Existing federal and state regulations governing the debt settlement industry are working, rendering the proposed legislation unnecessary and even harmful to Ohio consumers. Passing HB 173 will hurt the financial stability of Ohio working families, drive borrowers deeper into debt, and increase risks of bankruptcy. 

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Kalitha Williams’ testimony to the House Financial Institutions, Housing and Urban Development Committee on House Bill 173

Good afternoon, Chairman Adams, Ranking Member Boyce and members of the committee. My name is Kalitha Williams and I am the policy liaison for asset building at Policy Matters Ohio, a nonprofit, nonpartisan organization with the mission of creating a more prosperous, equitable, sustainable and inclusive Ohio. My work centers on household financial stability and consumer protection issues in Ohio. I also convene Ohio CASH, a statewide coalition of organizations focused on improving the financial and economic conditions for low- and moderate-income families and communities in the state. Thank you for the opportunity to testify today regarding House Bill 173. 

There are many consumers struggling with debt, people who are desperately seeking help and financial relief. The for-profit debt settlement industry aggressively markets its services to those struggling financially and promotes its services as a way for consumers to clear their debts.  Once the consumer engages in a plan, the debt adjuster insists that the consumer stop making debt payments and fund an escrow account to be used to negotiate with the debtors. Unfortunately, while the escrow account is growing, compounding late fees, higher interest rates, and finance charges continue to increase the amounts of the original, unpaid debts. In many cases, consumers go into default, finding themselves in worse shape than before they involved the debt adjuster. Many end up filing for bankruptcy, the very thing they were trying to avoid. In short, few consumers actually complete the program but many pay thousands of dollars in fees, and accrue more debt than before they engaged the debt settlement company.

As this committee considers HB 173, it is important that you understand that existing federal and state regulations governing this industry are working, rendering this proposed legislation unnecessary and even harmful to Ohio consumers. With this testimony I hope to outline how existing regulations are providing protection for Ohio consumers, and why this committee should reject this legislation. 

At the federal level, the Federal Trade Commission (FTC) found the industry’s previous practice of charging up-front fees (as much as 20 percent of the debt) to be an unfair practice and has implemented an industry-wide requirement that adjusters settle at least one debt before receiving payment.[i] 

At the state level, the Ohio Debt Adjusters Act protects Ohioans from for-profit debt settlement companies. The law prohibits debt adjusters from accepting more than $75 for initial consultation fees, charging more than $100 annually in consultation fees or contributions, or collecting more than 8.5 percent of the amount paid by the debtor each month or $30, whichever is greater. By lifting the fee caps and leaving Ohioans vulnerable to predatory practices and exorbitant charges, House Bill 173 would exclude out-of-state debt settlement companies from protections already in Ohio law. While the bill’s sponsors testified that the industry is not subject to the Ohio Debt Adjusters Act, the proposed legislation very clearly excludes the industry from the regulation on lines 21 and 22.

Ohio Attorney General Mike DeWine and his office have used the Ohio Debt Adjuster’s Act to protect consumers from debt settlement companies that prey on consumers. In 2012, the attorney general sued a group of debt settlement companies using the Ohio statute (see attached news release). The proposed legislation would remove the authority of the attorney general to protect Ohio consumers. 

The bill sponsors testified about the limited options available for consumers seeking help with their debt burdens, but other options may provide better outcomes for consumers than debt settlement companies typically do. Those options include:

• Consumers working directly with creditors to negotiate their debt payments. Rather than paying a third party, this approach directs all the money to the creditor and to reducing the consumer’s debt. Consumers may also be able to receive a hardship interest rate of under 10 percent, avoid debt defaults that lead to lawsuits, and pay off their debt faster;
• Through the National Foundation of Credit Counseling, a network of nonprofit organizations that offer debt management programs, consumers can work with a counselor who negotiates their debt with creditors. This approach avoids the for-profit industry practice of waiting until the consumer has saved enough money in an escrow account to begin negotiating the debt, a practice that often causes debt defaults;
• Bankruptcy can protect consumers from lawsuits that begin when they stop paying their debtors, a shelter that debt settlement agreements cannot provide. In addition, debts reduced through bankruptcy are not considered taxable income, unlike resolutions negotiated through debt settlement companies.

The industry has acknowledged to the FTC that fewer than 35 percent of consumers settle at least 70 percent of their debt in three years in a debt-settlement program.[ii] A survey conducted by the debt collection industry showed that 45 percent of creditors will not even work with debt settlement companies.[iii] Given these realities, consumers struggling with debt will most likely be better served if they avoid the debt settlement industry altogether.

Other government entities and consumer protection organizations have found problems with the industry.

• This year, legislation similar to HB 173 has been introduced in other states including Georgia, Hawaii, and Louisiana, and has been rejected;
• The Office of the Comptroller of the Currency, a national bank regulator, stated  that debt settlement “is not a legitimate method of satisfying debts”;[iv]
• In 2012, the New York City Department of Consumer Affairs conducted its own investigation of the industry and called debt settlement “the single greatest consumer fraud of the year”;[v]
• The Better Business Bureau rates the debt settlement industry as “inherently problematic” and has received complaints in all 50 States[vi], including nearly 300 complaints against American Fair Credit Council member companies that can be found by searching the Better Business Bureau website.[vii]

We ask that you protect Ohio consumers and oppose HB 173. Passing this legislation will hurt the financial stability of Ohio working families, drive borrowers deeper into debt, and increase risks of bankruptcy. Many member organizations of Ohio CASH are direct service providers and some have worked with consumers who have tried this program; they have told us that these practices leave consumers in worse financial shape rather than improving their outlook. Ohioans need real solutions to support their financial stability, not industries that take advantage of their economic challenges. 

Mr. Chairman, thank you for allowing me to testify on this legislation. I am happy to answer any questions that you or any of the other members of the committee may have.

Representative Hagan’s proposal for a severance tax offers the largest producers a chance to join Ohio as good citizens, to set a good example for their suppliers, to pay their fair share, and to build a stronger Ohio.

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Wendy Patton’s prepared comments on House Bill 212

People and businesses contribute to public services in the state, to police, fire protection, schools, roads, clean water, and all the things we need. We pay taxes. We pay income and sales taxes and businesses pay business taxes. 

Natural resource industries present a special case. They – uniquely – take something precious from the land that can be taken only once, and they profit from that valuable commodity. They remove, or sever, natural resources from the land. That is why, all over the world, these kinds of firms pay severance taxes – special taxes on the mining and drilling of precious resources, resources that will never be available to anyone else again. 

Horizontal drilling at the scale it is being done today, and in the locations it is being done, is relatively new, growing within the past decade. Accidents in sparsely populated regions like North Dakota and Wyoming affect few people directly. But Ohio is densely populated. There are people everywhere, even in our rural places. Urban areas large and small take water from reservoirs fed by rivers and streams that flow out of  Appalachia. Concerns about how horizontal drilling will affect our air, water and land must be taken into consideration. 

