Ohioans are struggling through economic slumps and recoveries with less help than in the past, according to this report. The safety net that used to ensure basic needs were met is in tatters, and needs to be updated for today’s challenges. This study is based on surveys of 150 non-profit groups that serve more than 100,000 Ohio families, and of 2,000 northeast Ohioans who have needed help affording food, clothing, day care and other essentials during the recent recession. It also analyzes public policy decisions that have affected modest-income families.

Executive summary

This report, analyzing the results of two surveys and a policy review, finds a tattered social contract in need of updating. Many Ohioans are not able to meet their family needs despite hard work. The social contract no longer ensures provision of essentials.

In 2010 and 2011, Policy Matters Ohio conducted two surveys, one of 150 non-profits serving more than 100,000 Ohio families and one of 2,000 northeast Ohioans who use social services. The surveys found:

• Caseloads increased by an average of 60 percent between 2008 and 2011, with the largest increases among providers of emergency food and shelter.
• Organizations added staff, demanded more of existing staff and turned clients away.
• Organizations said that the crunch meant that their clients skipped health care, rent payments or meals; exhausted savings; shed vehicles; borrowed money; and even left children unattended.
• When asked how policy should respond, organizations said the public sector should provide more funding, make health care more affordable, better fund safety net programs and expand eligibility for programs, among other reforms.
• Responding individuals, 92 percent of whom were employed but 80 percent of whom were earning $30,000 or less, reported enormous problems with health care and hunger. Despite working, three in five respondents could not get health care, through Medicaid or through their employers, and more than one in five said lack of money often made them skip meals.

American productivity increased by 112 percent between 1968 and 2008, but wages have been stagnant. Families have also sent more adults into the workforce but that has not been sufficient to meet basic needs. Other findings on returns to work include:

• Despite work effort and productivity, poverty recently reached its highest rate in 50 years, unemployment remains high, and many have left the labor market. Inequality is also at staggering levels nationally.
• Between 1983 and 2001 the percentage of 56-64 year olds with defined benefit retirement plans declined from 70 percent to less than 50 percent. Many households don’t have access to any retirement plan beyond Social Security.
• Health insurance provision has declined sharply with nearly one in five working-age Ohio adults lacking coverage, and much higher percentages among low-wage and young workers. More than four in ten Ohio employees do not have paid sick days and about seven in ten lack sick days to care for an ill child.

Because the workplace does not help all families escape poverty, state and federal programs have been set up to provide opportunity and security to Ohio families. These essential programs relieve poverty, but leave far too many behind. Among the study’s findings about the safety net are:

• Cash assistance helps some poor families, but many fewer than in the past. About three in four poor Ohio children lived in a family that got no cash assistance in 2008. General assistance, the program that once provided help to desperately poor adults with no children, no longer exists.
• The supplemental nutritional assistance program provides very low-income households with a modest $1,100 average per year to purchase food. A family of three earning $23,801 or more does not qualify, but last year the program helped one in seven Americans, the highest share on record. An additional program provides a modest $33.52 average per month to poor infants and pregnant mothers at risk of malnutrition. Last year Congress tried to slash both programs.
• Childcare is costly – center-based infant care would consume more than one-third of a median single parent’s income in Ohio. About 51,000 Ohio children were helped through a federal program, and about the same number got help through a state program. This enables parents to work and improves care quality, but federal and state cutbacks mean fewer will be eligible and overall funding will be reduced.
• In Ohio, a little over half a million workers are unemployed, with long-term unemployment levels reaching a sixty-year high in 2011. Unemployment insurance kept more than three million Americans out of poverty in 2009, while stabilizing communities and reducing a downward spiral in our economy. This program, too, is under threat at the federal level.
• Unlike nearly every other industrialized democracy, the United States does not provide universal health coverage and tens of millions of Americans are uninsured as a result. Medicare covers elderly and some disabled Americans, while Medicaid covers many of the poorest and of those who private companies exclude because of disease or disability. The Affordable Care Act will expand Medicaid, allow business and individuals to purchase insurance through an exchange, charge employers who don’t provide coverage and eliminate some coverage denials. This represents an unusual expansion of the social contract at a time when many parts of the contract are under threat.
• Social Security lifts 859,000 Ohioans out of poverty and has turned old age from the time of life when poverty was most likely to the time of life when it is least likely.
• The U.S. does not have a solid federal housing policy. Federal housing assistance peaked in 1978 and provides half what it once did in assistance. Ohio, with one of the nation’s most vibrant housing trust funds, does better than many states in this area, but many are still left behind.

Much of the way that we provide security and assistance to families is through the tax code, but that assistance is skewed toward the upper middle class and wealthy. The home mortgage deduction costs the U.S. treasury $103.7 billion a year and provides more assistance to those purchasing more expensive homes. Deductions for retirement savings cost $108.2 billion annually and are of greater assistance to upper middle-income and high-income earners who can afford to save more.  The Earned Income Credit, targeted toward poor and moderate-income working families, costs just $55.1 billion a year. This credit helps working families and is now the nation’s largest poverty relief program, lifting 6.5 million working families out of poverty each year.

In all, our survey found that Ohio families are struggling despite working and our review of policy found deep retrenchments in the social contract. If American families are to meet their own needs, we will have to ensure that either work or policy does more to bring about opportunity and security.

I. Introduction

In 1934, at least 50 percent of the elderly in America did not have enough income to support themselves, according to estimates.^[1] Fast forward more than 75 years, and the nationwide poverty rate among the elderly is now below 9 percent.^[2]  What happened? In part, America’s economy grew steeply over this period and we became a much wealthier nation. But not all social ills were so well controlled by the growth in our economy. The incredible progress on elderly poverty occurred because we decided, as a nation, to set up a strong structure to address poverty among older adults. We passed the Social Security Act, which ensured that Americans who worked and their spouses would be supported after retirement. Thirty years later, we strengthened it with the passage of Medicare, which helped ensure that retirees’ medical expenses would be covered.

During this country’s worst economic crisis on record, Americans acknowledged the shortcomings of the traditional sources of economic security, such as “assets, labor, family, and charity,” and demanded a government response.^[3] Business, government, workers and citizens worked together to create a social contract that would better ensure lifelong relief from poverty for Americans. We always liked wealth building, but for much of the twentieth century we used some our substantial wealth to do a better job of providing for most Americans’ well being. The workplace was always envisioned as the main source of support. For many workers, wages or salaries were complemented by employer-provided health insurance and employer-provided retirement plans that often offered defined benefits for as long as workers lived. But where support through the workplace fell short, Americans created Social Security and later Medicare for retirement security; cash, food and health assistance for poverty defense; and other strands in a safety net that was never perfect, but that increased opportunity and security for our families.

Over the last thirty years however, workers have been exposed to great vulnerability as jobs have been lost and employers have discarded benefits, or forced employees to contribute at rates they cannot afford.  On the government side, many programs have been weakened and in some cases dismantled, forcing families to rely upon charity to make ends meet.^[4] The notable exception is the Earned Income Credit, which has expanded and provides substantial assistance to many working families with children, and the Patient Protection and Affordable Care Act, which hasn’t been fully implemented but will expand an important part of the safety net.

Despite the weakened social contract, our public supports continue to sharply reduce poverty, do much to enable that people get health care, assist in purchasing necessities, help out when work is not available or possible, and in other ways enable our communities to function. One in six Ohio residents receives Social Security. The program is best-known for assisting retirees and their spouses, but also helps some with disabilities and some survivors whose wage-earning parent or spouse died. Social Security lifted 859,000 Ohio residents (including 47,000 children) out of poverty, on average, each year from 2007 to 2010.^[5] And in the midst of the deep slump in 2011, the federal Supplemental Nutrition Assistance Program provided a lifeline for nearly one in six Ohioans.^[6]

During and after the Great Depression, policymakers realized that for American business and workers to thrive, we needed to make sure that our growing prosperity included working people. Many business leaders understood that they needed well-educated workers and therefore needed a strong public school system. They also knew that if they wanted workers to take jobs where they could be laid off or there was a risk of being injured, such as in manufacturing and the skilled trades, then there had to be protection against unemployment and injury. Out of that recognition grew our unemployment and workers’ compensation systems. Many employers decided that if they wanted peaceful and profitable workplaces and a good customer base, they had to share some of the growing prosperity with the workers who were producing that wealth. Throughout the middle of the twentieth century, in the U.S. and in Ohio, broadly growing prosperity translated into broadly rising living standards and increased well being and security for families across the income range. While inequality existed – indeed often exceeded levels in other advanced industrialized countries – it was still the case that poor and wealthy families alike were seeing income growth. The social contract always worked best for educated white male workers, but many Ohio families were able to enjoy growing wages, health insurance, and retirement security when they were working and to be buoyed by unemployment compensation and the social safety net if they lost their jobs. 

This paper examines the strengths and weakness of our current social contract, how it compares to the social contract of the past, and how we can ensure that the combination of public systems and private employment can lift families and communities to a stable life free from poverty. The first section, below, reviews the results of two surveys conducted in northeast Ohio. The second large section reviews the portion of well-being that is delivered through the labor market and how that has changed over time, homing in on wages, health insurance, retirement, sick days, medical leave, and labor law enforcement. The third large section looks at how the public sector was tapped to provide some of what the labor market didn’t, including cash assistance, elderly assistance, health care for some, food assistance, unemployment insurance and some help with housing and child care – we examine, too, how these have changed over time. The fourth main section explores how we deliver much assistance through the tax code and how we might be surprised at who benefits most from that help.

II. Non-profits and clients speak out

To better understand the impact of the economic downturn on Ohio nonprofits and the clients they serve, Policy Matters conducted two surveys over the course of the past year – one of non-profit leadership and one of clients.

Nonprofit survey

The nonprofit survey sampled 150 health and human service nonprofits located in Northeast Ohio between September 2010 and January 2011. In total, the nonprofits that were surveyed assist more than 100,000 individuals or families a year. The survey yielded a response rate of approximately 33 percent. Figure 1 below displays the diversity of the respondent organizations, many of which serve multiple needs in the community.

These entities have long been part of the fabric of social life in northeast Ohio. Between 2008 and 2011 most of these nonprofits saw enormous increases in their caseloads. While on average caseloads increased 60 percent, organizations that provide emergency food and housing assistance saw the greatest increase in demand for their services, with caseloads expanding 50 to 300 percent. The survey confirms that emergency food banks are increasingly becoming a lifeline for clients in need.^[7] Nonprofits indicated that when clients lose eligibility for public programs, most seek help from food pantries and food banks and some turn to shelters and religious institutions.

 Most organizations coped with greater community need by adding staff, demanding more of existing staff, or increasing programs. However, some nonprofits were forced to limit or ration services, and some organizations provided services at a loss. The majority of respondents indicated that government funding in various forms has been the most helpful public sector response. Others reported that government assistance in the form of delivery systems, such as the Benefit Bank and food pantries, has been helpful. However, respondents overwhelmingly agreed that funding cuts have been the most problematic government reaction. 

The survey also sheds light on the ways that clients who depend on social services cope during an economic downturn. The results demonstrate the desperate situations that individuals and families are facing. When asked how their clients manage if they unable to make ends meet, the nonprofits indicated that the individuals and families they serve are likely to:

• Miss rent or mortgage payments;
• Forego health care;
• Borrow money or incur debt;
• Skip meals;
• Do under-the-table work;
• Spend savings;
• Leave children without child care;
• Break the law;
• Get rid of a vehicle.

According to our survey, organizations support a variety of policy changes for their clients. As Figure 2 indicates, nonprofits favor improved healthcare affordability, increased funding of safety net programs, workforce development and training, and more. Because the question was open-ended, respondents chose a range of answers, but the answers nonetheless coalesced around better funding.

Client Survey

To flesh out what non-profit leaders were saying, in 2011 Policy Matters asked the Cleveland Sight Center to help survey 2,000 clients of three northeastern Ohio nonprofits that provide housing, financial, and tax counseling to low-income families.[8] The survey asked the clients about their work, wages, benefits, and how they have weathered the recession.

The results demonstrate the extent to which the economic downturn has impacted low-income families. These were largely working families – only 8 percent of respondents said they were unemployed. Nonetheless, nearly a third of respondents lost a job during the previous year, and more than two-thirds reported that their hours, wages, or tips were reduced during that time. These households were living on modest incomes – about 80 percent of the respondents said they earned $30,000 or less. Although they were struggling financially, respondents had made efforts to be financially secure. Of those who responded, nearly all had a high school degree or GED. Nearly 30 percent had some college education or an associate’s degree, and 17 percent indicated that they had a four-year degree.

