Proposal in Ohio Senate Would (Slightly) Boost Local Government Funding. But There's a Catch

The State Senate's proposal would boost the local government fund by about $5 million a year, but would also change the formula by which that money is divvied up to direct more toward small municipalities.

The Ohio State House - ARYEH ALEX/FLICKR
The Ohio State House

As state lawmakers work to put the finishing touches on the state's budget, a proposal in the Ohio Senate would boost somewhat the amount of money from state tax revenues that go to municipalities. 

The state's biennial budget is in the final stages of completion ahead of the June 30 end of the fiscal year. Republican lawmakers claim the state Senate's $69 billion proposed budget would reduce taxes by more than $600 million, mostly through reductions to the state's income taxes for individuals and businesses. 

Despite the tax cuts, there are some increases in spending, including $172 million to boost Ohio's water quality and slightly more money for local governments.

On its face, that sounds like good news for the state's major cities, including Cincinnati, which have seen contributions from the state drop by millions of dollars in the past several years. But the devil is in the details. 

Currently, 1.66 percent of the state's tax revenues go into the local government fund. The Ohio Senate's budget proposal recommends that amount be upped to 1.68 percent, or roughly $5 million extra dollars a year. 

But the recommendation also calls for a change to the formula that is used to divvy up that money among the state's municipalities so that cities with more than 50,000 people — i.e. the state's major urban areas — are capped as to how much money they receive.

The proposal "alters the distribution of LGF funding paid directly to municipalities, generally shifting funds toward smaller cities and villages," the Ohio Legislative Services Commission's review of the proposed changes to the Ohio House of Representative's budget proposal found. 

That means big cities may not see much of a boost — if any at all.

It’s no secret that cuts made by conservative Ohio lawmakers under former Republican Gov. John Kasich to the local government fund have had big consequences for municipalities across the state. The situation has even drawn national attention, including a lengthy story in The New York Times about Lorain, Ohio. 

Current Ohio Gov. Mike DeWine has pledged to up contributions to the local government fund in some way. In October, as he ran a heated race with his Democratic opponent Rich Cordray, DeWine pledged to "do everything we can" to boost the funding. After the election, though, he indicated any boost will likely be through targeted programs to address the opioid epidemic, children's services and other specific issues. 

The fund, which was created in the 1930s to make up for the creation of a statewide sales tax, is a big deal for Cincinnati, Hamilton County and a number of other urban city and county governments.

The cuts, plus state lawmakers’ elimination of Ohio’s estate tax and some tax reimbursements, cost Cincinnati and other urban municipalities millions. In 2011, Cincinnati got more than $25 million from the local government fund and another $15 million from estate tax that the state legislature has since eliminated. By 2018, the city was receiving just $12 million from the local government funds and zero from the estate tax, which ceased in 2015.

Hamilton County lost $66 million in similar state funding between 2011 and 2017, Hamilton County Auditor Dusty Rhodes has said.

Local officials say the cuts have played a role in blowing big holes in local budgets. Cincinnati, for example, was facing as much as a $19 million deficit earlier this year, and county commissioners had to wrangle with their own $29 million deficit. Municipalities have eyed measures like sales tax hikes — which are more regressive funding mechanisms that often fall harder on lower-income residents — and tax levies as a means to fill the gaps. Hamilton County Commissioners, for example, voted to increase the county’s sales tax last year before backing off due to pressure from anti-tax conservatives.

County Commissioner Denise Driehaus last year tied the shortfall to reductions in state and federal funding.

"The federal government and the state government, in my view, have shifted the tax burden to local communities," she said.

Last year, the state legislature mulled changes that would have cost Cincinnati even more in state government funds, drawing pushback from city officials.

“The assault on local government has got to stop,” Mayor John Cranley said in a statement responding to that proposal. “Cincinnati is a net donor to the state's coffers. They are taking from us and giving to others.”

Hamilton County does seem to produce more tax revenue for the state than average. While the county’s 810,000 residents account for about 7 percent of the state’s 11 million people, the county’s sales taxes accounted for more than 8 percent of Ohio’s overall sales tax receipts in 2015. It contributes even more to the state’s income tax collections — about 10 percent of the state’s take annually.

The cuts to the local government fund were enacted to pay for reductions in income tax rates for individuals and businesses put in place during Kasich’s tenure. Those cuts were supposed to boost the state's economy, bringing in more tax revenues in the end.

However, local officials say income tax receipts in places like Cincinnati haven’t increased enough to pay for the reductions, and it’s clear that the cuts to the fund have made it more difficult for local municipalities to keep their financial houses in order even as the national economy — and some local economies — are booming.

Ire around the skimpier local government fund has grown as the state stacks cash in its reserve account. That rainy day fund hit $2.8 billion this year — close to the limit ascribed by state law.

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