External costs of production also are a cause for concern. Policy Matters Ohio has joined with research groups in our neighboring states – West Virginia, Pennsylvania and New York – to learn about the impact of oil and gas drilling on communities where the rigs are going up. After the thrill of the check in the mailbox, what happens? We are learning about impacts in the following areas:

• We find needs for affordable housing as work crews and oil field service providers come into a drilling region.
•  New costs emerge with new usage of roads: Repair and Maintenance from accidents and heavy trucks, traffic enforcement and safety 
• There are costs associated with training the workforce with skills needed throughout the supply chain.  The Carrollton superintendent of schools would like an energy center for students to train in workforce skills.  English-as-a second language instructors are needed.
•  Costs related to infrastructure are emerging: Water quality assessments are needed.  Public works boards worry about the seismic impact of injection of wastewater on old sewer and water infrastructure.

Representative Hagan’s proposal for a severance tax offers the largest producers a chance to join Ohio as good citizens, to set a good example for their suppliers, a chance to contribute, to pay their fair share, and to build a stronger Ohio. This proposal for a severance tax is responsible, straightforward and simple:

• There are no loopholes for recovery of the costs of production. Ten years ago horizontal drilling was not as common as it is today and was considered a high-yield but high-cost approach; states added loopholes to their tax codes to encourage producers to undertake this type of production. But this is the conventional approach to production in the Utica today. The kinds of tax breaks offered by other states, and in other times, are no longer needed or responsible;
• The proposal is simple: All product from the well is taxed at the same rate. 
• The rate falls within the range of other major producing states.  Kansas taxes natural gas at 8 percent; Montana at 9.26 percent; Texas at 7.5 percent; Oil is taxed at 11.5 percent in North Dakota, 8 percent in Kansas, 25 percent in Alaska.
• Condensate and liquid gas is taxed as well as dry gas;
• Funds are provided to mitigate the impact of this industrial development – and its supply chain – on communities – and it may be expected that the supply chain of the industry will affect diverse places in the state.  Cincinnati is thought to have good geology for waste injection wells.  Some places in Central Ohio are being leased.  Northwest Ohio has pipelines and refining.  Much of eastern Ohio has oil and gas activity;
• Funds are provided for environmental impact and conservation – a very common approach in states across the nation;
• This bill also provides funding for the future – for what happens after the boom. It provides for a permanent fund for economic diversification in communities that become dependent on oil drilling, for when the wells are pumped out and jobs are gone.  Mature oil and gas states establish permanent funds to ensure the state is left better off when the resources are gone. 

There is a term, “the natural resource curse,” which describes a peculiar condition of regions rich in natural resources where the people remain poor, with little opportunity. Mature oil and gas states have taken pains to provide for the future by establishing permanent funds to support economic development, education, research and development, and other drivers of economic progress.

Representative Hagan sees Ohio’s future in the same way – our precious natural resources can both create wealth today, and underwrite progress for tomorrow.

Ohio is tied for third-most megadeals—giant economic development subsidy packages for corporations—at a total cost of more than $1.5 billion.

Ohio ranks high in number of deals

In recent years, state and local governments have been awarding giant economic development subsidy packages to corporations more frequently than ever before. The packages frequently reach nine and even ten figures, and the cost per job averages $456,000 and often exceeds $1 million. Ohio is tied for third-most megadeals—with 12—at a total cost of more than $1.5 billion.

These are the findings of Megadeals, a report released today by Good Jobs First, a non-profit resource center based in Washington, DC. The report can be found online at www.goodjobsfirst.org/megadeals.

“These subsidy awards are getting out of control,” said Philip Mattera, research director of Good Jobs First and principal author of the report. “Huge packages that used to be reserved for ‘trophy’ projects creating large numbers of jobs are now being given away more routinely.”

In a painstaking review using hundreds of sources, Good Jobs First identifies 240 “megadeals,” or subsidy awards with a total state and local cost of $75 million or more each. The cumulative cost of these deals is more than $64 billion.

The number of such deals and their costs are rising: since 2008, the average frequency of megadeals per year has doubled (compared to the previous decade) and their aggregate annual cost has roughly doubled as well, averaging around $5 billion. For those deals where job projections were available, the average cost per job is $456,000.

Michigan has the most megadeals, with 29, followed by New York with 23; Ohio and Texas with a dozen each; Louisiana and Tennessee with 11 each; and Alabama, Kentucky and New Jersey with 10 each. Forty states plus the District of Columbia have done at least one megadeal.

In dollar terms, New York is spending the most, with megadeals totaling $11.4 billion. Next is Michigan with $7.1 billion, followed by five states in the $3 billion range: Oregon, New Mexico, Washington, Louisiana, and Texas.

“Despite their high costs, some of the deals involve little if any new-job creation,” said Good Jobs First executive director Greg LeRoy. “Some are instances of job blackmail, in which a company threatens to move and gets paid to stay put. Others involve interstate job piracy, in which a company gets subsidies to move existing jobs across a state border, sometimes within the same metropolitan area.”

Megadeals have been awarded to many of the largest and best known companies based in the United States as well as foreign ones doing business here, including: every large domestic automaker and all of the foreign auto producers with appreciable U.S. sales; oil giants such as Exxon Mobil and Royal Dutch Shell; aerospace leaders Boeing and Airbus; banks such as Citigroup and Goldman Sachs; media companies such as Walt Disney and its subsidiary ESPN; retailers such as Sears and Cabela’s; old-line industrials such as General Electric and Dow Chemical; and tech leaders such as Amazon.com, Apple, Intel and Samsung.

The most expensive single listing is a 30-year discounted-electricity deal worth an estimated $5.6 billion given to aluminum producer Alcoa by the New York Power Authority. Taking all of a company’s megadeals into account, Alcoa is at the top with its single $5.6 billion deal, followed by Boeing (four deals worth a total of $4.4 billion), Intel (six deals worth $3.6 billion), General Motors (11 deals worth $2.7 billion), Ford Motor (9 deals worth $2.1 billion), Nike (1 deal worth $2 billion) and Nissan (four deals worth $1.8 billion).

Fifty-six megadeals went to corporations with parents based outside the United States and seven more went to joint ventures of domestic and foreign companies.

The megadeals list is a new enhancement of Good Jobs First’s Subsidy Tracker database, the first online compilation of company-specific data on economic development deals from around the country.

Until now, the content of Subsidy Tracker has consisted exclusively of official disclosure data provided by state and local governments. However, many large deals pre-dated disclosure and many recent ones are missing from the official lists because of gaps in state and local transparency practices. To overcome those constraints, Good Jobs First went back and assembled information on large deals using a wider variety of sources. The resulting list of megadeals has been incorporated into Subsidy Tracker (www.subsidytracker.org). 

In a policy sidebar, the study points out that the Governmental Accounting Standards Board (GASB) has been long-negligent in failing to promulgate regulations for how state and local governments should account for tax-based economic development expenditures.  If GASB were to finally promulgate such regulations—covering both programs and deals—taxpayers would have standardized, comparable statistics about megadeals and could better weigh their costs and benefits. 

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Over the past 30 years, the enterprise zone program accomplished the opposite of what it was designed to accomplish. It facilitated the movement of jobs and investment away from distressed communities of high unemployment.

Wendy Patton’s testimony to the House Economic Development and Regulatory Reform Committee on Senate Bill 112

Good morning, Chairman Baker, Vice-Chair Terhar, Ranking Member Driehaus and members of the committee. My name is Wendy Patton and I am a senior project director at Policy Matters Ohio, a nonprofit, nonpartisan organization with the mission of creating a more prosperous, equitable, sustainable and inclusive Ohio. Thank you for the opportunity to testify today regarding Senate Bill 112.