One of the biggest problems revealed by the survey was inability to access health insurance. Even though 92 percent of respondents were employed, only about one in five had health insurance through their employers. About another one in five got coverage through Medicare/Medicaid. Some purchased private insurance, despite their modest incomes, but more than 40 percent of the respondents said they did not have adult health insurance, and 36 percent indicated that the children in their household did not have health coverage.

The survey found that health care costs were rising and that costs were a barrier to getting the medication that patients were supposed to take. A substantial majority said they had not filled prescriptions because they lacked money, and about half said their health care costs had increased.  Some families are leaning on free clinics and emergency rooms to meet healthcare needs; 14 percent said they had used a free clinic in the past, and over a third of respondents said they used urgent care or an emergency room.

A smaller but still alarming percentage of respondents faced issues with food security. More than one in five respondents reported that they often skipped meals or went hungry because there wasn’t enough money to buy food. More than 25 percent of respondents relied on family or friends for free food because they did not have money to purchase food. Some reported that they could not access government assistance – 11 percent said they needed food assistance but did not qualify. Only 18 percent of respondents were currently on food assistance/stamps, and 17 percent were referred to agencies for free food.

With regard to finances, the survey sheds light on challenges families face in building assets and saving for the future.  More than 75 percent of the respondents had a checking account, savings account or both. However, a majority of respondents also indicated that they relied on a payday loan or a check-cashing service during the previous year. Saving money was a priority for nearly a third of respondents, who said they put money into a savings account during the past year, and 18 percent indicated they would like a savings plan with resources and tips on saving money. However, when it comes to saving for retirement, only 4 percent said they put money into retirement savings. And nearly half (44 percent) of respondents said they have “overwhelming debts.”

The survey revealed that a large majority of the respondents had filed taxes previously, with almost half indicating that they had their taxes prepared at a free tax site. Among those who took advantage of the free services and obtained a refund, one in five reported saving the money. Over half used the credit to pay utility, credit card and other bills. One in four used the refund to pay rent or a mortgage, and nearly a quarter reported that they used the money for food.

The northeast Ohio surveys of clients and non-profit organizations confirm that low-income families need the services that the public and non-profit sectors provide. Many families can’t find work, as large public surveys show, but even those who are working are not consistently able to meet their families’ needs through their workplace compensation and benefits. But the surveys also reveal a social contract that is badly frayed – while families, including working families, need help with health insurance coverage, housing, food costs and other essentials, they are not always able to get it. Not-for-profit organizations have doubled and sometimes tripled what they are trying to do, but it is not sufficient. This paper now turns to examining how compensation and safety net programs have changed and what it has meant for families in Ohio and the U.S.

III. Working our way out of poverty

Americans place a high value on work. In 2003, 73 percent of Americans polled said that work was “extremely important” or “very important” in their life, ranking higher than friends, money, or religion.^[9] Across much of the political spectrum, 61 percent of Americans said they would continue working even if they won $10 million in the lottery.^[10]

Good jobs should provide a living wage and employment-based benefits that enable family security. If we had full employment in high-quality jobs, the need for much of the safety net would go away. However, many Ohio families are unable to obtain work or do not earn sufficient wages and benefits to support themselves and their families.

There are two large problems with the notion that families should support themselves through work alone however. The first is that we have never had universal employment in this country. Even in what is considered the best economic times, official unemployment typically remains above 4 percent.^[11] In recessions and recoveries, official unemployment can be much higher. Unemployment has fallen in 2012, a welcome trend, but 7.5 percent of Ohioans remained unemployed in March 2012, with rates much higher if we include those who have stopped looking. The second problem is that many jobs do not pay enough for a worker and a family to escape poverty or attain security. And increasingly jobs fail to provide health insurance, pension coverage and contributions to the other parts of compensation needed for a secure life.

Wages

While worker productivity has increased 112 percent since the minimum wage was enacted in 1968, wages have not kept pace.^[12]  In fact, over the past 30 years, the United States has gone from a country where everyone saw income grow to a country where the very top of the income ladder has benefited the most while the typical workers’ wages have stagnated. Figure 3 below shows how the bottom 90 percent of earners and the top 1 percent saw roughly comparable income growth between 1946 and the late 1970s in percentage terms. Beginning in the 1980s, however, the figure shows that earnings of the top 1 percent shot up exponentially, at rates sometimes exceeding 300 percent annually, while earnings of the bottom 90 percent stayed roughly the same.

The result of this and other problems is that Ohio poverty was reported at a 30-year high of 15.3 percent in 2010.^[13] Ohio’s unemployment rate has improved in 2012 but remains troubling.^[14] Both the unemployment and the poverty rates are to some degree the result of our current weak economy. But other disturbing trends, like our dramatically growing inequality, continue through recessions and recoveries. Figure 4 shows how extreme inequality is on a national level when we separate out the very top earners. In 2009, the bottom 90 percent of families earned only $31,000 on average, the top 1 to 10 percent of families earned $164,647 on average, and the top 1 percent earned $1,137,684. Beyond that point, inequality spiked even more astronomically, with the top .01 to .1 percent earning more than $3 million on average and the top .001 percent earning a mind-boggling sum in excess of $27 million a year.

Ohio follows, to a much lesser extent, the nationwide trend of increasing inequality, although data on the very top earners at the state level is not available. Still, available data shows that the state’s richest 20 percent of families have average incomes over six times that of the poorest 20 percent. Between the late 1980s and the mid-2000s, the richest 5 percent of families saw average income increase by $2,599 annually, compared to the poorest fifth of families only experiencing an average income increase of $112 per year.^[15]

In short, despite overall economic growth, many working people have seen stagnant or falling wages and many are unable to find work at all. Increases in costs for necessities like health insurance, child care, and care for the elderly have meant that incomes go less far than they used to for housing and the essential services, like child care, elder care and health care, that today’s sandwich generation needs. While wages have been stagnant, benefits through the workplace have often worsened and economists have discussed a “new normal” in which higher unemployment levels are likely to persist longer into recoveries.

Some argue that employers should be held to a higher standard and should provide workers with reasonable wages and benefits. Others instead say that the public sector should intervene and ensure that Ohioans can get the income and benefits they need if they are working or trying to work. What is clear is that the shredded safety net combined with lower employer expectations have combined in a way that leaves Ohioans too vulnerable.

Labor laws

Over thirty percent of American workers are contingent workers – temporary workers, self-employed or independent contractors – and as a result are not protected by labor laws, such as the Fair Labor Standard Act and Employee Retirement Income Security Act.^[16] This means they can be left out of benefits, regulations and safety net programs including unemployment insurance, workers’ compensation, overtime, vacation, minimum wage, health and safety regulations, family and medical leave, and Social Security.

Employers trying to reduce costs and evade taxes deliberately misclassify many workers. By misclassifying workers, these employers avoid paying full taxes, and avoid contributing to workers compensation and unemployment. Worker misclassification deprives the unemployment insurance system of an estimated 7.5 percent of its revenue each year.^[17] When these workers get injured or lose their jobs, they are not eligible for the benefits that appropriately classified workers can claim.

Even properly classified workers are sometimes not fully protected under the law. Most labor enforcement is based on a complaint system rather than an audit system, which places the burden on the worker to report violations. Many workers are not willing to report violations for fear of retaliation or losing their jobs. Government studies have found that between 50 and 100 percent of employers in the garment, nursing home and poultry industries are in violation of work wage and hour laws.^[18] Ohio has just six wage and hour investigators on its state staff – less than one investigator for every 728,000 Ohio private-sector workers.^[19]

Retirement

In 1983, 70 percent of employees age 56-64 had defined benefit retirement plans, which are plans where the employer pays the employee a fixed amount, no matter the status of the market.^[20] By 2001, less than half of employees in the same age group had this type of retirement plan. Instead, many employers now avoid paying retirement benefits of any kind, or instead use defined contribution retirement plans. With defined contribution plans, employers and employees can contribute to a retirement plan, but there is no guarantee that benefits will be sufficient – it depends on how much is put in, the performance of the stocks in which funds are invested, and the strength of the stock market at the time of withdrawal. The risk shifting places families at risk of losing significant retirement funds if they need to retire at a market low point.

In 2007 only 60 percent of family heads of households had access to a job-related pension or retirement plan, and of those, only 55 percent were taking advantage of the plan.^[21] This means roughly half of the American workforce lacks access to an employer-based retirement plan and fewer than a third are able to use those plans. It is even worse for young and part-time workers: In 2009, less than half of young or part-time workers had retirement plans at work.^[22]

Health insurance

Health insurance is another necessity that has been largely tied to employment in the United States. While Americans are expected to rely on employers for health insurance, in the last three decades the number of employers that offer insurance has dropped sharply. ^[23] In 1980 over 70 percent of Ohioans had private insurance from an employer; by 2011, only 57 percent had health insurance through their jobs.^[24] The result is that in 2010, nearly one in five working age adult Ohioans were uninsured.

Low-wage workers, those least able to purchase private insurance, face especially large barriers. According to the U.S. Department of Labor, only a quarter of low-wage earners had access to medical benefits in 2009, compared to 70 percent of all private-sector workers.^[25] Growing insurance costs make it increasingly unattainable for lower-income families. Indeed, in 2010 the average cost of a family insurance plan was $13,770, and the average worker’s share of the premium increased to 30 percent (more than $4,000).

Young workers also face significant barriers to obtaining health insurance. In a 2009 survey, 31 percent of young workers were uninsured, up from 24 percent in 1999. Of those without health insurance, nearly half said that they were uninsured because they could not afford their employer’s policy, and 31 percent reported their employer did not offer health insurance.^[26] 

The situation will improve substantially once the healthcare reform’s Affordable Care Act takes effect in 2014. According to the Congressional Budget Office, by 2021 about 95 percent of legal nonelderly residents will have insurance (compared to about 82 percent without the legislation).^[27] The new law will enable individuals and employers to purchase insurance from health exchanges, will eliminate exclusion from coverage based on health status, and will assist more low and moderate-income families in paying for coverage. This is a rare step forward in an era of retrenchment for the social contract.

When workers get sick

Many workers do not have access to paid sick days. The U.S. only guarantees medical leave in accordance with the provisions of the Family Medical Leave Act. This leave is unpaid, in contrast to the policy in the 163 countries that have some form of paid sick leave for workers.^[28] In Ohio, 42 percent of employees do not have paid sick days, leaving 2.2 million Ohio workers who must work when ill or forego pay. Adults in families with children substantially increased their hours of work over the past generation, making it more likely that a sick child does not have a stay-at-home parent. Yet access to paid sick days has not increased and only 30 percent of workers can use paid sick days to care for sick children. This means more than 3.55 million Ohio workers would have to forego pay to care for a sick child.^[29]

In addition to the costs to working families, this has larger societal costs. Workers forced to work when ill can spread illness and put customers at risk, particularly in the restaurant industry. In one instance, a Chipotle restaurant employee in Kent, Ohio, who had norovirus ended up infecting over 500 people, costing the community between $130,000 and $300,000.^[30]

Adults without paid sick leave are more likely to use emergency rooms than standard doctors’ offices because the ER operates during non-work hours. One study on the costs of unpaid sick leave noted that in 2006, “nearly 4.4 million hospital admissions in the U.S., totaling $30.8 billion in hospital costs, could have been prevented with timely and effective ambulatory care or adequate patient self-management of the condition.”^[31]

IV. Public sector steps in

As outlined above, work in America is not enough for many workers. Our work-based system leaves us with outrageous inequality, high levels of poverty amid plenty, low levels of health insurance coverage, substantial numbers who lack retirement income, inadequate income even during work years to meet needs for many families, and no assurance of security when illness hits. Because of those inadequacies of the labor market, we have used public policy and public budgets to try to assist families. The social contract that was established was meant to have public policy provide necessities that employment couldn’t or didn’t provide.

A combination of state and federal programs provide opportunity and security for Ohio families. A key part of that is a safety net to help Americans who don’t earn enough through work to meet basic needs. This section assesses the strengths and weaknesses of these programs. As an overview, the strength of these programs is that they pull people out of deep poverty and provide necessities that families wouldn’t otherwise get. The flaw with many of these programs is that they sometimes provide only the bare minimum, often are not available to everyone who needs them, and have remained at a very modest level, even as our economy has grown dramatically. In some cases, despite a growing overall economy, these programs have become more restrictive and stingier.

