Ohio is facing a multi-billion dollar shortfall in its next biennial budget. Perhaps it comes as no surprise that, in this election year, current lawmakers aren't falling all over themselves to give specific details about how they would fill this gigantic hole. The aim of the Ohio Budget Planning and Management Commission is to offer "a strategy for balancing the state budget for fiscal years 2012 and 2013." This week, Policy Matters Ohio (PMO) submitted a lengthy report to the Commission offering detailed information on one of the reasons the state is in crisis — mainly the 2005 tax overhaul which slashed income tax rates and eliminated two major business taxes. PMO estimates that these changes alone cost the state $2.1 billion annually. This report should be required reading for the Commissioners and other lawmakers who want to understand why Ohio's budget is on shaky ground.

Lawmakers in the other 49 states should see Ohio's experience as a warning and not rely on the flawed hope that drastically reducing tax revenue will somehow jumpstart a state's economy. PMO says in their report to the Ohio Budget Planning and Management Commission, "the tax cuts have not proven to be the magic potion for Ohio’s economy. Key measures of economic performance show the opposite: Ohio’s economy has produced relatively fewer jobs, fewer manufacturing jobs, less overall output and lower personal income growth than the country as a whole since the tax overhaul was approved in June 2005. Ohio’s share of the nation’s jobs has shrunk since then from 4.06 percent to 3.87 percent."

We hope the Commission follows the recommendations noted in this report "that we revitalize the income tax, in particular for high earners, and restore revenue from business taxes to levels that existed prior to the 2005 tax changes. This would still leave the business share well below where it was 30 years ago. Ohio’s tax system should be overhauled to produce the revenue we need for public services and investments that support our economic success and maintain our quality of life."

The Ohio House and Senate passed a bill last night that would delay the last phase of a gradual income tax reduction enacted under the previous governor, which lowered the state's income tax rates by 20% over five years. The current governor, Ted Strickland, proposed this measure in the fall. Despite support from the Ohio Chamber of Commerce and other business groups, the fate of Governor Strickland's proposal was still up in the air until yesterday.

This stand-off made the education community pretty nervous. If a resolution wasn't reached by December 31, that could have meant harmful cuts to fill the state's $851 million shortfall.

The deal finally reached in the Senate will delay the income tax rate reductions and also create a pilot program that will ideally reduce the cost of state-funded construction programs.  Governor Strickland is expected to sign the legislation.

Of course, Ohio isn't out of the woods yet. As Policy Matters Ohio's Research Director, Zach Schiller, says, "While this fills the hole for now, we have a gigantic, yawning gap ahead in the next budget. Even just continuing this, we would have billions of dollars in additional cuts and revenue needed."

This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.

With legislative sessions starting in just a few months, advocates and the press are weighing in on the options available to cash-strapped states. Kentucky lawmakers are urged to find a real solution to the state's fiscal woes. Idaho's Governor is suddenly open to delaying an improvement in an important tax justice tool. Maryland advocates urge a balanced approach to this year's budget, Arizona researchers offer insight into the cost of previous tax cuts, and Ohio lawmakers rethink their own previously enacted tax cuts.

Kentucky

Late last week, Kentucky's Lexington-Herald Leader published an editorial urging lawmakers to reform that state's tax code, saying "Our representatives and senators turned to a 'smoke and mirrors' approach to budgeting because they simply lacked the backbone to do the right thing: Pass the kind of real tax reform that could provide state government with a stable, sustainable revenue base." They fear that during this session lawmakers will continue to cut important programs instead of fixing the state's revenue stream. The paper warns the lawmakers appear to be on track to continue "robbing Peter to pay Paul...Only this time, Peter is a schoolchild."

Idaho

Tax fairness advocates in Idaho may be facing a similar uphill battle. Governor Butch Otter, once a strong proponent of the state's grocery tax credit (which helps to offset the state's sales tax on food), has now left the door open for delaying an increase in the credit amount in order to save the state $15.5 million. Of course, now is precisely the wrong time to delay such an important credit specifically targeted to help offset the state's regressive sales tax on food. While it's important to keep all options on the table, during this time of fiscal upheaval delaying the increase in this credit is an option that should be quickly dismissed.