In 2003, Policy Matters Ohio studied the first 20 years of Ohio’s enterprise zone program and, based on a review of the data, interviews with local officials and analysis of outcomes in communities, came to the following conclusions. Ohio’s enterprise zone program was initially designed to help urban communities with high poverty by lowering costs to incentivize firms to locate within their boundaries. It was assumed the program would make distressed communities more appealing places to locate jobs and to make investments. Over time, the type of place allowed to participate was broadened from the initial, distress-based definition. Our study found that in those first 20 years, lower-income districts were slightly more likely to participate in the program than other types of communities, but higher-income districts reaped most of the jobs and investment associated with the program.

In 2011, the national research group Good Jobs First published a study of enterprise zones in the Cleveland and Cincinnati areas between 1996 and 2010. One hundred and sixty-four small and medium-sized business establishments with an estimated 14,500 employees in these enterprise zones received lucrative tax breaks as they merely moved around within the Cincinnati and Cleveland metropolitan areas. These subsidized relocations were overwhelmingly outward bound and by many measures, especially in the Cleveland region, they fueled suburban sprawl. By dispersing jobs away from the two urban cores, the relocations contributed to disparities in wealth and opportunity among localities in the regions. They moved jobs away from areas with higher rates of poverty and people of color to more affluent and less racially diverse areas. And by moving mostly to locations that are not served by public transportation, they denied job opportunities to workers without cars. 

Over the past 30 years, the enterprise zone program accomplished the opposite of what it was designed to accomplish. It facilitated the movement of jobs and investment away from distressed communities of high unemployment.

In 2007, in the wake of the state tax overhaul of 2005 that eliminated some of the taxes the enterprise zone was established to abate, Senator Amstutz initiated a tax incentive review study. The legislatively mandated report found flaws in the enterprise zone program, including:

• Tax reform rendered major portions of the enterprise zone program obsolete;
• Tax abatement began in Ohio as a targeted urban development program, but by 2009 virtually all areas of the state qualified;
• Ohio’s tax abatement statutes did not align with its tax increment financing statutes;
• Ohio’s tax abatement statutes were found to be complex and confusing; and
• Ohio’s tax abatement and tax increment financing programs adversely impacted school district revenues, particularly in Ohio’s most “urbanized” counties.

The study suggested that the enterprise zone program be ended and consolidated with the other major local tax abatement programs. Consistency was encouraged, with a focus on:

• Growing existing businesses in place;  
• Eliminating the perception that incentives are an entitlement;
• Providing distressed communities with distinctive tools;
• Providing schools with a minimum of the foregone revenues;
• An early warning system for job loss;
• Financial mechanisms for enhancing infrastructure and public transit.

Regrettably, the incentive study’s call for a bipartisan working group to develop a detailed proposal to reform local property-tax incentives did not result in such an overhaul. The enterprise zone program is still with us, renewed year after year, in spite of dramatically changed context and recommendations for change, consolidation and/or elimination. Use is dwindling – the total number of active enterprise zone agreements reported in Ohio fell for the eighth year in a row in 2011, by 24 percent from 2010, according to the 2011 annual report for the program. 

Performance has been uneven: for example, while 10 percent more jobs (about 4,700) were created than promised, about 22 percent fewer jobs (27,000) were retained than promised. We do not know, from the annual report, why the performance was so uneven, or how underperformance was addressed.

This suggests a thorough examination of whether the program should continue is needed, rather than simply another extension. If the program is to be continued, it needs a serious overhaul.

Mr. Chairman, thank you for allowing me to testify on this legislation. I am happy to answer any questions that you or any of the other members of the committee may have.

Across-the-board federal cuts will take $184 million out of Ohio’s budget in 2013. These cuts mean furloughed defense workers, cuts to county funds for social services, reductions to public health programs for teens and seniors alike, and ongoing loss of Head Start slots for preschoolers.

Automatic federal cuts force reductions to Head Start, summer lunches, senior services, R&D

State and federal budgets are inextricably linked; in 2011, federal grants to state and local governments across the nation totaled $607 billion, or roughly 25 percent of spending by state and local governments that year.[1] In the two-year budget under consideration in the Ohio General Assembly, $44 billion (37 percent) is funding that comes straight from the federal government. Across all state, local, university, defense and other public functions, Ohio stands to lose $184 million in 2013 relative to 2012 as a result of changes in federal appropriations and the sequester.[2] 

Sequestration or “the sequester” are the terms used to describe the automatic across-the-board federal budget cuts that went into effect earlier this year as a result of U.S. congressional action. We are now four months into the sequester, which will take an estimated $5.1 billion out of state budgets in fiscal year 2013.[3] This policy brief gives new examples of how the sequester is affecting services in Ohio. These losses slow the Ohio economy as defense workers are furloughed and tourist attractions – like air shows – are cancelled. They also hurt current and future well-being because there are fewer summer lunch programs for children and Head Start slots for preschoolers. As the General Assembly finalizes the state budget for the coming biennium, it should consider how it can work to soften the impact of the sequester, which will cut deeper over the next nine years.

Health

The Ohio Department of Health (ODH) receives nearly 70 percent of its funding from federal agencies, but has received final sequestration budget cut information for only a few of the nearly 100 federal grants administered by the department. Impacts include the following:[4]

• Funding for food for the supplemental nutrition program, Women, Infants and Children (WIC) will be cut by $6.2 million in the current fiscal year; program nutrition services and administration will be cut by $1,842,164; these cuts will be absorbed by the ODH. The WIC Farmers Market program will also see funds for food will cut by  $104,804, a cut that is to be allotted locally; administrative cuts of $21,466 in this program will be absorbed by ODH;
• The loss of $96,475 for the Title V Abstinence Education Program will be split between ODH (7 percent) and local agencies administering services (93 percent);
• The “Personal Responsibility Education Program,” a public health program for adolescents in foster care aimed at reducing pregnancy and sexually transmitted disease, faces a total cut of $103,625, which will also be split between ODH (76 percent) and local agencies (24 percent);
• The “BioSense” public health IT program will be cut by $7,911, a cut absorbed by ODH;
• Cuts to Newborn Hearing Screening of $92,100 will be absorbed by ODH.

While the Ohio Department of Health is absorbing some of the sequester impact, other programs are being eliminated.  For example, ODH has eliminated testing for West Nile virus; the annual budget for the state’s testing program was $265,000.[5]

Food, health and human services

Nationally, the impact of the sequester on programs for older Americans has reduced food and other services to the elderly, one in seven of whom struggles with hunger. A national survey revealed that:[6]

• Programs have been forced to cut, on average, 364 meals per week;
• More than 70 percent are establishing waiting lists or adding to existing lists;
• Programs have increased their waiting lists on average by 58 seniors;
• 40 percent of programs responding have eliminated staff positions; and
• One in six are closing meal sites or home-delivered meal programs.