Cash assistance

For some of the poorest Ohio families with children, Ohio provides cash assistance. However, in 2008 only about one-fourth of Ohio’s poor children lived in a family that received cash assistance.^[32] The program is important in providing basic income to some of the neediest Ohio families, but it leaves 74 percent of poor children to survive without cash help beyond their poverty-level family earnings. Because of job loss and dramatic increases in poverty in Ohio, the state’s cash assistance caseload was third largest in the nation with an average of 102,446 families receiving assistance during the 2010 fiscal year – an increase of more than 30 percent over the level three years before.^[33]  However, participation in cash assistance did not rise as much during the 2009-2011 slump as it had in previous recessions, in large part because restrictive program requirements rendered families ineligible despite needing assistance.

Cash assistance is considerably less common and more restrictive now than it used to be. Prior to 1996, individuals and families living in poverty were entitled to cash assistance under Aid to Families with Dependent Children (AFDC).  However, in 1996 Congress eliminated AFDC and replaced it with Temporary Assistance for Needy Families (TANF). TANF eliminated cash assistance as an entitlement and instead provided a block grant to states.^[34]  Congress placed a 60-month lifetime limit on federal assistance, but allowed states to provide extensions for up to 20 percent of caseloads.^[35]

The TANF program also requires participant engagement in “work activities.”  Benefits are now tied to employment or school enrollment. However, many poor families can’t find jobs. This leaves many households without government assistance and without jobs. Nationally in 2010 there were 1.3 million single mothers who were both jobless and without any cash assistance.^[36]

According to the Center on Budget and Policy Priorities, some of these families face barriers to employment, including disabilities, children with disabilities, or lack of transportation or childcare.^[37] In this economic climate, even those without barriers to employment face problems meeting work requirements. In 2011, only 23 percent of Ohio TANF recipients were engaged in work activities, the lowest rate since 1997. A spokesperson for the Ohio Job and Family Services Directors’ Association attributed this to the recession, which has eliminated jobs.^[38]  Making matters worse for working families, county funding cuts have forced layoffs and eliminated programs that provide education and job training, meaning that fewer recipients are getting the resources they need to obtain the limited number of jobs that are available.

Ohio also lacks sufficient funding to meet increased demand during this weak economy. As the state faces an increase in caseloads, drastic funding cuts are pending. For example, the Montgomery County Department for Child and Family Services (which administers Ohio Works First funds) received $17.2 million in TANF funds in 2009 but despite increased demand was projected to receive less than half of that by 2013.^[39]

Ohio no longer provides cash assistance to adults without children if they don’t qualify for unemployment compensation. General assistance, once provided to needy single adults without children, was abolished in 1995. At that time, the New York Times reported on previous reductions in general assistance (but not outright elimination) that, “researchers in Ohio and elsewhere have concluded that most former recipients simply totter on the edge of subsistence. With few job skills, and often with disabilities and addictions, they somehow just manage to get by, frequently with the help of the underground economy, family members and friends.”^[40]

Food

Some may find it hard to believe that Americans skip meals, go hungry, or suffer from malnutrition, but they do. Now that cash assistance is time-limited and comes with work requirements, there are families in Ohio and the U.S. that have no cash income at all. The Supplemental Nutritional Assistance Program (SNAP), formerly the food stamp program, is the main way that the public sector tries to ensure that very poor families don’t go hungry, even if they don’t get cash assistance. This program provides low-income households with modest benefits to purchase food at authorized stores: in 2009 the average annual food stamp payment in Ohio was $1,105.^[41] The program is administered through the U.S. Department of Agriculture and state agencies determine eligibility and distribute the benefits via a card similar to a debit card. To qualify, a family of three must earn less than $23,800.

During the deep slump of the past three years, SNAP, modest as it is, has been increasingly relied upon as a safety net. Last year one in seven Americans was receiving SNAP, the highest share of the U.S. population on record, due in part to easing of eligibility guidelines, but also because of the weakened economy.^[42] Ohio has seen similar increases: According to USDA data, the average monthly participation in SNAP in Ohio “grew 44 percent to 1.66 million people in 2010 from 1.15 million in 2008.”^[43] As of June 2011, a quarter of residents in 70 of Ohio’s 88 counties were eligible for food assistance.^[44] The economic crisis stretched to suburbs: In Cuyahoga County the use of food stamps increased more than 20 percent in 22 suburbs between 2008 and 2010.^[45]

In many ways the SNAP program is a success. Unlike TANF, which is funded through block grants to states, the SNAP program is funded through the Farm Bill, which means the program can expand to meet increased need.^[46] Additionally, unlike other safety net programs, it is not tied to employment status, which means that, working or not working, families in need can obtain some assistance with SNAP benefits. The current caseloads reflect this difference; the TANF program caseloads increased 13 percent from December 2007 to December 2009, whereas SNAP caseloads expanded by 45 percent.^[47] SNAP’s expansion better reflects the increase in poverty and need during this recession.

Despite the strength of the SNAP program as a vital safety net for workers, the eligibility levels are quite low, and the benefits paid are small. Even so, the U.S. House of Representatives last year passed a proposal that would have reduced funding for the program by almost 20 percent and converted it to block grants to states. The proposal did not become law but its passage in the House gives a sense of how vulnerable the program is.^[48] 

The SNAP program staves off hunger but provides just $1,100 per recipient per year on average, and cuts off eligibility at around $23,800 for a family of three. Pregnant women, infants and very young children are at particular risk for malnutrition, which can cause costly lifelong disabilities and deficits. To address this, the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) was established in 1972 as a program of the United States Department of Agriculture (USDA) for nutrition among low-income families.^[49] Pregnant women, postpartum women, infants and children up to age five are eligible if they are in a family earning less than 185 percent of the poverty line and if a counselor deems them at risk of malnutrition.^[50]  It provides nutritious food, education at clinics, and referrals to other health services. 

In 2010 in Ohio, 292,937 women and children received WIC and the average monthly benefit per person was $33.52.^[51]  Modest as this figure is, participation has been associated with improved birth outcomes and lower Medicaid costs.^[52]  This program too is under attack: The House appropriations bill passed in May 2011 would have slashed funding for WIC and would have ended assistance to approximately 9,700 to 14,600 Ohio recipients.^[53]

Childcare subsidies

Over half a million Ohio children under age of six need childcare because their parents work.^[54] The cost is high: The average annual fee in Ohio for full-time center care of an infant is $7,761. For single Ohio parents with the median income of $21,538, the cost for one infant would comprise 36 percent of family income if they chose center-based care.^[55] To ease this financial burden and enable low-income parents to work, the federal government administers several programs aimed at improving affordability and quality of childcare, including the Child Care Development Block Grant (CCDBG), TANF and Title XX/Social Services Block Grants. The federal government is the primary funder of these programs (over $200 million), but the state also contributes $84 million to the CCDF, as well as $200,000 from the TANF block grant.^[56] While many needy families do not qualify, those that do benefit in several ways – quality of care can be increased,^[57] ability to work is made much more reliable,^[58] and income from work can stretch further.

Close to 30,000 Ohio families (with 51,000 children) receive assistance through these federally funded programs in the form of reduced childcare fees.^[59] An additional 50,000 children with family incomes below 150 percent of the poverty line can also get more modest state-level assistance.^[60] This assistance allows families to pay a smaller and more manageable fee for childcare. For instance, in 2010 an eligible family of three with an income at 100 percent of poverty ($18,310) would have paid 7 percent of family income or about $1,300 toward childcare and the program would have picked up the remaining cost.^[61]

The childcare assistance program is extremely helpful to those who qualify, even if childcare costs remain substantial for poor families. It also helps to improve quality. For instance, Ohio is one of 13 states that has established or is establishing a Quality Rating Improvement System (QRIS), which rates childcare programs and creates incentives for providers to improve their quality rating. Ohio established a QRIS in 2007, and already has 24 percent of licensed providers participating.^[62] 

Ohio initially was able to avoid cuts to childcare programs by receiving federal block grants from Child Care and Development Fund (CCDF), including $207 million in 2011.^[63]  However, these funds were only temporary, and instead of finding another source of revenue, Ohio leaders have slashed funding for vital services including childcare. Under the budget passed last year, the income-eligibility threshold was reduced from 150 percent of poverty to 125 percent of poverty (with an exception for those already receiving assistance). Those above 150 percent of poverty—for instance, a family of three making $27,980 a year (151 percent of poverty)— already didn’t qualify, and a family of three living on $23,348 a year (126 percent of poverty) will no longer be eligible. In addition to the stricter income requirements, the Ohio budget calls for reducing spending on childcare programs from $134.2 million in 2011 to $123.5 million in 2012.^[64]

Unemployment insurance

The deep slump of 2009 to 2012 produced some of the worst unemployment levels since World War II. In 2009, the number of workers unemployed longer than six months was the highest since 1946.^[65] The unemployment rate among men soared; from May 2007 to May 2009, male unemployment increased 119 percent. In Ohio, as of March 2011, more than 400,000 workers were officially unemployed.^[66]

Unemployment insurance was created in 1935 with two goals: to temporarily replace involuntarily unemployed workers’ wages, and to promote economic stability by spurring consumer spending.^[67] In addition to helping workers make ends meet, unemployment insurance reduces chaos in workers’ lives and improves their chances of returning to work once the economy improves.^[68] Individuals who exhaust unemployment benefits before finding work are more likely to end up on Social Security disability and possibly Medicaid.

Federal-state unemployment insurance (UI) provides financial assistance to “eligible workers who are unemployed through no fault of their own (as determined under state law), and meet other eligibility requirements of state law.”^[69] Funding is based on an employer tax in all states – three states also allow employee contributions. To be eligible for unemployment insurance in Ohio, a worker must have been employed at least 20 weeks during the previous “base period” and must have earned an average weekly wage of at least $222.^[70] Typically the unemployed worker receives about two-fifths of previous pay for a limited amount of time.^[71] The time limits are generally extended for states experiencing high unemployment, or during times of economic downturn and the federal government pays for the extensions.

In 2009, unemployment insurance kept over 3 million Americans out of poverty.^[72] Despite this huge success, many unemployed workers are not eligible for benefits. Currently only a little more than a quarter of the unemployed (32 percent) collect state unemployment benefits.^[73] One problem is that unemployment insurance was designed to serve the needs of the demographics of that time, which was a workforce mostly comprised of married male breadwinners.  Despite major workforce shifts and some modernization of the program, eligibility requirements have not been completely updated to reflect today’s worker demographics.

Workers who earn low wages or work part-time jobs often do not qualify for unemployment insurance in Ohio because they cannot meet base earnings and minimum-weeks-worked requirements. Workers in training programs qualify for benefits in some states but not in Ohio. Additionally, workers who need to quit work for “compelling family circumstances” (such as a spouse being transferred, a family member needing full-time care or a domestic violence situation) are ineligible for benefits because their job loss is categorized as “voluntary”.^[74] Overall, just 23 percent of unemployed Ohio workers qualified for benefits last year.

Under the American Recovery and Reinvestment Act, $7 billion was set aside for states that modernized their unemployment insurance.^[75] Ohio already enacted some modernization reforms years ago, including the policy of counting workers’ most recent earnings when applying for benefits, allowing the state to receive $88.2 million of the recovery act funds.^[76] Unfortunately Ohio did not fully modernize its system under either governors Strickland or Kasich, and consequently forfeited $176.3 million in federal funds.

States like Ohio also face financial challenges because they’ve underfunded their unemployment systems. Dozens of states (including Ohio) exhausted state unemployment funds and obtained federal loans to prevent disruptions in benefits. As a result, Ohio currently owes $2.3 billion in federal loan funds. The state has had to pay interest on this borrowing and has not yet come up with a long-term fix to the solvency problem. A key element of this solution should be to raise the share of wages that employers pay taxes on. However, state policymakers so far have shied away from the issue. Federal legislation was introduced to raise the taxable wage base and forgive debt for states that establish solvency plans, but it has not moved forward.^[77]  In the meantime, as federal law requires, small tax increases covering all participating employers have begun and will grow each year.

Health insurance

The United States has traditionally done much less to ensure health insurance coverage than other wealthy countries. However, throughout the middle years of the twentieth century, many families were able to receive health insurance coverage through a family member’s workplace. For families where the main wage earner had retired, Medicare provided coverage, and for poor jobless families, Medicaid was a safety net. Over the last 30 years, however, coverage through the workplace declined and more low-wage families found themselves without coverage and unable to afford to purchase it. This section describes what is available and what will change with the newly passed Patient Protection and Affordable Care Act.