Maryland

Recently the Maryland Budget and Tax Policy Institute released a paper urging lawmakers to approach the state's budget woes in a balanced way. The report makes a strong case against a cuts-only budget. "An all-cuts budget solution would sacrifice too many of the things that make Maryland such a great state." The report goes on to offer a list of concrete revenue-raising options available to lawmakers interested in preserving the state's education, health, and transportation programs.

Arizona

Arizona's budget woes are dire. A new report from the Arizona Children's Action Alliance describes the state's budget crater, which is projected to be $1.5 billion for FY10 and $2.5 billion in FY11. The report is useful for any Arizona advocate interested in understanding the impact that previous rounds of tax cuts have had on the resources available to fund public services. It explains "why any [budget] package that results in further net loss to the state general fund endangers the common benefits that Arizona counts on." The report goes on to offer ten reasons why the state should freeze and reverse the harmful tax cuts from recent years.

Ohio

Last week, the Ohio House of Representatives voted to suspend the state's scheduled income tax rate reductions for two years to help plug a budget hole. Governor Ted Strickland congratulated members of the House, saying they "acted quickly, courageously and responsibly to protect Ohio schools from devastating cuts while reducing their own pay in solidarity with struggling Ohio families and businesses." Now the legislation moves to the state's Republican controlled Senate. Let's hope lawmakers there follow in the House's footsteps and put the needs of Ohio first.

After some delay, Ohio Governor Ted Strickland is moving in the right direction regarding the need to raise revenue to fill the state's budget gap in a progressive way. The Governor has proposed temporarily repealing the last year of a five-year, 21 percent income-tax cut approved in 2005.

However, Policy Matters Ohio this week issued a report (utilizing analyses from ITEP) which urges policymakers to go even farther. The report makes the argument for repealing a year of the tax cuts and also reinstating the state's previous tax bracket of 7.5 percent for taxable income over $200,000. The report also urges lawmakers to consider introducing an 8.5 percent bracket for Ohioans with taxable income over $500,000.  According to ITEP estimates, this measure is estimated to increase revenues by $950 million in 2009 alone.

The paper makes a strong case for hiking taxes on upper-income taxpayers because "affluent Americans have benefited far more from economic growth in recent decades than those lower down on the income ladder...High-income Ohioans are most able to pay additional taxes -- and the revenue is badly needed." We couldn't have said it better ourselves.

Last week we told you about a ruling from the Ohio Supreme Court that put a roadblock in front of Governor Ted Strickland's plan to add video slot machines at horseracing tracks. We also argued that this presented an opportunity to instead make the state's revenue stream fairer and more sustainable.

On Wednesday, Governor Strickland took a step toward doing just that. He proposed postponing the last phase of the income tax rate reductions passed under the previous governor, which lowered the state's income tax rates by 20% over five years.

Policy Matters Ohio has said that the tax cuts haven't lived up to their promise of improving economic conditions for ordinary Ohioans. While a complete repeal of the Taft tax cuts would be ideal, Governor Strickland's proposal comes as welcome news.

Monday, the Ohio Supreme Court sided with a group that wants to put Governor Ted Strickland's proposal to install 17,500 slot machines at seven area horse tracks to a vote of the people in November 2010. This can't be welcome news to the Governor or his supporters who wanted to quickly implement the plan without such a vote and raise an estimated $933 million to balance the state's budget.

Despite the ruling, the Governor could order that the slot machines be placed anyway, but the political ramifications of moving before the vote could be unpredictable. The Akron Beacon Journal recently opined that the Court's ruling gives the Governor a second chance, and that "the opportunity the court has presented involves heading in a new direction, addressing the deficit in a simple and responsible way." 