The National Institute of Senior Centers shared this story from Hamilton, Ohio:

Our Elderly Services Program, for which I do intake, can provide medical transportation and limited non-medical trips for seniors over age 65. We are unable to provide transportation to anyone between 60 and 65. … That means many seniors will have no affordable way to get to medical appointments or the grocery stores. Since at least two-thirds of our clients receive less than $1,400 in monthly income, they will be stranded with little or no affordable means to get food or medical care.[7] 

The Ohio Department of Job and Family Services (ODJFS) received notice that its Federal Social Services Block Grant (Title XX) will be reduced to $39.7 million. This cut of $2.2 million, or 5.1 percent, will be shared across counties. This is a critical support to counties, and will hurt services from child welfare to senior services.  (See Appendix for county-by-county impacts in the current fiscal year.)

The ODJFS director reported that, across the agency, sequestration will mean less money for:[8]

• Commodity food programs administered by local food banks;
• Emergency unemployment compensation, reducing weekly benefits to those whose job hunt has extended beyond the 26 weeks underwritten by state unemployment insurance;[9]
• Workforce Investment Act funding for job training. Funding in Ohio has been declining for some time, to just $93.6 million in 2013 from a high of $174 million in 2009. The sequester and other formula changes could reduce Ohio’s share of funding to $80 million, the smallest allocation in the history of the program.

Travel and tourism

The sequester continues to hit the travel and tourism industry in Ohio. The National Museum of the U.S. Air Force in southwestern Ohio has cancelled both its Giant Scale Radio-Controlled Model Aircraft Show and its July and August Family Days; 95 civilian employees at the Museum will be affected by furloughs scheduled by the Department of Defense beginning July 8.[10]

Higher education

The sequester is reducing university budgets and research funding across the state:

• Research funding for Ohio’s public universities could be cut by $95 million;[11]
• Ohio State estimates a funding cut of $13 million in 2013 and $14 million in 2014;[12]
• University of Cincinnati estimates the impact will be around $17 million, including sequestration impact between now and 2022.[13]

Funding for children

To date, it has been reported that some 250 children in Lorain and the Cincinnati area have lost Head Start slots, although more anticipate cuts, including the cities of Athens, Mansfield and Marion. Cuts are expected to affect children across the state.

• The Coalition for Human Needs, using data of the National Education Association, reports that a $14.7 million cut to programming for children anticipated for the current fiscal year could hurt 2,500 Ohio kids in Head Start and 800 in childcare.[14]
• The same source anticipates Ohio’s schools will lost $25.2 million in Title I funds for disadvantaged children, harming 99 schools and 346 staff serving more than 34,000 students.[15] An Ohio Department of Education spokesperson said impacts will not begin until the coming school year (2013-14).
• Head Start funds in Lorain County will be cut by $319,472, and 53 children will be removed from the program.[16]
• The AmeriCorps VISTA Summer Associate program, which is a program that provides disadvantaged children with food in the summer, lost 135 positions.[17]

Defense

Furlough notices have gone out to the workers at the Defense Supply Centers in Columbus and Cleveland.[18]

Judiciary

Although state funding for courts is not impacted by the sequester, federal grant funds and the federal courts themselves anticipate cuts. One Ohio respondent to a national survey said fewer domestic violence victims had received court advocacy services in Montgomery County courts.

“If projected cuts in government funding proceed, we anticipate that our court advocacy program will be greatly curtailed, if not virtually eliminated,” the respondent wrote. “That means we will not be able to offer hands-on assistance in accompanying victims to court proceedings and in assisting clients to obtain protection orders. We anticipate not being able to do any court outreach which impacts our ability to assist in protecting victims of domestic violence.”[19]

Conclusion

Automatic across-the-board federal cuts will harm Ohio children, families, seniors, workers, and the economy as a whole, and the consequences will be long lasting. Ohio’s elected officials, both at the state and federal levels, should take steps to restore these important services.

Sequester hits Head Start, summer lunches, senior services, R&D

Across-the-board federal cuts known as the sequester will take $184 million out of Ohio’s budget in federal fiscal year 2013, which runs through September. These cuts mean furloughed defense workers, cuts to county funds for social services, reductions to public health programs for teens and seniors alike, and ongoing loss of Head Start slots for preschoolers, according to a new release by Policy Matters Ohio.

“The sequester will hurt many Ohioans, from kids losing educational opportunities to families of furloughed workers,” said Wendy Patton, senior project director for Policy Matters Ohio. “We see new damage every month. Unless Congress makes changes, we will see these cuts deepen for the next nine years.”

The losses outlined in this report, “Federal Sequester Keeps Hitting Ohio,” will slow the Ohio economy and hurt the current and future well-being of Ohioans. Federal funds are an important component of the state budget. In the two-year budget under consideration in the Ohio General Assembly, $44 billion (37 percent) comes from the federal government.

“Ohio’s elected officials, both at the state and federal levels, should take steps to restore the important services being hit by the sequester,” said Patton.

Research by the Economic Policy Institute on the sequester’s impact on state budgets provided the data for the Ohio study. The sequester will force reductions of about $5.1 billion to state budgets this year, according to the May report by EPI, “What do current federal funding levels in the wake of sequestration mean for state budgets?” (Available online at www.epi.org/publication/ib363-sequestration-and-state-budgets/.) 

Check this page for ongoing analysis of proposals and changes as the Ohio General Assembly debates a biennial budget for fiscal years 2014 and 2015.

Tax policy

Budget policy

More research on Ohio budget policy in the 2014-15 biennial budget

Medicaid expansion

The sequester

Selected media coverage

Studies question tax-cut links to new jobs, February 17, 2013

Ohio’s proposed tax changes could mean higher tax bills for some, February 11, 2013

Liberal Think Tank Attacks Tax Hikes In Governor’s Proposed Budget, February 7, 2013

Governor Kasich’s New School Funding Plan, February 4, 2013

The Ohio General Assembly soon will approve a new two-year state budget. But so far, instead of closely reviewing the 129 tax exemptions, deductions and credits that reduce the amount of revenue the state would otherwise receive, it is adding to them.

Executive Summary

The Ohio General Assembly soon will approve a new two-year state budget. But so far, instead of closely reviewing the 129 tax exemptions, deductions and credits that reduce the amount of revenue the state would otherwise receive, it is adding to them.   

The Senate version of the budget includes new exemptions for aerospace companies, for-profit grain handlers, and certain fraternal organizations, among others. While he attempted to broaden the sales tax to cover more services, Gov. Kasich made only a modest attempt to rein in exemptions, credits and deductions, or tax expenditures, as they are known. This effort was trimmed further in the House and Senate versions of the budget. The vast bulk of Ohio’s tax expenditures continue as usual, with no regular review. Despite agreement across the political spectrum that such a regular review is in order, the General Assembly has not taken action. Action is needed.

By far the biggest new tax break approved by the Senate and now being considered by a conference committee of legislators from both houses is a new income-tax exemption for business owners worth around $700 million a year. This poorly targeted exemption is unlikely to result in significant new job creation, as only a small share of those receiving it are in a position to create new jobs. Meanwhile, it will create a new avenue for tax avoidance.   

Ohio’s biennial tax expenditure report sheds some light on expected spending under the tax code during the next budget. The number of tax expenditures has remained about the same over the past two years, increasing to 129, from 128 in the previous biennium. Most of the exemptions, credits and deductions go to businesses. Seventy-six of the tax expenditures, accounting for just over half of the total value in FY14 or $4.0 billion, go for business assistance and economic development.