Medicare is the largest public health program in the country. Created in 1965 as Title XVIII of the Social Security Act, Medicare provides health insurance to people age 65 and older, regardless of income or health history.^[78] When the program was implemented in 1966, a little more than fifty percent of those ages 65 and above had hospital coverage, compared to almost universal coverage today.^[79] In addition to assisting seniors, Medicare was expanded in 1972 to cover people under 65 who have permanent disabilities.

As of 2009, 47 million Americans were enrolled in Medicare, and 16 percent of Ohioans received Medicare coverage. As of 2009, 40 percent of the Ohio recipients lived below 200 percent of poverty.^[80] For many elderly, Medicare provides “essential, but incomplete” protection against medical expenses.^[81] Gaps remain in coverage – for instance, Medicare does not cover long-term care, dental or vision – and as a result, most beneficiaries have some form of supplemental coverage.^[82]  In addition, the program has high deductibles and cost-sharing requirements, no limit on out-of-pocket spending, and a gap in prescription drug coverage. Lastly, securing stable funding and maintaining a high quality of care as the population ages will remain a political battle. Nonetheless, this program is an American success story, providing solid coverage at lower cost than most private programs and eliminating fears about medical costs for many older Americans.

Medicaid provides public health insurance and long-term care coverage for eligible low-income individuals and for some with chronic disease or disability who private plans exclude. Importantly, Medicaid was designed to meet increased demand during an economic downturn; enrollment can expand based on need because the program does not allow waiting lists or enrollment caps.

Medicaid works well, but more Ohioans should qualify. Many parents as well as adults without dependent children are not eligible, unless they are pregnant or disabled. In addition, in most states lawfully-residing immigrants are ineligible for the first five years of residency.^[83] There are millions of low-income Americans who are currently not eligible for Medicaid. This will improve dramatically when additional parts of the Affordable Care Act take effect in 2014.

In Ohio, 18 percent of the population relies on Medicaid.^[84] The Affordable Care Act will expand Medicaid to cover individuals at 133 percent of poverty, increasing enrollment and spending (relative to the baseline) by an estimated 31.9 percent by 2019.^[85]  In the meantime, the program must survive attacks by Congress. Under the House budget bill passed on April 15, 2011, Medicaid would have been converted to a block grant and funding reduced 49 percent by 2030.^[86]  Although the attempt failed, it would have resulted in states having to raise taxes, cut other spending, or cap enrollment, tighten eligibility, and reduce benefits.

Medicaid is also vital for kids. A staggering one-third of children in the United States receive health coverage from Medicaid or Children’s Health Insurance Program (CHIP), and over half of all low-income children participate in one of the two plans.^[87] Medicaid provides health insurance for the poorest children, and CHIP fills gaps by providing care for children who are low-income but outside the eligibility range of Medicaid. In Ohio, a family at 200 percent of the poverty level is eligible for CHIP, and 265,680 children were covered in early 2011.^[88] Nearly half of all Medicaid enrollees are children. While the program reaches a large number of children living in poverty, 7.9 percent of children in Ohio were uninsured last year, and over a quarter of the state’s two-year-olds are not fully immunized.^[89]

In March 2010, President Barack Obama signed the Patient Protection and Affordable Care Act after a long, protracted battle to deal with our growing health insurance crisis. By the time the Affordable Care Act is fully enacted in January 2015, small businesses and individual Americans will be able to purchase health insurance through an exchange, employers who don’t provide coverage will be required to pay penalties, insurers will not be able to deny coverage for any reason or charge premiums based on health problems, and Medicaid will be expanded to cover more of the near-poor. ^[90] As we document significant erosion of the social contract, this law represents a rare reinforcement of the social contract and will go a long way toward reducing the insecurity of Ohio families.

Social Security

Social Security provides economic insurance for families in the form of retirement benefits, disability benefits, life insurance benefits, and Medicare. The program was initially implemented in response to huge increases in poverty among the elderly. Even before the Great Depression, major demographic shifts including increased urbanization, reliance on wages rather than working the land, and a decrease in extended-family households that made the elderly especially vulnerable. It is believed that over half of the elderly in 1934 had insufficient income to support themselves.^[91]

Today, nearly one in six Ohioans receives Social Security. This crucial safety net lifts 859,000 Ohio residents out of poverty. While most beneficiaries are elderly, 47,000 Ohio children receive Social Security payments because a working parent who paid into the system died, became disabled, or retired. According to one estimate, without Social Security benefits over half of women aged 65 and older would be in poverty, whereas with Social Security that rate is reduced to 10 percent. ^[92]

Despite its many successes, Social Security needs to modernize. The program is designed with a certain worker in mind – a male breadwinner who works full-time. The current system is also biased in favor of married couples, so those who are single or divorced do not fare as well as their married counterparts. ^[93]

Additionally, because Social Security benefits are tied to employment, workers (primarily women) who have gaps in employment history or worked part-time suffer from lower retirement pensions. For example, women work 12 years fewer than men on average, resulting in less savings, fewer promotions and fewer pay raises over a lifetime.^[94] This combined with the fact that women live longer than men means that elderly women often deplete savings in order to pay for healthcare costs and have greater reliance upon Social Security.

Housing

Many Ohio families lack access to safe and decent affordable housing. According to the Coalition on Homelessness and Housing in Ohio (COHHIO), over a quarter million Ohio households spent more than half of their income on housing in 2010. A widely accepted formula deems housing unaffordable if it comprises more than 30 percent of a household budget.

The United States does not have a federal housing policy, in the way that it has food stamps, Medicaid, Medicare, Social Security, or even cash assistance (constrained as that now is). While federal and state programs help some low-income families, there is no guarantee, little consistency, and an extreme shortfall. Assistance peaked in 1978 and today is funded at about half that level. Meanwhile, the very low-income population grew from 10 million in 1978 to 16.3 million in 2005. ^[95]

Public housing provides some eligible low-income families with access to a varied housing stock, including single-family homes and high-rise apartments. Public housing also acts as a crucial safety net for the elderly and the disabled: Two-thirds of families in public housing have a family member who is elderly or disabled. ^[96]

Federal housing vouchers, such as Section 8, help some very low-income families secure housing by subsidizing the cost of rent above 30 percent of the family’s income. The voucher program is managed by a local public housing authority and lets renters live in privately owned housing.^[97] But the program has a waiting list and many eligible families cannot get any assistance.

Federal housing assistance helps only one in five low-income households in need.^[98] We provide much more to help financially secure families with housing than we do to help the neediest.  Federally, approximately $230 billion supports home ownership, which benefits upper middle class and wealthy families disproportionately, while only $60 billion is focused on the rental sector.^[99] Even though extremely low-income renters comprise a quarter of all renters,^[100] 9 million extremely low-income renters currently compete for only 6.2 million affordable homes.^[101]

Because of a federal shift toward home ownership and a decrease in funding, state governments are increasingly called upon to fill the gaps. In Ohio, state-based programs such as the Housing Assistance Program and the Housing Trust Fund provide some housing assistance for low-income families. The Housing Assistance Program provides funding for emergency home repair, repair to make homes accessible to residents with disabilities, counseling and down payments for low-income individuals and families.^[102]  In 2010 the program gave grants totaling $6 million and provided homeless assistance worth $20 million.^[103]

Ohio’s Housing Trust Fund was created as a result of a grassroots effort to improve housing conditions in the state. Ohio has one of the most vibrant Housing Trust Funds in the nation, the result of savvy negotiating by Ohio housing advocates.^[104] In 1990 voters approved Issue 1, a constitutional amendment making housing a public purpose, and a year later the legislature passed implementing legislation.^[105]

Today the Housing Trust Fund supports homelessness prevention, construction/rehabilitation of rental units and homeownership units and supportive services to low-income households. In addition to supporting families in need, the program helps Ohio’s economy. An analysis of the economic impact of the Housing Trust Fund found an extremely positive impact on the regional economy, ranging from a $2.31 return to a $14.54 return per dollar spent, depending on how the estimate is calculated.^[106]

Another way to help with housing is by making homes more energy efficient. A small number of poor families get this help. It’s a smart investment. The Weatherization Assistance Program, created in 1976, improves the energy efficiency of low-income households, helps lower rising home energy bills and improves home health and safety.^[107] The program got a huge boost under the 2009 American Recovery and Reinvestment Act, which allocated $5.1 billion to state weatherization assistance programs, including nearly $248 million to Ohio.^[108] Since July 2009, this program has created 1,000 jobs, weatherized 5,602 homes, and helped homeowners save an average of $350 a year (32 percent) on energy bills.^[109]

The program is a success as an economic investment, as a form of assistance to low-income families, and as a way of reducing carbon emissions. According to the U.S. Department of Energy, for every $1 invested in the program $2.73 is returned to the household and society, with $1.67 in reduced energy bills and $1.06 in non-energy benefits such as jobs, improved housing quality, and improved health and safety.^[110]  In addition to saving homeowners money, the weatherization program addresses other issues in the home such as problems with unsafe combustion systems, mold or moisture.

The weatherization program only helps only a fraction of the families that could benefit from better weatherization. Those who do get assistance see long-term benefits, but many are left out. Overall, the weatherization program is extremely effective but it should be expanded to generate jobs, reduce pollution and help families lower their energy costs.

V. Help through the tax code – but who benefits?

Increasingly, the United States is delivering social benefits through our tax code. This is particularly true of programs designed to help with healthcare, child-rearing, retirement and home ownership.^[111]  Benefits through the tax code include tax expenditures (such as deductions, which reduce the amount of taxes someone owes) and tax credits. Tax expenditures promote certain policies (such as home ownership, retirement saving or higher education investment) by allowing filers to deduct from taxes owed, reducing their tax bill and government revenue. Tax credits, on the other hand, apply against any taxes owed, and the difference (up to the full amount of the credit) is refunded to the taxpayer.  Because low and moderate-income families typically do not owe as much in taxes, they often are not able to take full advantage of deductions. 

Some tax policies, such as the Earned Income Credit, are extremely helpful to low- and moderate-income families. However, the federal tax code is largely skewed in favor of those who make $50,000 a year or more, which means many working families cannot access benefits that encourage asset building and developing wealth. Major changes are needed to develop a tax system that lifts more families out of poverty.

Table 1, below, lists the major federal tax deductions and credits that help individuals save or meet basic expenses. Retirement deductions are the biggest ticket item in terms of overall cost to the federal budget – in 2010 families with enough spare income to put money away each month for retirement were able to reduce their tax liabilities, in total, by $108.2 billion. This is an important public policy. Social Security benefits are modest and families need to save beyond Social Security to retire comfortably. However, wealthy and upper middle earning families benefit far more from this set of deductions than lower-middle or low-earning families.

At about the same cost, $103.7 billion, is the home mortgage deduction. This costly program is extremely helpful in enabling people to buy a home. However, as with retirement deductions, many of the principal beneficiaries are wealthier families. The ability to deduct the cost of a second home skews this program even further toward spending on the wealthy.

Coming in third in terms of overall cost to the government is the Earned Income Credit, which is targeted toward families of modest income. The cost of this, the government’s largest anti-poverty program, is less than a fourth of the cost of the retirement and home mortgage deductions combined, each of which vastly disproportionately benefits upper middle income and wealthy families.

Earned Income Credit

The Earned Income Tax Credit (EIC) is a refundable tax credit for low- to moderate-income working families. The credit aims to make work pay by countering payroll taxes and returning money to families. An estimated half of all families with children will receive the credit at some point. In addition to the federal EIC, 24 states and the District of Columbia offer state credits but Ohio does not.^[112] The credits assist working families with expenses and partially make up for the fact that most state and local taxes are regressive and consume a greater share of moderate-income families income than of higher income families. Because filers must work to claim the credit, the EIC is seen as encouraging work, and was expanded when welfare became more restrictive.

The EIC is now the country’s largest poverty relief program. In 2011, the credit lifted 6.6 million working families out of poverty, including 3.3 million children.[113] In addition to reducing poverty, the EIC supplements low wages, encourages work, and attempts to balance a tax system that overwhelmingly supports the wealthy.For many, the credit is a lifeline. Survey data reveals that families use the credit to pay for groceries, clothing, household necessities, rent, mortgage payments, or to fix cars, invest in education or make home repairs.