There certainly are more responsible and progressive ways to address the deficit than relying on slots, a point that Policy Matters Ohio has been making for several years. For more dtails, see their timely report, A Step Toward Fiscal Balance: Options for Ohio's Income Tax.

In brighter news for Ohio's budget, the Ohio Supreme Court ruled last week that grocery stores were indeed responsible for paying the state's Commercial Activity Tax (CAT) despite language in the state's constitution which forbids taxing food.

The CAT functions like a gross receipts tax. The Ohio Grocers Association challenged the tax's constitutionality, arguing that the tax is, in fact, a tax on food because it is calculated from the gross receipts of grocery stores. But Justice Maureen O'Connor disagreed. She wrote in the majority opinion, "When the CAT's practical operation is considered, it becomes evident that it is what it purports to be: a permissible tax on the privilege of doing business, not a proscribed tax upon the sale or purchase of food."

The Court's ruling means that the cash-strapped state can keep $350 million in CAT revenue it has already collected from grocers and can expect another $370 million over the next two years.

When someone demands that Congress abolish the federal income tax, we typically consider that a fairly extreme position. But then again, we don't run in the same circles as Georgia gubernatorial candidate John Oxendine, who feels that his peers in the anti-tax community are too wishy-washy if they don't also call for a repeal of state income taxes. 

He recently said, "I think it's very hypocritical for state officials to be running around bad mouthing the federal government for having an income tax when the state of Georgia does the same [thing]. As governor, I want to get rid of the state income tax." Oxendine thinks that states like Georgia must lead the way and eliminate their state income taxes.

In Georgia, inadequate tax revenue is a threat to justice -- quite literally, in the sense that the state is not able to carry out the basic administration of justice through its court system. As the Wall Street Journal reports, "the wheels of justice in Georgia are grinding more slowly each day" because "Cuts in spending for the state court system have led to fewer court dates available for hearings and trials, creating a growing backlog of cases."

Now, just three months into the state's fiscal year, already under-funded state agencies are being asked to cut another 5 percent from their 2010 budget. Now is likely not the time to eliminate the state's largest source of revenue.

Former Ohio Congressman John Kasich is running for Ohio Governor and is also promising to repeal the state's income tax. However, the severity of Ohio's budget situation has apparently provoked some caution. The Columbus Dispatch recently reported "Kasich also said that the state's dire budget situation would make it difficult to begin phasing out the state income tax in his first term." He apparently assumes that the state's current budget crisis is the last the state will ever face, freeing it to abolish a major source of revenue in the future.

Of course, abolishing a state's income tax is a terrible idea even in times of surplus because income taxes are fairer than any other type of revenue source. A recent ITEP report makes this point in analyzing a recent proposal in Missouri to eliminate corporate and individual income taxes and replace the revenue with an enormously expanded sales tax. The Missouri proposal (which was not enacted) would have effectively slashed state taxes for wealthy residents while sending the bill to working families who spend most of their income purchasing necessities.  

There’s a lot that can go wrong when a state turns to legalized gambling as a source of revenue.  This is a fact that Kentucky, Pennsylvania, and others should keep in mind during their continuing efforts to push for expanded gambling as a solution to their budget woes

For starters, a poor economy, opposition by local residents, legal challenges, and a number of other factors can delay the opening of newly legal gambling establishments.  And without functioning gambling venues, there’s no money for the state.  Recent stories out of Maryland and Pennsylvania demonstrate the very real nature of this threat.  Additionally, recent polling done in Illinois suggests that opposition to gambling at the local level – fueled in part, no doubt, by the Not-In-My-Back-Yard (NIMBY) syndrome – could cause similar delays there.  And legal challenges in Ohio indicate that the Buckeye state could be in for delays in gambling implementation as well.