Sales-tax expenditures account for the largest share of the total:  57, adding up to $5.08 billion in FY14, or nearly two-thirds of the total. While figures in the report do not estimate the revenue gains from repeal, this significantly reduces the sales-tax base, as sales and use tax revenue that year is expected to be about $8.92 billion in FY14.

Seven new tax expenditures valued at a total of $72.2 million in FY14 have been added since the last tax expenditure report two years ago. Five, valued at $225.4 million in total in FY13, were eliminated because of the repeal of the corporate franchise tax (1) and the estate tax (4). This included one substantial break for banks, the gain from which was given back to banks in tax-rate cuts. One other individual income tax credit expired.

Forty-four tax expenditures have ended over the past decade because of the elimination of the corporate franchise and estate taxes. Yet the total number today is just 9 below what it was in 2003 because so many have been transferred to be used against other taxes, or altogether new ones have been created. Leaving aside cases where tax expenditures were repealed and replaced with something similar, or originally approved for just a limited time, the General Assembly eliminated only two individual tax expenditures over the past decade.

Still embedded in the tax code are such breaks as a write-off against the Commercial Activity Tax (CAT) for losses that big companies experienced before it was enacted, even though they no longer pay taxes on their income; a sales-tax exemption worth almost $20 million a year for pollution-control equipment purchased by utilities even though most of it is mandated; the vendor discount for retailers that collect the sales tax, a windfall for the big retailers who get most of the benefit, and the cap on sales tax for wealthy buyers of shares in jet aircraft, who pay only a fraction of the tax they would otherwise.

Existing tax breaks have been expanded over the past two years. These range from a CAT break for a metals-refining company and a sales-tax exemption for building materials used in livestock structures for captive deer to tax credits for call centers that employ workers out of their homes.

Among substantial tax expenditures that are expected to grow the most between FY12 and FY15 according to the Taxation Department are the historic preservation tax credit, used against the individual income tax and various financial institution taxes, and the job retention tax credit, used against the CAT.  

Bills providing for a regular review of tax expenditures have been introduced by members of both major political parties, and support for a regular examination has been voiced by Ohioans of varied political stripes. To be more than a review that sits on a shelf, these legislative efforts need to add automatic sunsets, so that new and existing tax expenditures expire unless they are explicitly renewed. It is time for the General Assembly to scrutinize spending through the tax code as it does other state expenditures.

Introduction

The Ohio General Assembly soon will approve a new two-year state budget. But so far, instead of closely reviewing the 129 tax exemptions, deductions and credits that reduce the amount of revenue the state would otherwise receive, it is adding to them. The Senate budget bill, which was approved last week, includes seven new exemptions and expands or extends six others. Only two are set for repeal. These include a modest deduction covering dependents that two different taxpayers can deduct on their state income tax, and the Technology Investment Tax Credit, which has reached its authorized limit.

The biggest new tax expenditure, as such exemptions are known, would be a break worth about $700 million a year for owners of certain Ohio businesses. It would exempt half of up to $750,000 from the income tax. This huge exemption, which overnight would become the second-biggest in the tax code, is very poorly targeted and is unlikely to result in significant new job creation.[1] A recent national study by researchers at the U.S. treasury department found that only 11 percent of taxpayers reporting business income own a bona fide small business with employees other than the owner.[2] The new tax break would benefit passive investors who have no role in business decisions, while opening up new avenues for tax avoidance. 

To fund this big new tax expenditure, some have proposed curbing others. For instance, the Ohio Chamber of Commerce has suggested reducing or minimizing the $20 credit and the personal, spousal and dependent exemption available under the income tax.[3] Reducing or eliminating such exemptions and using the funds for a business-income tax exemption would shift taxes from the more affluent to poor and middle income Ohioans. That’s because it is the former who benefit the most from such a cut. Cutting existing tax expenditures to finance unproductive new ones is not a useful exercise.  

However, a regular review of Ohio’s tax expenditures is very much in order. A biennial report produced by the Ohio Department of Taxation (ODT) examines state tax expenditures, and should serve as a starting point for a reevaluation of all 129 of them.     

This year’s tax expenditure report, as always, is Book Two of the governor’s executive budget proposal. In it, the taxation department estimated that in Fiscal Years 2014 and 2015, 129 such exemptions and credits will amount to more than $7.7 billion in annual foregone revenue to the state’s General Revenue Fund (see Table 1 below). “Tax expenditures result in a loss of tax revenue to state government, thereby reducing the funds available for other government programs,” ODT noted in the report. “In essence, a tax expenditure has the same fiscal impact as a direct government expenditure.”[4] The report estimates foregone revenue, which is not necessarily what the state would take in if a tax expenditure were to be repealed.[5] Still, the loss of revenue is sizeable, given the current expectation that the state will generate $21.1 billion in GRF tax revenue in fiscal 2014.[6]

“Unlike direct budgetary expenditures, unless there is a pre-existing termination date, tax expenditures may remain in effect indefinitely with little or no scrutiny by policy makers,” the tax expenditure report notes.[7] Over the past couple of years, new attention has focused on tax expenditures. However, the General Assembly has no regular process to hold hearings on tax expenditures or to systematically examine them.[8]

The General Assembly should closely review the report, and reduce or eliminate unneeded loopholes. Both the House and Senate should review each of the 129 tax expenditures, starting with the 90 where the foregone revenue is $1 million or more a year in FY15. All tax expenditures should be given sunset dates, so that they only continue after an affirmative decision that they should. And a permanent review mechanism should be established.  

The taxation department projects that the total value of tax expenditures will grow 13 percent between FY12 and FY15, as shown in Table 1.

This report covers some of the highlights of this year’s tax expenditure report, which include:

• The number of tax expenditures has remained about the same. It increased to 129, from 128 in the previous biennium.
• Most of the exemptions, credits and deductions go to businesses. Seventy-six of the tax expenditures, accounting for just over half of the total value in FY14 or $4.0 billion, go for business assistance and economic development.
• Sales-tax expenditures account for the largest share of the total:  57, adding up to $5.08 billion in FY14, or nearly two-thirds of the total. While figures in the report do not estimate the revenue gains from repeal, it is still worth noting that the current estimate from the Office of Budget and Management for GRF sales and use tax revenue in FY14 is $8.92 billion, so the sales-tax base is significantly smaller due to these tax expenditures. Thirty-six income-tax expenditures are valued at $2 billion in FY14.[9]
• Seven new tax expenditures valued at a total of $72.2 million in FY14 have been added since the last tax expenditure report two years ago. Five, valued at a total of $225.4 million in FY13, were eliminated because of the repeal of the corporate franchise tax (1) and the estate tax (4). The individual income tax credit for alternative fuel sold at retail expired.
• The vast bulk of Ohio’s tax expenditures continue as usual, with no regular review. Despite agreement across the political spectrum that a regular review of Ohio’s tax expenditures is in order, the General Assembly has not taken action on the issue.
• 44 tax expenditures have ended over the past decade because of the repeal of the corporate franchise and estate taxes. Yet at 129, the total number today is just 9 below what it was in 2003 because so many have been transferred to be used against other taxes, or altogether new ones have been created. Leaving aside cases where tax expenditures were repealed and replaced with something similar, or originally approved for just a limited time, the General Assembly has only eliminated two individual tax expenditures over the past decade.