A number of studies show that this tax credit is one factor behind increased workforce participation among the poor, especially single women with children. One study found that an approximate $400 EIC increase boosted employment rates by 3.2 percentage points.^[114]

While the EIC has proven successful on many grounds, there are ways that the tax credit could help more. First, we could put in place a state EIC, which would supplement the federal credit. Second, low-income households with children where both spouses work are often ineligible for higher credits, even if the parents earn low wages. We could encourage work by allowing exclusion of half the income of the lower-earning spouse, giving the family a larger credit and reflecting the greater expenses faced by two-worker households when compared to households with a parent available for child care, household chores, and other unpaid work in the home. In addition, childless workers aged 18-24 currently are not eligible for the EIC. Some suggest changing the eligibility age to 18, with a provision excluding full-time students.

Despite the success of the EIC, more should be done to make the tax code work for low- and moderate-income families – in total tax expenditures raise the income of the highest income by 13.5 percent, while only raising the income of the bottom fifth of earners by 6.5 percent.^[115] 

Child credit

The Child Tax Credit (CTC) provides parents with a qualifying income up to a $1,000 credit per child.^[116]  The CTC is one of the largest refundable tax credits, with $54.4 billion in tax expenditures in 2010 .^[117] The credit has two components: a basic, non-refundable tax credit, and an additional credit that is refundable. Non-refundable tax credits can only be deducted against taxes owed, so families who earn too little to pay income taxes cannot benefit, even though they pay a disproportionate share of payroll taxes, sales taxes and other state and local taxes. Unlike the EIC, the CTC is only partially refundable, meaning that the filer receives a refund only if the credit exceeds the amount of tax owed. Families can get a refund equal to 15 percent of earnings above $3,000, and up to $1,000 per child. ^[118]   

In 2009 the CTC lifted 2.3 million people above the official poverty line, including 1.3 million children.^[119] Despite this, the CTC is slightly regressive because more of it goes to families with taxable income than to families who don’t earn enough to pay income tax. Families without taxable income must file for the Additional CTC, the refundable portion of the credit. Families who earn less than $3,000 do not qualify for the credit at all, and families who earn between $3,000 and $9,667 only receive a partial credit.^[120] Approximately 10.6 million low-income children did not qualify for the credit in 2007, and 11 million received only a partial credit. In addition, 50 percent of African-American and 46 percent of Hispanic children either received partial or no credit because their family had low or no earnings. Many working families earn too little to qualify for a full or even a partial credit. According to the Urban Institute, a fully refundable CTC would reduce poverty by 9.2 percent.^[121]

Child Care Credit

The Child and Dependent Care Tax Credit (CDCTC) helps subsidize preschool or childcare by providing families with a tax credit between 20 and 35 percent of childcare costs, up to $3,000 for one child or $6,000 for two or more children.^[122]  Families who make less than $15,000 per year qualify for the 35 percent rate, and the credit decreases by 1 percent for every $2,000 dollars in income.

Families who make between $75,000 and $200,000 benefit most from the CDCTC. Because the tax is non-refundable, families not making enough to pay federal income tax are not helped. President Obama has proposed that the 35 percent rate be expanded to all families making up to $85,000 per year. This would increase the average family’s credit from $1,200 to $2,100, and would allow 235,000 new children to be served.^[123] 

Saver’s Credit

The saver’s credit is designed to offset the first $2,000 that workers voluntarily contribute to IRAs and 401(k)s, as well as to promote saving for retirement.^[124]  Individuals earning up to $26,500, married couples filing jointly and earning up to $53,000, and heads of household earning up to $39,750 qualify for the saver’s credit.^[125]  The IRS reports that in 2006 (the most recent year for which data is available), joint filers claimed an average $213, heads of household $149, and single filers $128.^[126]

The number helped by the credit is likely to decrease unless credits and qualifying income levels are adjusted for inflation.^[127] President Obama has proposed changes that would improve access to the saver’s credit for lower-income Americans.  His primary change would make the credit refundable for families who don’t have federal tax liability and would deposit the credit directly into the savings account, maximizing the savings impact.^[128] Legislation to expand the Saver’s Credit during tax time was introduced previously but is awaiting introduction in the current Congress.^[129]  An alternative approach, proposed by The New America Foundation, is a saver’s bonus that would match deposits made into eligible savings accounts, up to $500. This would allow saving for more purposes, encourage asset building among the poor, and level a playing field that now perversely provides more than 90 percent of wealth-building tax credits (those for home ownership and retirement) to those earning more than $50,000.^[130]

Student Loan Interest Deduction

The Student Loan Interest Deduction (SLID) is a tax deduction to help those who took out student loans in pursuit of higher education.^[131] The SLID is a deduction, rather than a credit, and therefore does not need to be itemized.  The maximum deduction for tuition and fees is approximately $4,000, however, this credit changes relative to income. In fiscal year 2010, it is estimated that this reduced taxes by $760 million on those eligible.^[132] The filer’s maximum adjusted gross income must be below $80,000 or $160,000 if filing as a married couple.^[133] Loan interest deductions are either $2,500 or the balance of the loan. In the 2011 tax year just passed, this policy reduced taxes on those eligible by $1.4 billion.^[134] 

While a student loan interest deduction is a good start, more should be done to support students. The New York Times reported that in 2010 student loan debt outpaced credit debt for the first time, and is expected to exceed $1 trillion in the coming year.^[135]  That year, students graduated with $24,000 in debt on average.^[136]  Dramatic decreases in state funding for education have made the cost out of reach for many families. As a percent of the Ohio budget, “higher education spending peaked in 1978 at 17.7 percent . . . .has fallen each year since 1996…[in 2005 was] 11.7 percent.”^[137]  In 2008, the median Ohio family would need to contribute 39 percent of its income to support a child attending a four-year public institution.^[138] 

Summary of tax deductions and credits: Who benefits?

Since 1950, the number of tax deductions has grown tremendously, from 12.2 percent of Americans’ adjusted gross income in 1950 to 23.9 percent in 2008.^[139] All tax expenditures combined cost more than Social Security, for example, or than Medicare and Medicaid combined as Figure 5 shows.

Unfortunately, tax deductions are skewed in favor of wealthy Americans. As one commentator notes, “The richest one percentile is 3.25 percent richer from itemized deductions, while the bottom quintile gains just a .02 percent increase in income as a result of itemized deductions.”^[140] The home mortgage deduction is one illustration of this: While those earning under $40,000 a year benefit very little from the deduction, those earning between $100,000 to $200,000 make up only 8.2 percent of returns, but claim more than 28 percent of all home mortgage interest spending.^[141]

Two large tax credits—the Earned Income Credit and the Child Tax Credit—are progressive and “increase[d] the bottom two quartiles’ income levels by 5.35 and 3.99 percent, respectively.”^[142]  On the other hand, non-refundable tax credits (such as the Hope Credit and the Child Care Tax Credit) favor middle-class families, but even these credits “are dwarfed in comparison to the deductions, exclusions, and refundable credits.”^[143] In the end, tax expenditures that assist working families are overshadowed by the extensive deductions and exclusions that favor higher earners.

VI. Conclusion

Ohio families are struggling. Many can’t find work and many have left the workforce. Even those who are working often can’t meet their families’ needs through work. Although much of what we hear about the economy raises fears, the truth is that our economy is larger than ever and is generally productive and profitable. Yet workers are not sharing in these profits.

The public sector does much to help those in poverty. Social Security, Medicare, Medicaid, Food Assistance and unemployment insurance do an enormous amount to stabilize communities, meet medical needs, assist middle class families and raise people out of poverty. Other programs also help, although more sporadically. But these programs are too restrictive in eligibility and too many are left behind.

Americans show tremendous support for work, both in what they say and in what they do. But work is falling short for too many of us. The social contract must be updated – either by increasing our demands on what employers provide for their employees, or by increasing what the public sector offers to fill the gap. Without such change, we will continue to see high levels of poverty, staggering levels of inequality, and insecurity around food, housing, retirement income and health coverage. Such insecurity is not acceptable in what remains, credit ratings and stock fluctuations aside, the wealthiest country on the planet and throughout history.

Report finds that Ohioans struggle through slumps and recoveries with less relief than in the past

Ohioans are finding it harder to thrive economically and are slipping into poverty amid the destruction of vital services that were once a pathway to the middle class, according to a new study by Policy Matters Ohio. Poverty is high through slumps and recoveries, the study shows, and both work and the safety net do less to meet basic needs than they once did in Ohio. Wages have stagnated and benefits once common, like health insurance and pensions, are increasingly scarce.

“Too many working Ohioans cannot make ends meet,” said Amy Hanauer, report author and executive director of Policy Matters. “Many jobs no longer cover the essentials for a family, and fewer options are available for those who lose jobs and need short-term help.”

The study is based on surveys of 150 non-profit groups that serve more than 100,000 Ohio families, and of 2,000 northeast Ohioans who have needed help affording food, clothing, day care and other essentials during the recession. It also analyzes public policy decisions that have affected modest-income families. Key findings include:

• Caseloads increased by an average of 60 percent between 2008 and 2011, with providers of emergency food and shelter reporting the biggest jump. Many people seeking help were turned away because staffing and other resources were inadequate to meet demand.

•  To make ends meet, families skipped health care, rent payments or meals; sold vehicles; exhausted savings; borrowed money; and even left children unattended because child care was not available or affordable when they worked.

• Organizations said the public sector should provide more funding, make health care affordable, better fund safety net programs and expand eligibility for services, among other reforms;

• The vast majority of individuals surveyed, 92 percent, were employed, but 80 percent earned $30,000 or less and had difficulty affording essentials. Three in five could not get health care, through employers or Medicaid. More than one in five said they often had to skip meals.

Many try to cover the basics through work, but wages have been stagnant even as American productivity has increased dramatically and families have sent more adults into the workplace. Provision of health and retirement coverage through the workplace has declined precipitously over the past generation.

Because work does not help all families escape poverty, state and federal services were put in place to provide security and opportunity, allowing Ohioans to stay in the workforce and afford necessities as they try to move up to better-paying jobs.  But these services are under siege and leaving far too many behind:

• The Supplemental Nutritional Assistance Program (SNAP) helps very low-income households – the vast majority of them with children — put food on the table. Despite its modest cost – an average of $1,100 per family each year — and successful track record, Congress is considering proposals to slash SNAP, as well as a related program that assists infants and pregnant women at risk of malnutrition.

• Fewer children will be eligible for day care because of federal and state cuts. Childcare can be among a family’s biggest expenses, with center-based infant care consuming more than one-third of a median single-parent income in Ohio.

• Unemployment insurance kept more than 3 million Americans out of poverty in 2009 as they searched for work, allowing them to continue spending money locally on necessities and arresting the economy’s downward spiral. This program, too, has been attacked in Congress.

• Cash assistance helps some families, but many fewer than in the past. About three in four poor Ohio children lived in a family that got no cash assistance in 2008. General assistance, the program that once provided help to desperately poor adults with no children, no longer exists.

• Social Security lifts 859,000 Ohioans out of poverty and has turned old age from the time of life when poverty was most likely to the time of life when it is least likely.

Much assistance is provided through the tax code and is skewed toward the wealthy. The home mortgage deduction costs the U.S. treasury $103.7 billion a year and provides more assistance to those purchasing expensive homes. Deductions for retirement savings cost $108.2 billion annually and do more for high-income earners who can afford to save more.  The Earned Income Tax Credit, our main poverty relief program for working families, costs just $55.1 billion a year.

“Our survey found that Ohio families are struggling despite working and our review of policy found deep retrenchments in the social contract,” Hanauer said. “If we want our communities, economy and families to thrive, we will have to ensure that either work or policy does more to bring about opportunity and security.”

Southwest Ohio residents continue to reach for their credit cards and sign off on auto loans at a brisk clip, boosting borrowing twice as fast as most economists had predicted.

Total U.S. consumer credit grew by $21.36 billion in March, according to the latest figures from the Federal Reserve. That was the biggest month-to-month jump since 2001 led by a surge in auto loans, personal loans and student loans, which combined for about $16 billion of the increase.

Credit card debt shot up, too, climbing by $5.1 billion after a $2.3 billion decline in February, according to the Fed.

As consumers increasingly leverage credit, local economists and financial experts continue to debate whether the turnaround from a lengthy period of austerity is good for the economy.

On one hand, a certain amount of consumer debt is necessary for a healthy economy since consumer spending accounts for about 70 percent of economic growth.

But overspending consumers strung out on easy credit were among those hit hardest by the financial collapse of 2008, and some experts fear consumers could be heading for the same financial cliff they fell off at the start of the recession.

“We don’t see it as much now as we did before the recession, but there are some individuals who are overextending themselves and doing just undisciplined kinds of things with credit,’’ said Melodee Shiels, director of Consumer Credit Counseling. “But the bulk of our clients are using credit just to get by and meet day-to-day expenses. Eventually, you reach your limit, and then you end up in a downward spiral because you can’t even make minimum payments.’’