But even after a state manages to get its gambling operations up and running, the revenue stream produced by gambling may not be as lucrative as advertised.  A recent New York Times story details the degree to which gambling revenues (from casinos, racetracks, lotteries, etc) are disappointing states this year.  The most obvious culprit in this case is the slumping economy, though some experts believe that increasing competition for gamblers both between states, and within states – known as “market saturation” – may be at least partially to blame.  Worries about market saturation have been on full display in Ohio, where racetrack owners are on edge about the effect that casino legalization (to be voted on by Ohioans this November) could have in cutting into their profits.

In other cases, it may simply be the case that gambling just isn’t as popular as first expected.  The perceived need among many states to legalize slot machine gambling as a means of drawing gamblers back to struggling racetracks is evidence of this problem.  Unfortunately, the failure of this method in Indiana has drawn into question the wisdom of this revenue-raising strategy as well.

Other methods, such as loosening the restrictions on betting limits or alcohol sales (which were originally imposed to secure support for gambling from reluctant lawmakers) are being tried as well.

Ultimately, the fact is that gambling is far from a fiscal panacea for the states, and given the tendency for implementation delays, is exceedingly unlikely to result in much revenue to fix the current round of state budget shortfalls.  Take a look at this ITEP policy brief for more on the gambling issue.

A new report from Policy Matters Ohio offers a wealth of information on the benefits of enacting a state level EITC. Over twenty states already offer such a credit, though as the report points out, Ohio policymakers in recent years have instead focused on providing "extensive reductions in tax payments for higher-earning taxpayers." The report includes data on the use of the federal EITC in Ohio, data on the breakdown by district of benefits from a state EITC, and a distributional analysis from ITEP.

We've been lamenting for the past several years about the folly of Ohio's former Governor Bob Taft pushing through a phased-in 21 percent cut in income tax rates. Of course, the tax reductions made Ohio's overall tax structure less fair. Policy Matters Ohio recently released a report detailing the impact of the Taft tax cuts. Analysts there found that "key economic trends continued to go in the wrong direction after the tax overhaul." Despite this evidence, current Governor Ted Strickland has vowed to continue Taft's tax cutting legacy. But there is some hope brewing in the Buckeye state.

Representative Michael Skindell has called for freezing the phase-in of the Taft tax cuts for the wealthiest Ohioans. It's estimated that adopting Skindell's recommendation would bring in over $200 million and it's certainly a step toward making Ohio's income tax more progressive.

For tax justice advocates in Minnesota, it's a bleak time. Governor Tim Pawlenty is vehemently anti-tax, and his 21st Century Tax Reform Commission has largely followed his lead with recommendations to eliminate the state's corporate income tax and enact several investment tax credits, though in fairness the Commission does recommend two revenue raising options: expanding the sales tax base and increasing cigarette taxes. It's too bad that progressive revenue raising options weren't mentioned. It's hardly a surprise that some would like to see income tax cuts for the wealthiest Minnesotans preserved. But Wayne Cox at Minnesotans for Tax Justice argues against tax cuts in a recent commentary, correctly arguing that increasing the progressivity of Minnesota's tax structure would not harm the state's business climate. He warns that "the alternative is carrying out an even riskier plan that trims muscle, not fat."

There are more good proposals on improving the progressivity of state income taxes. Next we turn to Montana where Representative Dave McAlpin is trumpeting a "fix" to the state's 2003 major tax revision that reduced the top tax rate and bracket. State estimates were that the tax changes were supposed to cost $26 million a year, but in reality they actually cost the state $100 million. His legislation would introduce a new top income tax rate of 7.9 percent on Montanans with taxable incomes over $250,000, and help to right the wrongs of the 2003 revisions. If Rep. McAlpin's bill is adopted, the state could see $26 million in additional revenue and improve the progressivity of Montana's tax structure.

For more on the importance of progressive income taxes read ITEP's policy brief on this topic.

In 2005, Ohio's former Governor Bob Taft signed sweeping tax legislation that phased out the state's Corporate Franchise Tax, the state's corporate income tax, and the Tangible Personal Property Tax, a local tax on things like machinery and equipment, and replaced all these important revenue generators with the Commercial Activity Tax (CAT). Four years later, the CAT is one of the reasons why Ohio is facing an enormous budget deficit and the tax itself has come to resemble swiss cheese.