In his budget proposal, Gov. Kasich made a modest effort to repeal some tax expenditures. He sought to eliminate the sales-tax exemption for magazine subscriptions, worth $7.4 million in FY14; the newly created income-tax deduction for gambling losses (see below) and allowing an individual to be claimed as a dependent by more than a single taxpayer, respectively ($33.8 million together).[10] He also proposed eliminating the Technology Investment Tax Credit, a program that provides credits to investors in qualified, technology-based Ohio companies, though existing credits would be honored (this credit was estimated to cost $3.8 million in FY13 and $1.4 million in FY14 before dialing down to 0 in FY15, as the program has reached its cap).[11]

However, in its version of the budget, the House struck the governor’s elimination of the gambling-loss deduction (estimated at GRF $29 million a year) and the magazine subscription sales-tax exemption. The Senate in its budget bill agreed on these two measures with the House. 

A description of many of the tax expenditures that are created or expanded in the House and Senate budget bills can be found in the Appendix. Among them are:

• A new Commercial Activity Tax exclusion for grain handlers. The LSC has estimated this would reduce CAT revenue by $11 million a year, half of which would go to the General Revenue Fund and half to school districts and local governments. This new exemption is based on the idea that for-profit grain handlers need it to compete with nonprofit grain handlers, which aren’t subject to the tax. It has been opposed, however, by the Ohio Manufacturers’ Association, whose representative noted in testimony to the Senate Ways & Means Committee that, “All for-profit enterprises should be paying the CAT; in fact, equality in the burden of taxation demands that they all remain subject to the tax.”[12] Added by the House, this new tax break was retained by the Senate.
• A new property-tax exemption in the House version of the budget would cover fraternal organizations like the Masons that provide financial support for charitable purposes and have been operating in Ohio for at least 100 years. As The Plain Dealer reported, the Legislative Service Commission has estimated the cost to local governments and school districts at $4.8 million or more a year.[13] This would not show up in the tax expenditure report, because it is not a state exemption, but a local one. It is no less a matter of state policy, however.
• A retailer could keep 75 percent of the piggyback sales tax it would otherwise pay to a county if it employs at least 150 people and meets certain other requirements. This break, originally approved in 2006 to support Bass Pro Shops in Wood County, had expired, but was revived in the Senate, with a lower investment requirement ($30 million instead of $50 million). It includes tighter restrictions than before in that at least 50 percent of the customers must live in within 50 miles of the facility and relocations of employees and property from other facilities elsewhere in Ohio are not permitted. Promoted as a spur to other development in the area, the Bass Pro has not attracted much nearby investment.[14]

Overall, the Senate budget will would create six new state tax expenditures while repealing two.  That does not include the additional local tax breaks that it authorizes.

Inexplicably, neither the governor, the House nor the Senate sought to eliminate some of the obvious special-interest breaks in the tax code.[15] Some examples are:

• A write-off against the Commercial Activity Tax for losses companies experienced before it was enacted, even though they no longer pay taxes on their income. This break is available only for companies with at least $50 million in losses; small businesses that had losses less than that were excluded. Value in FY14: $5.5 million;
• A $19.5 million sales-tax exemption in both FY14 and FY15 for pollution-control equipment purchased by utilities even though most of it is mandated;[16] 
• The vendor discount, worth $54.3 million in FY14, under which retailers that collect the sales tax get a 0.75 percent discount on what they collect if they send the tax in by the due date of the tax return. While this uncapped discount may have made sense before the days of computers, today this is a windfall for big retailers, which get most of the benefit.  According to data in the previous tax expenditure report, more than half of the $50.7 million received in such discounts in 2008 went to the 687 retailers that collected at least $1 million in tax, while the 197,487 other retailers got the rest;[17]
• One worth $600,000 for buyers of shares in jet aircraft, who pay only a fraction of the sales tax they would otherwise.[18] The state has an $800 cap on total state sales tax paid for each aircraft, so a buyer who spends $150,000 could save thousands of dollars in sales tax.

Largest tax expenditures

The list of the largest tax expenditures has remained similar to that from two years ago. Nineteen of the top 20 in value in FY14 were listed in the top 20 for FY12 in the last report. Notably, the one that fell off the list – the exemption from the corporate franchise tax for goodwill and abandoned property, estimated to be worth $123 million in FY13 – no longer exists. It had long been a major avenue for tax avoidance.[19] This exemption does not exist in the new tax on banks created by the General Assembly last year, the financial institutions tax (The FIT replaced what was left of the corporate franchise tax. This was Ohio’s corporate income tax until 2005, when it was phased out for most non-financial companies). The Kasich administration targeted the exemption in its appeal for the new FIT,[20] and its elimination represents an important step forward in cracking down on tax avoidance. Regrettably, the additional revenue generated was given back to the banks in the form of rate cuts and the bill also contained new loopholes.[21]

Moving into the top 20 is the exclusion from the CAT of qualifying distribution center receipts against the commercial activity tax. Suppliers to big Ohio distribution centers with more than $500 million in sales don’t have to pay the tax on such sales under this exclusion, as long as more than half of what each center ships goes outside Ohio.[22]  One of the faster-growing tax expenditures, it is estimated to increase 15.7 percent between FY12 and FY15, to $89.7 million.[23]

The Columbus Dispatch described recently how Jackson, Ohio, businessman Alan Stockmeister convinced the General Assembly to amend the existing tax break for suppliers of certain big distribution centers so that it would also include his precious-metals refining business. According to the Dispatch, he wanted to open a new copper-recycling business in Waverly, but said he needed tax relief to do so – and that without it, he might also be forced to move his existing metals-refining business to Texas, where the parent company is located. “Within a few weeks, legislators amended an existing Ohio exemption for distribution warehouses to include metal refineries in the state’s Appalachia region. The Department of Taxation calculated the cost of the exemption for Ohio Precious Metals to be $1.3 million in 2014,” the Dispatch reported. [24]   

In addition to Ohio Precious Metals, six other facilities are certified under this exclusion this year:  Cardinal Health National Logistics Center in Groveport; Humana Pharmacy Inc., doing business as RightSource, in West Chester; McKesson Corp. in Washington Court House; Medco Health Solutions of Columbus West; PC Connection Services in Wilmington; and Primary Healthcare Distribution Inc. doing business Curascript in Grove City.[25] Part of the growth in the value of this exemption reflects the increasing number of users. With this exemption, the state is favoring large companies over small ones. This tilts the advantage to big companies and violates a tenet of sound taxation: That “businesses and persons with similar assets and income should be taxed alike.”[26]

Some on the top 20 list have risen while others have fallen. Most significantly, the estimated value of the sales and use tax exemption for sales to the state, its subdivisions and certain other states fell substantially, dropping that exemption from 11^th biggest two years ago to 16^th in the current report. The lower estimates were based on new U.S. Census data that showed a decrease in reported non-construction capital outlays for local government, along with a change in assumptions about how big a share of local-government spending goes towards items covered by the exemption.[27]  

By far the largest tax expenditure, triple the size of any other at an estimated $1.8 billion in FY14 and $1.88 billion in FY15, is the sales-tax exemption for machinery, equipment, fuel and supplies used in manufacturing. Most states with a sales tax have a similar exemption. However, Ohio’s has not been examined closely since it was last overhauled in 1990. The size of this exemption suggests it should be reviewed more often.