In Ohio, the average credit card balance climbed to $3,648 in March, up more than $190 from year ago, according to the latest figures available from Experian, one of the three main credit bureaus.

James Brock, a Miami University economics professor, said the pick-up in consumer borrowing can be viewed one of two ways:

“Some people would argue that it’s an indication that things are not good because people have had to go deeper into debt to get by,” he said. “But the other side of the story is that maybe things are getting better and people may feel a little safer about spending more than they did before. It’s really a glass-half-empty or glass-half-full question.” Brock thinks the glass is half full. “The economy is getting better,” he said. “It’s getting better in fits and starts; sometimes it’s two steps forward and one step back. But if you look at most of the broad statistical gauges of the economy, they’re generally trending up.” Brock noted that retail sales, car sales, even home sales have all started to pick up in recent months. “I would look at (consumer credit) as another reinforcing measure of the recovery of the economy,’’ he said.

Brock is not alone. More consumers also seem to think the economic glass is half full rather than half empty.

U.S. consumer sentiment has risen to its highest level since January 2008, according to the Thomson Reuters/University of Michigan’s preliminary May reading on the overall index of consumer sentiment. The index rose to 77.8 earlier this month from 76.4 in April, beating forecasts for a small decline to 76.2.

The monthly survey found also 65 percent of consumers thought buying conditions were favorable, the highest level in more than a year.

While many households are feeling more upbeat about the economy, a significant number have simply been compelled to make purchases — regardless of their financial situation.

David Rothstein, a researcher at Policy Matters Ohio, a public policy think tank in Cleveland, said Queen is typical of people who have delayed spending on necessities.

“People have waited and waited to see if the economy would get better,’’ he said. “They’ve put off different purchases like moving or buying a car, but people can no longer wait to make those decisions.

“They don’t have the money anymore to pay up front, so they just have to borrow,’’ he said. “And we saw what that did during the mortgage crisis.’’

Ohioans are especially vulnerable to financial calamity as a result of overspending, according to the Corporation for Enterprise Development’s Assets and Opportunity scorecard.

Nearly a third of Ohio households are asset poor, or have little or no financial cushion to rely on in case of emergency. Ohio ranked 37th out of 50 states and the District of Columbia for the financial security of its residents.

Consumer debt surge highest since 2001

The U.S. can grow jobs with a clear national manufacturing policy that focuses on regional clusters of specialized companies such as those in machinery, composite materials, autos and aerospace in the Dayton metro area, a new report from the Brookings Institution said.

Ohio had 620,000 manufacturing jobs by the end of 2010 despite losing 39 percent of manufacturing jobs in a decade, said the report, “Locating American Manufacturing: Trends in the Geography of Production.”

The encouraging report detailed manufacturing growth in the Midwest that’s exceeding growth elsewhere. Nationwide, it said, manufacturing is “largely located in metropolitan areas, displays greater variety than may be recognized, and falls into six broad patterns” of clustering.

It said those industry clustering patterns include: computers and electronics, transportation equipment, chemicals, machinery, food productions and low-wage manufacturing industries.

Scott Koorndyk, executive vice president of economic development for the 14-county Dayton Development Coalition, said the report validates strategies here to build on existing clusters, such as aerospace and advanced materials, which restore the region’s historic manufacturing base.

“We are in the middle of the nation and in an area that is growing more quickly,” he said. “We are investing in early-stage technologies to build clusters in those things that we are good at.”

A coalition study said that since manufacturing is Dayton’s “driver industry,” the manufacturing losses here devastated the rest of the economy, making the Dayton metro area third in the nation for nonmanufacturing job losses in a decade.

Other Brookings’ report findings:

• A long-term shift of manufacturing to the South has ended. Between 2000 and 2010, the Midwest and the South each lost about a third of their manufacturing jobs. Between the first quarter of 2010 and the last quarter of 2011, manufacturing jobs in the Midwest grew by 5 percent, while manufacturing job growth in the South was 2 percent. Manufacturing in the Dayton metro area grew 4.5 percent.

• Metro areas, particularly large metros and central metro counties, are the nation’s manufacturing centers. Metros had nearly 80 percent of all manufacturing jobs in 2010, and 95 percent of very high-tech manufacturing jobs.

• Manufacturing pay varies widely, from almost $145,000 in average annual earnings in San Jose, Calif., to $35,000 in McAllen, Texas. Wages vary for education levels of workers, differences in products and processes, and worker bargaining power. In the Dayton area, the average manufacturing wage is $53,645, compared with $42,891 for all jobs.

The report is the latest in a string of think-tank reports criticizing policy drift that erodes the nation’s industrial power, fuels a $600 billion annual trade deficit, and hinders job growth.

The Brookings recommendations also line up with President Barack Obama’s $1 billion proposal to establish 15 federal manufacturing research centers in the U.S. An Ohio consortium, including the University of Dayton Research Institute, is pursuing a pilot center for additive manufacturing, also known as 3D printing.

Estimates say the $1.7 trillion manufacturing economy employs 11 million Americans directly and another 7 million in related business. It has an economic multiplier effect superior to any other industry.

Howard Wial, an author of the Brookings report, said neglect by U.S. federal leadership on balancing trade, promoting industrial development, vocational training and a broad swath of related issues has harmed the economy for a long period.

“We really welcomed off-shoring and didn’t do anything to discourage it,” he said. “On the domestic side, we didn’t pay attention to our manufacturing base and improving quality of products, or helping small and medium-size manufacturers improve productivity and innovation.”

But on the positive side, manufacturing is still a growth machine. The Institute for Supply Management says U.S. manufacturing has been expanding for 33 consecutive months.

Tim Krueger of Policy Matters Ohio in Cleveland, a co-author, said local and state economic development efforts and public funding should focus on local industry clusters, not select firms, or courting new industry. “What makes us more competitive is to use money toward a cluster of firms, organized on their own, and helping them find ways to work with research networks, invest in technology and workforce skills,” Krueger said.

In northeastern Ohio, for example, a coalition of 80 civic leaders developed a regional plan that includes Cleveland, Akron and Youngstown, for manufacturers.

A national policy should support innovative “high-road” manufacturing (aggressive innovation and productivity and high wages) in U.S. metros, Wial said.

A recent poll shows a slight majority of Ohioans support a right-to-work law in the state. Ohio also routinely uses tax credits and other subsidies to attract companies to the state.  But Susan Helper, economics professor at Case Western Reserve University and co-author, said, “We can make investments … , or we can watch things crumble.”

A collection of people who shape education law in Ohio, and those most affected by it — school administrators — gathered for a roundtable discussion at North Royalton High School May 7.

Under the umbrella of “The Future of Public Education in Ohio,” a seven-member panel discussed topics ranging from school funding to new district ratings to needed changes in Ohio’s education system.

“My hope is that we take this back to our own districts,” said Dan Langshaw, North Royalton school board member. Langshaw along with Terry Groden, North Olmsted school board and Reno Contipelli, Cuyahoga Heights school board organized the event.

The trio of school board members held a similar roundtable in 2011.

This time, members of the panel were: Anthony Podojil, executive director for The Alliance for High Quality Education; Piet Van Lier, communications director from Policy Matters Ohio; Michelle Francis, deputy director of legislative services from Ohio School Boards Association; Barbara Shaner, associate executive director for Ohio Association of School Administrators; Tom Ash, director of governmental development from Buckeye Association of School Administrators; Rep. Nan Baker, R-16, member of the House Education Committee; and Rep. Mike Dovilla, vice-chair of the House Education Committee.

Posed with the question of whether or not the tax burden on homeowners will ever lessen, both Dovilla and Baker urged school districts to do more.

“Some of this comes down to making tough decisions at the district level that we have to make at the state level,” Dovilla said. “To rely on the debt of residents in the district to fund an operating budget is just not right.”

“It’s not always about money. It may be more about doing better with what we have,” Baker added.

Shaner pointed out that, while Ohio is often thought of as a state with a high tax burden, it’s in the middle of the pack when local taxes are not factored in.

“What’s happened in Ohio has not made us stronger,” said Van Lier. “It won’t get better until we address the funding issues in the state.”

House Bill 136, a controversial bill, aimed to provide funds for students to attend schools outside their home district was also part of the discussion. Opponents feel the bill would steer public school students toward private schools.

While the panel collectively felt the bill, which is currently on hold, needs work, Ash felt public schools weren’t getting enough credit.

“We feel public schools will compete with anybody, if given the chance to compete,” he said.

Many school administrators are concerned about expected changes how schools are rated, and the confusion that may cause. A rating of “Excellent” or “Continuous Improvement” for a school district would switch to a letter grade between A and F.

“We do need time to explain this,” said Shaner. “There will be questions like, ‘What does it mean?’ and ‘Why are the grades changing?’ ”

When asked what changes the panel would like to see with Ohio’s education system, Dovilla focused on job training.

“The jobs we are training kids for today will not be the jobs in 10 to 15 years,” said Dovilla.

Podojil questioned the importance placed on state assessment tests students take in the spring.

“We’re getting away from the body of work it takes to evaluate a student,” said Podojil. “At some point I’d like to see a dialogue switch to the bigger picture.”

Van Lier feels cooperation will be a key to moving forward.

“All these districts are fighting for their little piece of bread,” he said. “We have to try and treat these issues as one. We have to work together.”

State, local education minds gather in North Royalton for roundtable

The Mahoning Valley remains the part of Ohio most dependent on manufacturing, according to a national report.

The report is by the Brookings Institution, which surveyed 100 metropolitan areas in the nation. Brookings is a nonprofit public-policy organization based in Washington, D.C.

In the Valley, manufacturing jobs represent 12.6 percent of all jobs, which ranks eighth nationally. The Valley is more dependent on manufacturing jobs than any other part of the state, although Akron and Cleveland are close, ranking 13th and 14th, respectively.

The area has 28,416 workers in manufacturing jobs. The Mahoning Valley had lost 46.2 percent of manufacturing jobs compared with 2000, according to the Brookings report.

The region made a comeback in the past two years with manufacturing jobs increasing by 11.7 percent between the first quarter of 2010 and the fourth quarter of 2011. The increase ranked third nationally, according to the report.

At one time, dependence on manufacturing was even greater, said Tony Paglia, vice president of government affairs for the Youngstown/Warren Regional Chamber.

“I think we have an infrastructure in place for manufacturing,” Paglia said. “We have diversified within manufacturing.”

At one point, nearly all manufacturing businesses within the Valley were related to steel or metals, Paglia said.

The Mahoning Valley Manufacturing Coalition believes the high percentage of manufacturing jobs is good.

Spending for manufacturing has a greater multiplier effect than any other industry, which means more money into the area’s economy, said Jessica Borza, coalition executive director.

“Things were down for so long that the companies that survived have come back stronger. They’ve learned to diversify within their products and customers,” she said.

Coalition members, in a survey, estimated their companies would grow 33 percent in the next two to three years, Borza said. Those estimates do not include any anticipated growth from manufacturing for oil and gas companies.

The Valley needs to take advantage of what it can in terms of manufacturing jobs, Paglia said.

“We also need to have a strategy for continuing to diversify,” he said. “There are always cycles in the economy, and we need to prepare.”

Nationwide, the Brookings report shows that American manufacturing has shed its Rust Belt image and become more diversified and advanced. The report finds that U.S. manufacturing is located largely in metropolitan areas, and the long-term shift of manufacturing to the South came to a halt in the past decade.

What is needed now, the report concludes, is a national policy that plays to regional strengths and supports development of innovative “high-road” manufacturing in U.S. metropolitan areas.

“We can pave the high road, or we can block it,” said Susan Helper, an economics professor at Case Western Reserve University and co-author of the Brookings study. “We can make investments in training, in research and development, in infrastructure, or we can watch things crumble. We can take advantage of the synergies that are happening on the ground, or we can squander the energy that’s building.”

In Northeast Ohio, a coalition of 80 civic leaders, including some from Youngstown, developed a regional plan that has a strategy for helping manufacturers adopt new manufacturing methods, develop new products and reach new markets.

“A lot of economic development has been geared toward changing a region’s blend of industries or creating something like ‘the next Silicon Valley,’” said Tim Krueger, a research assistant with Policy Matters Ohio and a study co-author. “Yet the data show nearly every metropolitan area already has an important set of core competencies. New economic thinking should be geared toward recognizing these strengths and building on them in creative ways.”

