TAX NEWS - 2010

Ohio Tax: Drastic changes might be needed to fill budget hole

Looming two-year, $8 billion shortfall could force state to undertake massive layoffs, raise taxes, or both

COLUMBUS: State leaders could close half of the potential $8 billion two-year budget deficit starting in July 2011 by laying off state workers.

All of them.

Eliminating all 58,000 state workers would save about $4 billion over two years.

Or state leaders could eliminate tax funding for a dozen state agencies, including the departments of mental health, developmental disabilities, development, veterans services and youth services (juvenile prisons) — saving about $3.4 billion.

Maybe they prefer taxes over cuts: Raising the state sales tax from 5.5 percent to 8 percent (a 45 percent jump), would bring in about $6.5 billion. Wiping out the 2005 income tax cut that has taken effect so far (a 17 percent hike) could mean about $3.4 billion.

Or they could sell off the Ohio Turnpike, the Ohio Lottery or state buildings, trading long-term revenue streams for a one-time, multibillion-dollar cash infusion.

"It's almost inconceivable to think of how you could cut your way into balance or tax your way into balance," said John Begala, executive director of the Cleveland-based Center for Community Solutions, a nonprofit that last week recommended a blend of cuts and taxes to balance the unprecedented budget hole.

Begala's social-service research group said the $8 billion in one-time state and federal revenue used to balance the current budget equals about 20 percent of the state's general revenue fund. The center says that once all economic and policy factors are considered — including some admitted best guesses — the structural shortfall for the next budget will be $6 billion to $7 billion. Some Statehouse Republicans think it could be more like $8 billion.

Whether it's Democrat Ted Strickland or Republican John Kasich, in about eight months one of them must introduce a balanced, two-year state budget.


Political differences

Strickland is crossing his fingers and lobbying Congress for another federal bailout package, but the chances of that are tenuous as the federal government drowns in debt.

Kasich has signed a no-new-taxes pledge and talks about smaller government, but he has offered very few details of how he would tackle the budget, more than 85 percent of which is spent in five areas: schools, higher education, Medicaid, prisons and property tax relief for businesses and homeowners.

Strickland has promised schools significant funding increases over eight years starting in 2012. And government medical costs continue to rise as more than 2.1 million Ohioans now get their health coverage through Medicaid.

State Sen. Bill Seitz, a veteran GOP lawmaker from Cincinnati, wrote in May that "voters will be electing charlatans" if they choose candidates who won't address the state's money mess.


Underfunded programs

In addition to the hole of possibly $8 billion, the state faces a multibillion-dollar debt in its unemployment compensation fund, several underfunded public pension systems, and new federal health-insurance mandates that will cost Ohio taxpayers $1.45 billion from 2014 through 2019.

"Nobody wants to talk about this," said Jerry Austin, a Democratic consultant from Cleveland who in 2002 ran Tim Hagan's unsuccessful campaign against Gov. Bob Taft.

That year, Hagan spread a message of doom about Ohio's upcoming budget, while Taft labeled him "Taxin' Tim" and brushed aside his predictions.

In 2003, Taft and legislative Republicans approved a penny state sales tax increase to balance the budget.

"On the one hand, the incumbent is in charge, trying to show he has solutions, is going to wait until the last possible moment to let us know what those are," Austin said. "I don't think you can get away with: I'll tell you after the election."

On Tuesday, six lawmakers, three from each party, will convene the first meeting of the Budget Planning and Management Commission. In a legislative session where partisan gridlock has been the norm, it's taken nearly a year for the commission to start talking about ways to deal with the next budget.

In a highly charged election year, expectations for the budget commission are low around Capitol Square. Some say that, if nothing else, they hope lawmakers convince the public — and each other — the light at the end of the tunnel really is an oncoming train.


Other groups weigh in

It's possible that the more substantial budget solutions will be conjured up outside the legislature or the governor's office.

The Ohio Chamber of Commerce, in conjunction with the eight metropolitan chambers around Ohio, has hired national budget reform expert David Osborne, an author and former adviser to Vice President Al Gore, to work on ways to change Ohio's budget and government structure.

Linda Woggon, vice president of governmental affairs for the Ohio chamber, said Osborne's research offers major structural reforms that stress spending money in better ways.

"You don't want to waste a crisis," she said. "We think it presents an opportunity to think way outside the box and ask a lot of the tough questions that haven't been asked over the last couple decades."

The Ohio chamber gave state lawmakers a taste of some of Osborne's ideas at its retreat last fall, when he explained his model for budgeting based on the outcomes the public wants, rather than what was spent the previous year. He talked of a more efficient bureaucracy with fewer rules, where managers have more power and flexibility.

"Virtually every government in America, from the smallest school district to the federal government, is in deep fiscal crisis," Osborne said. "And it's not just the recession. It's going to continue right into the recovery."