Proponents of the CAT, a gross receipts tax, said that it would make Ohio's business climate less burdensome and remove pesky exemptions and deductions that benefit select Ohio companies with access to legislators and lobbyists. But a report released this week by Policy Matters Ohio explains that the CAT is one reason why the state faces an enormous budget shortfall and that the low-rate, broad-based tax that its advocates promised has not come to fruition. Instead, the CAT has become a victim of lawmakers eager to insert special provisions and deductions, just as happened with the taxes that it replaced. The paper offers specific recommendations for how Ohio's business taxes could be improved. Let Ohio's experience be a lesson to other states interested in business tax reform.

In 2005, the Ohio Legislature adopted, and then-Governor Taft signed into law, House Bill 66, a sweeping change to the personal income tax that reduced tax rates "across the board" by twenty-one percent over five years. The cuts were passed with the promise that they would improve economic conditions for Ohioans and make the state more competitive both nationally and internationally. How did the tax cuts perform? Did Ohio see even miniscule growth in key economic indicators?

According to Policy Matters Ohio the answer is simply no.

In a report released this week, Policy Matters Ohio writes, "The results are very clear. Even before the current economic downturn, Ohio was not keeping pace with the nation. Key economic trends continued to go in the wrong direction after the tax overhaul. The report finds unmistakable evidence that the state's relative economic decline accelerated since H.B. 66 was passed." In terms of important economic indicators including economic output, productivity, manufacturing and income, Ohioans haven't enjoyed any of the promises that tax cuts were said to provide.

The enormous tax cuts have already taken millions of dollars away from government's ability to do its work and the state has little to show for its efforts. In fact, according to the report, the state joins the majority of others in facing an enormous budget shortfall of between $4.7 billion and $7.3 billion for the next budget biennium and the gap between services available and those needed is actually widening.

Despite the drastic mistake policymakers made when passing these cuts, it's not too late to undo the mess. Governor Strickland and legislators would be wise to follow the recommendations of Policy Matters Ohio and revise the current income tax structure, introduce an EITC and shore up the state's business taxes.

Ohio is one of many states that are facing a budget shortfall. One reason for the state's budget woes is the permanent income tax cuts championed by former Governor Bob Taft. The drastic cuts amount to an across the board twenty-one percent reduction in income tax rates over five years. The last round of these cuts is scheduled to take place in 2009.

Earlier this year, Policy Matters Ohio released A Step Towards Fiscal Balance: Options for Ohio's Income Tax.The report cites ITEP data and offers realistic alternatives to policymakers interested in raising revenue to fill the budget gap instead of relying on painful reductions in services. For example, freezing income tax rates at 2008 levels is offered as an option that should not be dismissed.

Momentum is building for these sound solutions. This week an Akron Beacon Journal editorial cited this report saying that it, "offered the start of an answer for a state lacking the resources to cover basic services."

Like many states, Ohio currently faces a serious budget deficit, one that has prompted the administration of Governor Ted Strickland to announce plans to cut agency budgets by more than $400 million for the FY08-09 biennium. The consequences of those cuts are already being felt around the state, but, as a recent column from Joe Hallett of the Columbus Dispatch implies, they shouldn't be entirely unexpected. The combination of recent income and property tax cuts and the only-partial replacement of Ohio's corporate income tax with a new commercial activities tax (CAT) will mean that the state will lose in excess of $10 billion in tax revenue between 2006 and 2010, making spending cuts all but inevitable.

As Hallett notes, "Tax cuts are easy to love. But the reality is that taxes pay for services citizens want and need." This latestreport from Policy Matters Ohio details the substantial revenue losses Ohio will experience as a result of reductions in personal income tax rates and explains how heavily those reductions are tilted in favor of the rich.