Report: Valley depends on manufacturing

Dear Chairman Widener:

During testimony before the Finance Committee yesterday, you questioned some of the numbers that we presented. We stand by these numbers, and provide the following information to show how we arrived at them.

The two figures you specifically mentioned: the $1.8 billion reduction in funding for K-12 education and the $1 billion for local services, were published before in our budget brief of August 1, 2011.[1]   We present the published information here. As we often do, in writing this report we relied on data on from documents published on the website of the Ohio Legislative Service Commission.

Table 1, below, is taken from that brief and illustrates the source of our conclusion that the funding to K-12 schools in the current budget is $1.8 billion less than in the prior biennial budget.

We compared the level of spending from biennium to biennium: total funding in the biennial budget for FY 2010-11 compared to total funding in the biennial budget for FY 2012-13. As Table 1 shows, we include in our calculations funds outside of the General Revenue Fund (GRF) because state legislators can make decisions about use of funds in some other fund categories, such as the revenue distribution categories, and because legislators have the ability to replace funding lost from sources they do not control – such as the federal stimulus spending – by restoring lost tax revenues and appropriating them for specific purposes. For example, revenues could be raised by closing loopholes and taxing oil and gas to restore funding for primary and secondary education and local governments.

The loss to community services is attributable to the reductions in three areas: the Local Government Fund, reimbursement of tangible personal property tax, and reimbursement of the kilowatt-hour tax. The change in funding in these three line items is illustrated in Table 2, below.

Table 2.  Cuts to Local Government Property Tax Fund – Utility, Local Government Fund, and Local Government Property Tax Replacement – Business, FY 2010-11 compared to FY 2012-13.

Source:  Policy Matters Ohio, based on Ohio Legislative Service Commission ‘Budget in Detail (as enacted)’

for the 129^th General Assembly.

We looked at the change in funding in these lines on a biennial basis: FY 2010-11 compared to FY 2012-13. We looked at these funds, which are outside of the GRF, because legislators have authority over use of those funds. Figure 1, below, illustrates the loss of funding. These are flexible funds: the state does not tell local governments how to use those funds. Some communities use it to repair street lighting, others use it to supplement human services, and so forth.

In our testimony, we also reference a half-billion-dollar reduction in funding for higher education. This is a figure we have included in prior writings, including the August 1, 2011, budget brief. This  reduction in funding for classroom teaching (State Share of Instruction) resulted from the expiration of federal stimulus money that filled gaps in the state budget during the recession and enabled tuition to rise more slowly than in the current biennium. This is not GRF funding, but policymakers could have chosen to raise revenues to replace these funds. As with K-12 and local services, we based our analysis on data provided by the Ohio Legislative Service Commission.

As residents of Ohio, we appreciate the opportunity to add our testimony to the range of opinions we hope lawmakers consider. We thank you for the opportunity to respond to your comments on the accuracy of these specific numbers. We also stand by additional comments and numbers in our testimony, which is available at www.policymattersohio.org/mbr-testimony-may2012.

Best Regards,

Wendy Patton

Senior Project Director

Cc: Senate Finance Committee: Shannon Jones (Vice Chair), Tom Sawyer (Ranking Minority Member), Kevin Bacon, Bill Coley, Keith Faber, Jim Hughes, Peggy Lehner, Scott Oelslager, Tom Patton, Michael J. Skindell, Shirley A. Smith, Charleta B. Tavares.

Delivered before the Commerce, Labor and Technology Committee of the Ohio House of Representatives on May 9, 2012. 

Good afternoon, Chairman Young, Ranking Member Yuko and members of the committee. Thank you for the opportunity to testify today about HB 484: SharedWork Ohio. I am Hannah Halbert, policy liaison and workforce researcher at Policy Matters Ohio, a nonprofit, nonpartisan research institute with offices in Cleveland and Columbus. Policy Matters Ohio supports the passage of SharedWork Ohio.

Shared work, or Short-Time Compensation, is a proven layoff aversion tool. These programs increase the flexibility of the unemployment compensation system. Instead of allowing unemployment compensation only to be paid to workers who are laid off, the program allows unemployment compensation to also be paid to workers who face a reduction in hours. In short, the program allows employers to shorten the workweek of a larger number of employees instead of laying off a smaller number entirely. This can benefit Ohio workers and the companies that employ them in several ways.

Employees can maintain much of their income, stay employed and retain their benefits. They are able to continue to meet their financial obligations and to contribute to their local economies. Employees can retain their health insurance and keep accruing retirement benefits. In addition, the emotional hardship associated with layoffs, and the stress of looking for a new job in a tough labor market is averted.

Employers can retain skilled employees, avoid expensive retraining and rehiring, boost employee morale and be more easily able to gear up when demand recovers. Employers responding to a January 2012 survey of participants in Washington state’s shared work program were very much in favor of the program; 99 percent said they would recommend the program to other businesses, 68 percent said the program had helped their business survive the recession, and an additional 20 percent said that the program probably helped their business survive.

In addition to the state of Washington, 21 states and the District of Columbia operate work-sharing programs and New Jersey passed short-time compensation legislation in January of this year.^[1] During the 2007 recession, participation mushroomed in the states with existing shared work programs. In 2009, more than 288,000 individuals participated in one of the fifteen shared work programs that reported in-state beneficiaries to the U.S. Department of Labor. This was a considerable increase from 2006 reports, which showed slightly more than 39,000 participants. Participation declined significantly in 2010, but remained higher than in any year except 2009, according to the Congressional Research Service.

“The Mid-Biennium Review neither looks back in review of the sweeping changes in public services caused by the current state budget nor forward in preparation for the loss of hundreds of millions in federal funds as a result of the Budget Control Act of 2011. Instead, more services are cut; tax breaks continue to go unscrutinized; unfunded or underfunded mandates are imposed; and more privatization is authorized.”

Testimony on the Mid-Biennium Review and the corrections bill to the Senate Finance Committee

The Mid-Biennium Review includes components of legislation that go beyond the corrections bill, and our testimony considers themes evident in House Bill 487 as well as the others spun out of the Kasich administration’s initial legislation or included as part of the MBR as posted on the Budget and Management website. 

As a whole, the Mid-Biennium Review neither looks back in review of the sweeping changes in public services caused by House Bill 153, the current state budget, nor forward in preparation for the loss of hundreds of millions in federal funds as a result of the Budget Control Act of 2011. Instead, across the many bills under consideration in the MBR process, more services are cut; tax breaks continue to go unscrutinized; unfunded or underfunded mandates are imposed; and more privatization is authorized. 

Last year’s $1.8 billion cut to K-12 education has been portrayed as a fight with teachers about jobs and pay. It’s a much bigger story than that. Education funding in Ohio had expanded under court order to increase equity of opportunity, and graduation rates soared from Toledo to Steubenville, Bucyrus to Ironton. The current state budget wiped out the investment that fueled those gains, returning funding to the level of a decade ago.

Last year’s budget bill also cut a billion dollars from community services through the local government fund and property tax replacements. Firehouses have closed, potholes gone unrepaired, playgrounds unsupervised and streetlights dimmed in places around the state. An essential way working families build wealth is through home ownership. The services we need to restore property values in many Ohio neighborhoods are eviscerated in many places by the huge cut in aid.

The changes of the corrections bill you consider this spring – the $72 million squeezed out through debt management and deeper cuts to agencies and services – tinkers around the edges of last year’s unprecedented reduction in public services to Ohio’s children and families. Some of the policies in the legislation have no immediate recognized budgetary impact, but lay the groundwork for future costs. We are concerned about unfunded or underfunded mandates, loss of oversight by citizen boards, broadened powers of privatization, many new cuts to services and a new round of tax changes that continues to leave Ohio with inadequate revenue to make the necessary investments in our future.

Unfunded or underfunded mandates – In the context of last year’s cuts to schools and communities, all requirements that impose new costs burden overstrained systems. Some included in the MBR legislation include:

• 3d-grade guarantee – Lori Ward, superintendent of Dayton Public Schools, testified on behalf of the Ohio 8 that states that have implemented reading guarantees supported them with significant investment – hundreds of millions of dollars – committed over a long period of time for  universal pre-K, targeted professional development, community outreach and aligned curriculum starting at birth. Although a small amount of funding has been appropriated for this initiative, in the context of last year’s $1.8 billion cut to K-12, a big, new, underfunded mandate is not fair to Ohio’s families and kids.
• Step up to Quality – This bill requires adoption of this early care program by early care and other childhood education providers without funding to assist in that adoption.

Weakening of oversight – Transparency and oversight protect public expenditures and ensure accountability. 

• The Ohio Public Health Council is abolished as responsibilities for oversight are transferred to the Ohio Department of Health director.
• The Development Finance Advisory Council is abolished and the Industrial Technology and Enterprise Advisory Council eliminated.

Expanded privatization – Leasing public assets and contracting with private companies to provide public services may seem thrifty, but can be more costly in the long run. Just ask Chicagoans about their parking meters. It can reduce transparency:  Will the public be able to find out how well services are being delivered and keep tabs on the private monopolies that will be providing these services?

• Sale and leaseback of state and local public buildings – House Bill 487 expands privatization authority for the sale and leaseback of public buildings.
• Weights and measures – The ancient practice of verifying weights and measures is authorized for privatization. 
• Public health inspections – Inspections of manufactured home parks, and other health related inspections, may be contracted out.

Service cuts

• Department of Youth Services – Education reimbursement in the Department of Youth Services is cut by $1.9 million. Nutrition programs are cut by $305,022.
• Aging – The Department of Aging loses $146,944 in Senior Community Services, Alzheimer’s services, and other.
• Disease prevention – The Department of Health loses $105,000 for immunizations, $130,000 for chronic disease and injury prevention and $115,000 for local environmental health services. The Department of Agriculture loses $100,000 for animal disease control.

Tax changes

• Financial Institutions Tax – The proposed new bank tax closes major loopholes, but gives the additional revenue back to banks. It also creates a special, new low rate for the biggest banks that will help just a dozen institutions. This is unlikely to help Ohio’s economy.
• Severance tax – The Kasich proposal to tax oil and gas could raise substantial funding that is badly needed to help communities prepare for up-front costs of drilling and to restore schools and local services.  But this revenue would go mostly to upper-income Ohioans in an income-tax cut. The middle fifth of Ohio residents, making between $32,000 and $49,000 a year, on average would get about $42 – not enough for a tank of gasoline at today’s prices. With every day that passes, Ohio loses its share of the mineral wealth being severed from the land, but the General Assembly eliminated the proposal from the MBR and is not even discussing it.
• Tax breaks – Last year, before it was stripped out in conference committee, the Senate approved as a part of budget bill a committee that would have created a permanent mechanism for reviewing new and existing tax expenditures. This year, no such review is provided, but we do see proposed additions to tax credits, such as the venture capital tax credit. Instead of adding to the $7 billion in annual tax expenditures, the General Assembly should review those already in place.

The budget hole Governor Kasich references when justifying the billions of dollars of cuts to our schools and communities, the half-billion reduction in higher education instruction, and the additional, new cuts of House Bill 487 – that budget hole was due more than anything to the generous tax cuts of 2005, which knocked $5 billion out of the state budget every biennium. Those tax cuts have not helped Ohio’s economy. We have lost 285,000 jobs since 2005 – a rate of job loss more than eight times that of the nation as a whole.

Tax cuts eliminate the revenue we need to provide schools with uniform quality across the state that helps kids graduate and community services that keep families’ assets intact. The Mid-Biennium Review fails to review what’s really wrong with the biennial budget and the corrections bill doesn’t correct the problem.

This report explores how revenue from a fracking tax could bolster vital public services if it is not used to finance income tax cuts that would mostly benefit wealthy Ohioans, as Gov. John Kasich has proposed. The Ohio General Assembly should consider an adequate tax on oil and gas extraction to help restore local jobs, schools and services and assist communities impacted by drilling.

Executive summary

The Kasich Administration has proposed strengthening the severance tax, but the General Assembly won’t have the debate. Job losses mount and local economies falter as the result of billions cut in the state budget. There is urgent need to raise revenues to restore jobs and services and help impacted communities with up-front costs of drilling. Every day the oil and gas extracted from Ohio’s land will never be replaced, yet legislators are not even talking about keeping a share of that value to build opportunity for Ohio’s future.

Current severance tax
Ohio’s severance taxes are among the lowest of all energy states. Regardless of the price for a barrel of oil, the driller pays a dime per barrel for the severance tax and another dime in a conservation fee. Whether oil is selling for $35 or $150 per barrel, Ohio is getting just 20 cents. The severance tax on natural gas is also low, at 3 cents (including a half-cent conservation fee) per thousand cubic feet (mcf). Whether natural gas is selling for $10.00 or $2.28 per mcf, Ohio is getting just 3 cents. 