Table 2 lists the 20 largest tax expenditures, according to the taxation department. Seven of the top ten in value are sales-tax exemptions. With two exceptions, each of the top 20 accounts for at least $100 million in foregone revenue.[28]   

Since the last tax expenditure report was issued two years ago, seven new expenditures have been added, estimated at $72.2 million in FY14 and $60.9 million in FY15. As noted above, five were eliminated, including the goodwill exemption cited earlier and four deductions or credits against the estate tax. That tax was repealed effective January 1, 2013. Three other tax credits against the corporate franchise tax worth a total of $14.2 million in FY14 were transferred to the new Financial Institutions Tax.[29] The individual income tax credit for alternative fuel sold at retail, first approved in 2007 and continued through 2011, expired.

The largest new tax expenditure added since the last report is a new small-business investment tax credit, estimated at $32.1 million in FY14. This investment tax credit, dubbed InvestOhio and worth up to $100 million each biennium starting in FY2014-15, was dropped into the last biennial budget in conference committee without public review. The break will go to investors in companies with at least 50 Ohio employees or more than half of whose employees are in Ohio. Companies will have to have assets of less than $50 million or annual sales of no more than $10 million. Investors can get a 10 percent income-tax credit if they invest in such companies and hold onto the investment long enough. The total amount of such credits estimated by the taxation department declines in FY15, based on applications for the credit to the Ohio Development Services Agency.[30]

For the investor to receive the tax break, the company has to make at least one of five different types of investments equal to or greater than the investor’s outlay, ranging from motor vehicles to compensation of new employees to property used in the business.[31] However, no new job creation is required (although the program was modified last year to require reports on job creation).

Also going into effect for the year that began Jan. 1 is a new income-tax deduction for gambling losses. Approved in 2010, this new deduction, worth $29 million a year, allows gamblers to subtract their losses from their winnings in calculating their income tax. As columnist Tom Suddes of The Plain Dealer pointed out at the time, unlike the Internal Revenue Service, Ohio hadn’t allowed a deduction for gambling losses. Though it was approved as part of casino legislation, Suddes noted, it doesn’t just cover casino losses in Ohio, but “losses racked up anywhere (Indiana or Las Vegas, say) and not just losses from casino gambling, but also losses on horse-race bets; lottery tickets; “you name it,” a Taxation Department official confirmed.” [32] As mentioned above, Gov. Kasich sought to eliminate this tax break in his budget proposal. A bill sponsored by Sen. Shannon Jones would repeal the break and use the revenue to increase the income-tax credit for adoption of a child, as well as raise the maximum deduction for college savings contributions.[33]

Motor fuel dealers also won a new exclusion from the CAT tax for product exchanges that don’t involve monetary compensation other than payment for differences in location and grade. Fred Church, then deputy director of tax policy and budget for the Department of Taxation, testified when the exemption was being considered two years ago that it threatened the viability of the CAT, which was designed as a broad-based, low rate tax. “If state government continues to allow exemptions from the CAT, or credits, or special tax rates, then every industry that is subject to the CAT can be expected to look through the law, find an industry that is somewhat similar that has an exemption or a credit, and ask for a similar exemption or credit,” he said then.[34] Table 3 lists these new tax expenditures and estimates of foregone revenue from them. 

Invisible growth in tax expenditures

The list above does not cover all the measures that the General Assembly has taken that extend or expand tax expenditures since the last report. Newly authorized local property tax breaks are not included, so action the legislature took last year exempting operators of convention centers in Columbus and Youngstown from property taxes go unrecognized in the report, as does continued extension of the state’s Enterprise Zone program.[35] The national research group Good Jobs First published a study in 2011 of enterprise zones in the Cleveland and Cincinnati areas between 1996 and 2010. The study concluded that, “One hundred and sixty-four small and medium-sized business establishments with an estimated 14,500 employees received lucrative tax breaks as they merely moved around within the Cincinnati and Cleveland metropolitan areas. These subsidized relocations were overwhelmingly outward bound and by many measures, especially in the Cleveland region, fueled suburban sprawl.”[36] Reform in this local abatement program called for in a study mandated by the General Assembly in 2007 has never occurred, yet the program has continued to be extended. [37] Amended Senate Bill 112, approved in the Senate and pending in the House, would extend the program for another two years. 

Other changes in tax expenditures involve the expansion of existing tax breaks. The new law allowing call centers to obtain tax credits for workers who are employed out of their homes isn’t a new tax expenditure, nor were the expansions of the Job Retention Tax Credit in 2011. Similarly, in the budget two years ago, the General Assembly added to the existing sales-tax exemption for building materials and related services used in livestock structures so it also included those for captive deer, known in some circles as “the Bambi exemption.” Last year, the General Assembly enlarged a sales-tax exemption for the direct-marketing industry, and expanded the motion-picture credit, from $20 million per biennium to $40 million per biennium.[38] It is clear that the motion-picture credit doesn’t come close to paying for itself, in that state and local tax revenue from the film production is far smaller than the credits given out.[39] A major question with these credits is whether they generate a local motion-picture industry or if they simply require indefinite continuation of state subsidies to bring in an out-of-town industry.[40]

In other instances, special breaks aren’t considered tax expenditures because the tax law providing for them doesn’t provide for that to be a part of the tax base to begin with. Thus, the 2012 bill creating the new financial institutions tax calls for certain so-called dealers in intangibles, such as captive finance companies, to be taxed under the CAT instead of the financial institutions tax. In its fiscal note on the bill, the Legislative Service Commission said that the impact was uncertain, but likely would cost the General Revenue Fund several million dollars a year and potentially up to $20 million.[41]

Tax expenditures now vs. 10 years ago

Over the past decade, the number of tax expenditures has fallen from 138 to 129.[42] However, that decline masks major changes in the state’s exemptions, credits and deductions. The creation and elimination of entire taxes has been the hallmark of Ohio policy over that timeframe, rather than any attempt to broaden the tax base by reviewing tax expenditures. Since 2003, Ohio has phased out its corporate franchise tax, which had 39 tax expenditures a decade ago, and the estate tax, with 5.[43] The General Assembly also changed telephone company taxation in 2003, making local phone companies subject to the sales tax and corporate franchise tax but exempting them from the public utility excise tax (this eliminated 5 tax expenditures).[44]

Had no new tax breaks been created, it would have meant a meaningful decline in the total number with the disappearance of all of these tax expenditures. However, that’s not what happened. Ten of the tax expenditures from the corporate franchise tax were transferred to be used against other state taxes. The Commercial Activity Tax, created in 2005 as a broad tax to replace the loophole-ridden franchise tax, has a total of 19 tax expenditures worth an estimated $427.3 million in FY14, compared to total estimated CAT receipts of $1.75 billion.[45] Legislators added 7 new sales-tax expenditures and 12 new income-tax expenditures over the past decade. (See list in the Appendix.) Leaving aside cases where tax expenditures were repealed and replaced with something similar, or originally approved for just a limited time, the General Assembly eliminated only two individual tax expenditures over the past decade: 

