage the losing battle against the income tax. 

The sooner we take these steps the sooner Ohioans can begin working on achieving the school funding reforms that are long overdue.

Whiteguys and Wingers and Birthers, Oh My

I surveyed the attendees assembling for the Cleveland Tea Bag Festival from my fourth floor perch on Lakeside Avenue.   From this vantage point I could surmise some basic themes emerging in the gathering crowd pf proto-revolutionaries. From the signs people where carrying there was a definitive animus towards the federal government, Obama, taxes of any kind and liberals.

Here are some things I didn't see:

Crispus Attucks - Let's face it, this is a white man's movement.

Non Partisans - The whole tea party theme is a cover for the ant-Obama / Democratic party slant on display at every location I've seen coverage of.

The Independently Wealthy - Let the middle class do the work of shilling for the rich guys.

NPR - Can't imagine the anti-Fox News will do to much to acknowledge today's rallies.

History Majors - The original Tea Party was to protest the actions of a large corporation, this one intends to do their bidding.

Empty Hands - Flags or poster board signs with witty or paranoid sounding slogans were mandatory to gain entrance.

CoExist Bumper Stickers - Doubtful this was a crowd willing to embrace people of all backgrounds.

The Ability to Detect Irony

Tea Bagging The Stimulus

The people streaming through Public Square today were not protesting the violence in our city streets or the Kellen Winslow trade. The fifty or so protesters parading around in the rain with home-made signs were there to voice anger over taxes and government spending and communism and the long slow march towards collectivism. It kind of looked like a mini McCain-Palin rally.

The hatred for the stimulus bill and revocation of Reaganomics it represents were the inspiration for the series of nation-wide Tea Party's that were held in America's city's. The events were championed by a coalition of conservative groups and bloggers and held in numerous cities. Even ones that are in desperate economic straits and could use a boost from federal spending.

Michelle Malkin even went as far as to brand the movement as a counterculture of fiscal responsibility . Such parlance is typical to movement conservatism. Where was the fiscal restraint the past eight years? The winger histrionics have started and we're only five weeks into the Obama era.

Apparently there are some people in the greater Cleveland area that took Bobby Jindal's tuesday night speech seriously. Why use the power of government action to sand off the rough edges of the recessionary downturn? Tax cuts will make things all better.

So get out there Cleveland and stand up for your right not to have new roads and bridges. Don't let the government increase the tax burden on your wealthier friends. Surely we can have our never ending war in Iraq and not pay for that either. Tea Party!

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.

Powered by ScribeFire.

Stickland's Reality Deficit

Governor Strickland announced $540 million in budget cuts to the State Budget to the chagrin of local governments and school districts all around the State. They know that the fiscal pain unlike Reagonomics will trickle down to bite them in the budgetary asses. Large counties like Cuyahoga are already contending with budget deficits in 2008 ($20 million) and onwards and this latest bad news will compound those troubles. These cuts are in addition to the first round($733 million) made this spring.

The state's Local Government Fund that reallocates State GF revenue down to counties, cites, schools and libraries is probably not in good shape. That translates into less dollars available for local services like public safety, education and social programs. According to the State Budget director, Pari Sabety all major revenue sources are off target (from GONGWER):

Director Sabety said that an ominous sign within the monthly revenue reports is the downward trend in personal income tax withholdings, which she described as "a significant negative indicator."

Ohio's dire budget predicament, while not unique among the states (see separate story), has also been underscored by recent reports on unemployment, the housing market, and other economic indicators.

"Every indicator we look at is pointing downward at this point in time," Ms. Sabety said.

The shrinking LGF allocations could be aggravated by reduced State funding in other areas to local governments and seriously hamper efforts to reign in budgets deficits at the local level. This could be referred to as a tail spin.

Our current governor is held hotage by a sinking economy and the bad tax policy choices of previous legislative sessions. One of the chickens that has come to roost is the 21% income tax reduction that was phased in over the past several years. Ted is now straddling the line between fiscal restraint and hard right taxcut mania. He has had to acknowledge the damage to the State revenue picture but admits he will not tamper with the near suicidal reduction in income tax rates, not even a temporary freeze.

"Without a doubt, if the tax reform had not taken place we would have had significant more resources for this biennial budget," he said, adding that under some estimates the cuts in that package may have reached $1.9 billion to this point. "Having said that, I have embraced the tax reform because I do believe that it is important to Ohio's future that our state be a state that is attractive to those who would invest and create jobs."

On top of that change the Commercial Activity Tax created to replace the tax on inventory and equipment lost a large chunk of its tax base last week. Raising taxes is not popular but the ability to cut State budgets will continue to negatviely impact local governments and their constituents (you and me). This puts the State's top Dem in a real bind. He will now have to fend off attacks from up and coming State Auditor Mary Taylor (again from GONGWER)*:

"The announcement today by Governor Strickland concerning the continued deterioration of the financial condition of the state of Ohio is troubling," Auditor Taylor said in a statement. She said that while the initial budget adjustments made last February entailed some cuts, "it also included a number of questionable fiscal management proposals such as Keno, delaying program expenditures from one fiscal year to the next and short-term cash management actions."

She and other top State Republicans will be prepping the battle field for the next round of state wide elections and the even the gubernatorial contest in 2010. This crowd is touting the Mechagodzilla of all tax cuts, a plan to eliminate the state income tax all together. This plan pushed by Blackwell et al at the Buckeye Institute has had some media exposure but limited examination of the consequences. The backers think the magic of the free market and the CAT (the one with an eroding base) will more than make up for the lost revenue.

Ted please come back to reality and consider freezing the income tax reduction. As unpopular and vunerable as it may make you, putting the brakes on for now could do some good. highlighting the weakness of the current plan could help demonstrate how supersizing the income tax cuts would be even more devastating to Ohio than the plan that is already in place.

* Sorry no links to GONGWER, it is a subscription only service.

Powered by ScribeFire.

Is Joe Lieberman a Maoist?

Obama is not a Marxist. I couldn't say if Joe is or isn't a Maoist. It's certainly something that could be looked into further. I mean Marxism and Maoism are equally prevalent in today's society aren't they?

Joe's good friend John McCain is certainly not a Marxist. He just proposed relinquishing even more fiscal responsibility through more tax cuts. This time its the federal gasoline tax that is holding us back. How about we triple the gas tax and use the money to pay for your pet project in Iraq?