After weeks of political wrangling, Ohio's legislators have finally agreed on a budget overhaul bill. On June 4, Gov. Bob Taft signed the bill into law, balancing Ohio's budget through the fiscal year ending June 30, 2003.
This bill addresses short-term budget issues without raising personal income taxes but fails to adequately provide for the state's long-term budgetary health and, in some cases, shifts heavy financial burdens onto future legislatures.
The original budget for the biennium of fiscal 2002 and 2003 was established more than a year ago. The economy, however, stubbornly refused to fulfill the expectations of lawmakers. While the flow of tax revenues slowed, the outflow of spending, which had been based on those rosier predictions, continued unabated. If left unaddressed, this divergence would have resulted in the state spending $1.9 billion more than it took in during the biennium.
To address the effects of the downturn, Taft first ordered department heads to cut spending during fiscal 2002 by an annual rate of 6 percent. These cuts saved $225 million and subsequent belt tightening yielded an additional $100 million.
The economy, however, continued to falter — not plummeting headlong downhill, but certainly not climbing back.
It soon became evident that Ohio's fiscal crisis would require not only executive orders, which are limited in scope, but a legislative overhaul of the entire budget.
This overhaul is contained in Senate Bill 261, an expansive collection of spending cuts, targeted tax increases and fund shuffling that effectively addresses the goal of balancing the state's budget for the biennium. By generating or reallocating nearly $1.6 billion in revenue and eliciting promises from Taft to cut state spending by an additional $390 million, lawmakers have closed the daunting budget gap.
But the budget bill does not address long-term budgetary issues and highlights the legislature's inability or unwillingness to deal with economic malaise. The Center on Budget and Policy Priorities (CBPP), a public-policy research organization, noted this reluctance in a 1999 analysis of Ohio's rainy day fund, a savings account for use during downturns.
Using standard forecasting methods, CBPP calculated that Ohio would need $3.9 billion to survive a moderate recession without raising taxes or cutting services. Instead, lawmakers built up a $1 billion rainy day fund and returned nearly $2 billion to taxpayers in the form of income tax rebates. As predicted by CBPP, the state is now drastically cutting spending and completely draining the rainy day fund.
From this fund, $400 million was tapped in the original 2002-2003 budget for increases in education spending and to compensate for the slowing economy. Lawmakers have now used the remaining $600 million to close the $1.9 billion gap, leaving Ohio defenseless against economic slowdowns that could require significant spending cuts and tax increases.
While the lack of emergency funds places the state in a precarious position, at least the use of that money provides current relief. In order to gain the vital support of conservative Republicans and secure the passage of the bill, lawmakers added a provision that strips revenue from future years with no gain in the current biennium.
Beginning in 2005, the rate schedule for Ohio's personal income tax will be adjusted annually for inflation so increases in income at or below the rate of inflation will not bump taxpayers to a higher rate of taxation. A blessing for the individual budgets of Ohioans, this indexation will nonetheless substantially and adversely affect the state's budget.
The Legislative Service Commission (LSC), a government body that analyzes the impact of legislation, estimates the state will lose $70 million in fiscal year 2006, $151 million in 2007, $250 million in 2008 and an increasing amount after.
Lawmakers' decision to fund a portion of the budget shortfall with $345 million from the Tobacco Master Settlement will also adversely affect future budgets. At Taft's request, these funds were previously earmarked for school construction. Due to Ohio Supreme Court rulings, the legislature cannot simply cut the school construction appropriations, but must replace the tobacco settlement money.
To accomplish this, the budget repair bill authorizes the issuance of $345 million in bonds, thereby replacing a free source of funds with debt that will cost taxpayers $262 million in interest charges over the next 20 years.
Another substantial piece of the deficit was funded by a 129 percent increase in the state's cigarette taxes. Beginning July 1, smokers will pay 55 cents in state taxes, up 31 cents from the current tax. This increase is expected to raise nearly $260 million in fiscal year 2003 and $236 million in 2004.
This revenue, however, is expected to decrease in future years. The LSC estimates the cigarette tax increase will reduce the number of cigarettes sold and taxed in Ohio by as much as 14 percent — 6 percent due to price-sensitive smokers kicking the habit and the rest due to increased smuggling of nontaxed cigarettes, with the loss of sales to neighboring states with lower taxes: Indiana, Kentucky and Pennsylvania.
Additionally, for the past several years, cigarette consumption in Ohio has decreased by 1.5 to 2 percent annually, a trend that is expected to continue and to diminish the effect of the higher cigarette tax.
Of the major provisions of Senate Bill 261, the cigarette tax is the only one that provides for increased revenues in future years, and its gains are easily swallowed up by losses due to the indexation of personal income tax rates and numerous other provisions.
The general assembly attempted to cap spending at 2001 levels, as adjusted for inflation; but Taft viewed the limit as inflexible in light of spending increases required for school funding and too constrictive on future legislatures.
So all that remains from the budget repair bill to protect Ohio's fiscal future are two new committees, one that will study the state's economy and another that will examine the overall impact of Ohio's tax structure.
Unwilling to plan sufficiently for an economic slowdown and unable to construct a long-term plan for Ohio's financial needs, lawmakers have once again avoided action and responsibility by forming committees, the very symbol of political indecision and cowardice.
