State faces tough decisions to solve budget shortfall

1/23/2005

COLUMBUS By now, Ohio lawmakers had expected what Gov. Bob Taft described as The Perfect Storm two years ago to have moved out to sea.

But despite encouraging signs in Ohio s economy, it s still raining as lawmakers begin debate on the next two-year budget that must take effect July 1.

Three years ago, desperate for votes for a 31-cent-a-pack hike in the cigarette tax to close a widening hole in the state s cash-starved budget, Republican leaders found them by offering to tie Ohio s personal income tax brackets to inflation.

The move to prevent cost-of-living salary adjustments from bumping

Ohioans into higher tax brackets came at a time when the state was turning over every seat cushion in search of loose change.

The compromise would result in a reduction in future income tax revenues, but lawmakers put off that pain for three years, deciding to wait to implement the change until Jan. 1, 2005.

The change is estimated to reduce projected state income tax receipts this year by $75 million.

In the same stopgap measure, lawmakers approved Mr. Taft s proposal to expand the income tax to trusts. The only way leaders could get the votes for the expansion was to stamp an expiration date on it.

That tax, which raised about $60 million last year, expired Dec. 31.

In 2003, faced with a revenue outlook that seemed to worsen by the day, legislative leaders could get votes for a penny-on-the-dollar hike in the state sales tax only by promising to make it temporary, putting off the consequences of its demise for two years.

The sales tax surcharge is set to expire at midnight on June 30, taking with it about $1.3 billion a year.

The combined impact for these three tax measures the expiration of the 1-cent sales tax and taxing trusts, and the implementation of adjusting tax brackets for inflation hovers like a nearly $3 billion cloud over the next two-year, roughly $50 billion budget.

Then there s the state s reliance in the past on other one-time sources of money to fund ongoing programs. They included nearly depleting the state s budgetary reserves, tapping surplus federal welfare dollars, borrowing, using emergency federal budget aid, taking from the state s tobacco settlement, and employing various accounting gimmicks.

The resulting structural deficit the difference between revenue coming in and what s needed just to finance existing services is about $4 billion over the next two-year budget. That shortfall approaches $5 billion once anticipated growth in Medicaid, the health insurance program of last resort for the poor and the elderly, is factored in.

That doesn t take into consideration increases for K-12 education, universities, prisons, economic development, or any other state-funded programs.

The poor economic times, whether considered a recession or not, have lasted longer and have been deeper in Ohio than expected, said state Sen. Randy Gardner (R., Bowling Green).

I don t know that anyone can predict two or three years out what the future economy will bring, and it doesn t help to criticize what happened two budgets ago, he said. The most important thing is to take a good hard look at what is needed and demonstrate the courage to do it.

Other states are in similar situations.

[States] have managed to cover their expenses, but now they ve gotten to a point where they ve used up all the low-hanging fruit to solve their budget crises, said Auturo Perez, fiscal analyst with the National Conference of State Legislatures. Now they re faced with some tough decisions.

When Mr. Taft delivers his seventh State of the State Address on Feb. 8 and then follows up with his proposed budget, he will be speaking to more than Ohio. Wall Street also will be watching.

Despite some scary moments, Ohio s credit rating, which determines how much interest it pays for borrowing, has survived at AA-plus, the second-highest score Standard & Poor s offers. By comparison, Michigan saw its rating decline from an excellent AAA to AA-plus.

[Ohio has] done well overall, said Susan Knutson, a state primary analyst for S&P. They made budget cuts when they needed to make them. But they re walking a thin line, because they have no budget reserves.

The cornerstone of Mr. Taft s budget will be a promised overhaul of Ohio s tax system, a variation on a plan he proposed two years ago that lawmakers largely ignored.

It has to happen this year, said Tom Johnson, Mr. Taft s budget director. It will be tough for the legislature to support because there are always people or businesses that don t quite fit in with what they envision as tax reform. The governor will have a plan that is well thought out. Hopefully we ll get the support.

This year both chambers have named tax reform their top priority for this session.

Mr. Taft s controversial 2003 plan called for expansion of the sales tax base to more services, adjustment of personal income and corporate franchise tax rates, and the closing of corporate tax loopholes.

Separately, he proposed another $1 hike in cigarette taxes and a call for higher alcohol taxes that lawmakers didn t enact, and this time his administration is considering a statewide 1 percent hotel tax.

While the tax-reform plan will be pushed as an attempt to bring the tax code in line with a more service-oriented economy, the immediate question is whether it will offset the loss of the penny sales tax and the cumulative impact of past one-time fixes.

As much as it would theoretically be great to be revenue neutral, it s not going to be, said Senate President Bill Harris (R., Ashland).

On top of all of this is a proposed constitutional amendment designed to restrict future spending growth, a variation on which Mr. Taft may propose in hopes of making it easier to sell his tax-reform plan.

Over the last 10 years, state general-fund spending has climbed nearly 63 percent from $15.3 billion in 1996 to an estimated $25.1 billion this year. Most of the spending increases came in the areas of Medicaid, K-12 education, and spending on higher education and prisons.

State agencies and social service organizations are bracing themselves for stagnant funding or even spending cuts.

Spending in most areas of state government has really flattened out, said Mr. Johnson. Many agencies are spending less than they did of general revenue funds than they have in the past. But we had areas where we couldn t spend less, like Medicaid. We ve tried to put more money into education. Property tax relief has grown. All of this has put a real pinch on the budget.

The Taft administration has already informed social service agencies that growth in the massive Medicaid program will be limited to 4 percent. By comparison, last year, Ohio s Medicaid spending grew by nearly 12 percent. The average national growth for Medicaid was nearly 13 percent.

The governor is going to present a very stark budget, so draconian, so bare, that it will compel defense of the sales-tax increase, and that will put the majority in the rather difficult position of supporting a very unpopular tax that squarely places the burden on the middle class, said House Minority Leader Chris Redfern (D., Catawba Island).

Contact Jim Provance at: jprovance@theblade.com or 614-221-0496.