• The sales-tax exemption for motor vehicles used exclusively for a vanpool ridesharing agreement when the vendor is selling or leasing the vehicle under a contract with the Ohio Department of Transportation. This exemption, whose value was deemed “minimal” or less than $1 million in the 2003 tax expenditure report, was one of a dozen sales-tax “special interest carve-outs” that Gov. Bob Taft sought to repeal in his biennial budget proposal that year.  Only this one was stricken from the Ohio Revised Code.[46] 
• The sales-tax exemption for investment coins and metal bullion. This is sometimes known as the Noe amendment because coin dealer Tom Noe, convicted in the Coingate scandal for engaging in a pattern of corruption in his management of Ohio’s $50 million rare-coin fund investment with the Bureau of Workers’ Compensation, helped win its approval in the General Assembly in 1989. The exemption was repealed in the 2005 biennial budget bill after the scandal.[47]

Clearly, the General Assembly has not made a serious effort to review individual tax expenditures over the past decade and determine if they are still needed.   

Fast-growing tax expenditures

Among substantial tax expenditures that are expected to grow the most between FY12 and FY15 according to the Taxation Department are the historic preservation tax credit, used against the individual income tax and various financial institution taxes, and the job retention tax credit, used against the commercial activity tax.  Five of the next nine fastest-growing tax expenditures are health-care related. Table 4 lists the 16 tax expenditures that are expected to grow by the greatest relative amount between FY12 and FY15, and are estimated to be worth at least $10 million in FY15.

The last biennial budget extended in perpetuity, from June 30, 2011, the 25 percent credit for expenses to rehabilitate historic buildings, and allowed $60 million in such credits per year against the personal income tax, the corporate franchise tax, or the dealers in intangibles tax (these last two taxes are being phased out, so it will then be available against the new Financial Institutions Tax). The budget required a cost-benefit analysis of the project as part of the approval process.  According to the 2012 annual report, a total of $327 million in tax credits has been approved for 156 projects to rehabilitate 229 buildings for a total investment of $2 billion, including federal tax credits.[48]

The job retention tax credit has not grown as much as was expected in the previous tax expenditure report. This may be in part because some large projects awarded such credits either have not gone forward (American Greetings, Diebold) or have only just been completed (Goodyear Tire & Rubber, Eaton) and only now will be eligible for such credits, which are based on the earnings of employees. While not as large as earlier expected, its projected growth between FY12 and FY15 still ranks second among all those tax expenditures estimated at $10 million or more in FY15.

In its 2009 report, the Taxation Department broke out tax expenditures by broad type. It discontinued doing so, but Policy Matters Ohio has used the same categories earlier employed by the department to provide such a breakdown. Business is the biggest beneficiary of Ohio’s tax expenditures. Overall, 76 of the tax expenditures, accounting for just over half of the total value in FY14 or $4.0 billion, go for business assistance and economic development. Another 13, valued at $878 million in FY14, are assistance to public and nonprofit organizations. Fourteen expenditures amounting to $696 million are health or education-related assistance to individuals. And 26 tax expenditures totaling $2.1 billion are other financial assistance to individuals. Thus, overall, individuals are to receive 40 tax expenditures estimated at $2.8 billion in FY14. 

Tax expenditures get more public attention than they used to. The Ohio Chamber of Commerce repeatedly has urged a review; together with the Metro Chambers of Commerce of Ohio, it again called for a review in the December 2012 update of its priorities for the state, Redesigning Ohio.[49] Two years ago, urged on by three organizations of disparate views on other issues, the state Senate included the creation of a permanent review committee in the budget, but it was excised by the conference committee and did not make it into the final budget document.[50] Since then, committees in both houses have held hearings on tax expenditures. Rep. John Adams, R-Sidney, who chaired the special House committee that heard testimony in five cities across the state in 2011 on tax expenditures and other tax issues, put out his own report afterward, in which he stated:

“Tax Expenditures are both poor policy and poor concept, and there was near unanimity that such expenditures should be reviewed both for permanent validity and also on an ongoing basis, e.g., being subjected to performance audits and periodic renewal. The Chair agrees that expenditures should be subject to review each two years, on a rotating basis, during off budget years, so that the results are available in budget negotiations. The House Ways & Means Committee should establish a standing subcommittee to review tax expenditures and issue a report to the House.”[51]  

Bills have been introduced by legislators on both sides of the aisle that would require a regular review of all of them: House Bill 24 by Rep. Terry Boose, R-Norwalk, and House Bill 81, by Reps. Mike Foley, D-Cleveland, and Denise Driehaus, D-Cincinnati (The bills differ on certain points, such as how often: HB 24 calls for a review every eight years, while HB 81 would require one every two years). Rep. Boose delivered sponsor testimony on HB 24 before the House Ways & Means Committee on June 12. “Allowing poorly performing tax expenditures to exist in perpetuity is not sound tax policy,” he noted.[52] Members of the Senate also have shown interest in possible review of tax expenditures.[53] However, no bill has moved close to approval yet. 

To be more than a review that sits on a shelf, these legislative efforts need to add automatic sunsets, so that new and existing tax expenditures expire unless they are explicitly renewed. This would make the review process meaningful.

Ohio’s tax expenditure report provides a beginning point for analysis. It is time for the General Assembly to scrutinize spending through the tax code as it does other state expenditures. 

The author would like to acknowledge Policy Matters Ohio interns Phuong Le, Evan Pelecky and Ryan Thombs for the research help they provided for this report. We would like to thank the Center on Budget and Policy Priorities, the George Gund Foundation, and the Ford Foundation for their generous support for our research on Ohio tax policy.

In this week’s eNews — Ohio governor’s office supports industry sector partnerships, the Senate approves its version of the budget, and Policy Matters welcomes its summer interns.

Picking partners – The Governor’s Office of Workforce Transformation announced this week that it supports industry sector partnerships. This approach – which brings together employers, educators and training providers, economic and workforce development officials, labor and community allies to develop training for in-demand occupations – has led to better jobs in other states. It’s great to see our governor trying to create similar opportunities in Ohio.

No surprises – For the past few weeks, the Senate has been busy crafting its version of Ohio’s budget. The Senate did not restore Medicaid expansion, which the House removed from Gov. Kasich’s proposal, but senators did include a grab bag of tax breaks and further reduced transparency for existing local tax incentives. Zach Schiller told the Senate Finance Committee as it considered the bill that HB 59 does not address the most important tax issues facing Ohio: ensuring that the state has the revenue it needs for crucial investments in our future, meeting principles of simplicity, and creating a broad tax base. The budget has now moved to conference committee.

Meet the interns – Summer’s almost here, which means we’ve welcomed an amazing new crop of interns. Working as research assistants in Cleveland: Natalie Davis and Jen DePaoli from Ohio State; Lauren Klingshirn from College of Wooster; Michelle Newman from University of Akron; Evan Pelecky from Case Law; and Shubo Yin from Yale. In Columbus: Ryan Thombs from Otterbein and Brian Williams from Ohio State. This energetic group reminds us that, whatever worries we have about the future, there are plenty of brilliant young people eager to take on Ohio’s challenges.