Kasich’s proposal
Gov. John Kasich proposes raising rates on fracked oil and natural gas liquids to 4 percent with a tax break that lowers it to 1.5 percent for up to 24 months. Fracked dry gas would be taxed at 1 percent. A small share of the revenues – no more than what would be raised at today’s low rates – would be used for oversight and regulation of the industry. The rest would be given back in income tax cuts.

Rates should be higher
Kasich’s proposal could raise up to a billion dollars over four years. A 5 percent severance tax rate (on all production, no loopholes) could generate up to $1.8 billion over the same time period. An additional 2.5 percent could raise another $900 million. None of this is enough to restore the nearly $2 billion cut from Ohio’s K-12 schools and the $1 billion cut from communities for services ranging from pothole repair to senior centers. But a severance tax at 5 percent or 7.5 percent could start to restore jobs and investment in local communities and local services.

Tax loopholes should be eliminated
Kasich’s proposal includes tax loopholes that allow frackers to recover the costs of drilling. The tax break lowers the severance tax rate on oil and natural gas liquids for the first year, and up to another 12 months, from 4 percent to 1.5 percent. This loophole may cost as much as $603 million over four years.

Tax cuts are the wrong use
The state has lost 275,000 jobs since 2005, when the Ohio legislature cut the state income tax by more than 20 percent. Kasich proposes using severance tax revenues for further income tax cuts, an approach that has not created jobs in the past. Furthermore, most families won’t benefit from Kasich’s proposed tax cuts, which would average only $42 for median-income Ohioans, but would give $2,300 to the top 1 percent, those averaging incomes of $321,000 a year. Revenues should be used instead to keep cops on the beat, firehouses open, teachers in the classroom and to maintain vital services that families depend on, like senior centers, community mental health, trash pick-up, clean water and pothole repair.

Local communities impacted by drilling face a treadmill of costs
The Kasich proposal for local impact fees would require well owners to make an up-front payment of $25,000 (based on estimates of needs related to roads) but would require that fee to be paid back.  This ignores not only many costs associated with drilling activity, which range from roads to health care, schools, emergency services, and waste disposal, but also the recurrence of drilling impacts related to repeated well stimulation. Horizontal drilling has unusual costs that recur as the well is stimulated over and over: swarms of workers, truckloads of supplies, well preparation, wastewater disposal or recycling. The “treadmill” of drilling and fracking activity means heightened and more continuous industrial impacts on rural infrastructure and stress on community services. As a result, communities impacted by drilling will need resources on an ongoing basis. The severance tax is the tool of public finance used to assist impacted communities in states with significant energy production. For example, Colorado provides 63 percent of its severance tax to local government.  Montana provides 39 percent; North Dakota, 11 percent; Wyoming, 35 percent.

Drillers are going to drill if the resource is there
The oil and gas industry is vociferous in opposition to Kasich’s proposal. But imposition of the tax won’t discourage oil companies that have spent billions on land leases. The leases already create a contractual obligation to drill. Leases expire after three to five years and although they may be renewed, there is a cost to renewal. 

Recommendations 

• The tax rate on all oil and gas needs to be higher than 4 percent. A 5 percent severance tax rate would help restore local jobs, schools and services and assist impacted communities. An additional 2.5 percent should be used to create a permanent fund dedicated to economic recovery from the drilling and to provide for environmental risk.
• There should be no tax breaks. Loopholes for cost recovery such as those in Kasich’s proposal were first used as horizontal drilling and pressurized extraction were under development.  Other states have such breaks, but they reflect years of legislative fights that oil company lobbyists won. There is no reason to adopt the outcomes of those battles in a new tax structure in Ohio.
• All production from the well – dry gas, wet gas and oil – should be taxed at the same rate. Natural gas may be low in cost now, but it has been high in the recent past. The proposed severance tax fee is based on percentage, so when taxation falls with market value.
• Funds should not be used for tax cuts.  Revenues should be used to restore services, help local communities with drilling costs and start building a diversified economy when wells run dry.

Introduction
The severance tax is used to ensure that the wealth of the land, mined and sold by private interests, provides lasting benefits to the people of a region or state. As oil and gas drilling expands in Ohio, Gov. John Kasich has proposed boosting the severance tax, a good idea. However, the proposed rates are too low; tax breaks would erode collections yet don’t interest a defiant industry; and the complexity mirrors states where energy taxes have been distorted by decades of legislative wrangling. There’s much to debate, but Ohio’s House of Representatives, reluctant to even talk about taxes, stripped the proposal from the budget bill it passed in April and sent over to the Senate. 

Last year’s budget cuts undermined the economic recovery by causing thousands of layoffs in schools and local government. An adequate severance tax could help restore jobs, lower class size, open closed senior centers and turn streetlights back on. But even if the legislature would consider it, Kasich wants to use the money for more tax cuts, and tax cuts that favor the wealthy – again. Middle-income households would get an average of just $42 per year under the Kasich proposal; wealthy households averaging $321,000 in income would get $2,300.[1]

Adequate taxation of mineral wealth is a responsible recommendation the legislature should embrace, the sooner, the better. A natural resource boom doesn’t last. A severance tax provides for the present and prepares for a future after the minerals are depleted. The oil companies’ land leases to drill expire within 3 to 5 years: now is the time to act.

Depending on market prices, a 5 percent severance tax rate on oil and gas production – with no loopholes – could yield up to $1.8 billion over four years for job creation, economic recovery and restoration of investment in Ohio.[2]  Investment funds rise to  $2.7 billion with a rate of 7.5 percent.  This could help repair some – but not all – of the damage of the slashing of $2 billion cut to schools, the $1 billion cut to communities, and a $500 million cut to instruction in colleges and universities.  Revenues should be used to restore jobs, local economies and services and to help communities impacted by the drilling boom. Prudent leadership would use some of the money for a permanent fund to lay the groundwork for a strong, diversified economy after the drillers are gone, and to establish a cushion in the case of liability if the air, water and/or soil are poisoned by drilling. 

What is a severance tax?
Citizens and businesses alike pay taxes to support civil society. The severance tax is different: it is the tax that allows the people to share in the wealth of natural resources removed forever from the land. In developing nations, valuable minerals and natural resources may be abundant and vigorously extracted, but the people often remain poor. In The United States, the wealth reserved through the severance tax is typically used to boost opportunity: to strengthen schools, keep tuition low, build roads and bridges, plan for a diversified economic future, and protect communities from environmental degradation that is often a part of the extractive process.

What is the current severance tax on natural gas and oil in Ohio?
Ohio’s severance taxes on oil and gas are among the lowest of states that produce energy.[3] Regardless of the selling price for a barrel of oil, the driller pays a dime per barrel for the severance tax and another in a conservation fee. Whether oil is selling for $35 or $150 per barrel, Ohio is getting just 20 cents. The severance tax on natural gas is also low, at 3 cents (including a half cent conservation fee) per thousand cubic feet (mcf).  Whether natural gas is selling for $10.00 or $2.28 per mcf, Ohio is getting just 3 cents. 

Kasich’s proposal for new severance taxes
The Kasich Administration’s proposal is complex, establishing new definitions based on type of well and setting taxes based on these new distinctions. It creates a distinction is between wells drilled with a horizontal bore and those with a vertical bore (“non-horizontal”). It distinguishes between dry natural gas and the more valuable natural gas liquids (‘wet gas’). Oil produced from conventional (non-horizontal) wells would see no change in severance tax. Most current natural gas wells would be exempted from any severance tax on production, wet or dry. The owner of a horizontal well would pay one severance tax rate on natural gas liquids and oil, and a different rate on dry natural gas.

Natural gas wells producing dry or “pipeline quality” gas
Kasich’s proposal would tax wet gas and dry gas separately.[4]

• Non-horizontal wells producing ‘dry’ natural gas and producing less than 10,000 cubic feet per day (referred to as 10 MCF) per day would no longer be taxed.  This exempts 44,500 wells from the severance tax, 90 percent of Ohio’s current natural gas wells.[5]
• Wells producing more than 10 MCF daily either through conventional wells or horizontal wells would be taxed at 1 percent of value with a cap of 3 cents per MCF.[6]
• Wells that produce through horizontal drilling will be taxed at 1 percent of value even if production is less than 10 MCF per day.
• Value will be based on metered volume of the gas in the quarter multiplied by the average of the daily closing spot “Henry Hub” prices for that quarter listed on the New York Mercantile Exchange.

Natural gas wells producing “wet’ gas
Some of the natural gas coming out of a well condenses into liquids that are processed into butane, ethane, propane, and others and used in chemical and plastics manufacturing.  Wet gas would be taxed at the same rate as oil under the Administration’s proposal.

• Wet or liquid natural gas from a horizontal well would be taxed at 4 percent of value.
• Value is based on metered volume multiplied by the average of the daily closing spot “Mont Belvieu” price for the condensate that quarter listed on the New York Mercantile Exchange.
• Producers of wet gas through horizontal wells may apply for a reduced rate of 1.5 percent during the initial 12 months of production, with extension if necessary up to 24 months, to recover the costs of drilling.
• Wet gases produced from non-horizontal wells would be exempted from the severance tax.

Oil wells

• Oil from horizontally drilled wells would be taxed at a rate of 4 percent of value.
• Value is based on metered volume multiplied by the average of the daily closing spot “WTI Cushing” (oil) prices for that quarter listed on the New York Mercantile Exchange.
• Producers of oil through horizontal wells may apply for a reduced rate of 1.5 percent during the initial 12 months of production, with extension if necessary to up to 24 months, to recover the costs of drilling.
• Non-horizontal oil wells would be taxed at the existing severance tax rate (10 cents per barrel for a severance tax and 10 cents per barrel for a conservation fee).

Appendix B contains tables that compare features of Ohio’s proposed system to other energy states.  The application of the tax specifically to natural gas liquids is a good feature of severance taxes in many states, and the Kasich administration is right to adopt this feature. Other aspects, like the tax breaks for cost recovery, immediately accede to the legislative victories of oil and gas lobbyists in other states and in earlier times. These concessions don’t acknowledge the fact that drillers who want to extract from Ohio’s shale-based resources will probably use horizontal drilling. 

How much money would the proposed severance tax raise?
The Kasich administration’s proposal will produce around $600 million to $1 billion dollars over the next four years depending on prices and use of tax breaks, according to simulations by the Ohio Department of Taxation.[7] At the lowest level, assuming low market prices for oil and gas and 24-months of tax breaks on oil and natural gas liquids, revenue collections under the administration’s proposal would raise $594 million over four years (Table 1; see Appendix A for prices, production and comparisons). This would replace only a little more than half the funds cut from local government for safety, street repair, and other essential services – in the two-year state budget. With higher market prices and use of the cost recovery tax break for only 12 months, the Kasich proposal would raise more than $1 billion over four years (Table 2).

Table 1 illustrates collections of severance tax under the Administration proposal if prices for oil and gas are less than they are at present.  Revenues come primarily from production of oil.   Although the revenues from natural gas over the next four years could be very helpful,[8] they are minimal compared to the estimates for oil. The cost recovery tax break, which brings the severance tax rate down to 1.5 percent instead of 4 percent, is assumed here to be used for the maximum time allowed, 24 months, and low market prices are assumed. Revenues are adjusted for fiscal year collections, which lag the calendar year by three quarters.[9]

The highest production of oil and gas happens in the first two years of production, so the cost recovery tax break can shelter income during peak production. [10] The price tag under the Kasich proposal could be as high as $603 million.[11]

Table 2 shows the high estimate revenue collections under the Kasich proposal.  This scenario assumes higher market prices and only 12 months of the cost recovery tax break.

Table 3 shows that if all production – oil, dry gas, wet gas – were taxed at a severance tax rate of 5 percent rate, with no tax breaks,  $1.5 to $1.8 billion in revenues could be generated in the next four years, depending on market prices. (See Appendix A as well.)

Table 4 shows that at a tax rate of 7.5 percent on all production, with no incentives, $2.3 billion to $2.7 billion could be raised over four years time.  

The value of oil and gas production from fracking in Ohio is projected to total between $45 and $54 billion dollars over four years. (See Appendix A, Tables 1-A and 2-A, for estimates of number of wells per year and annual production for the first 5 years of a well.) Figure 1, next page, shows that tax collections, at 7.5 percent, would represent a small share of total value.  

Gongwer Ohio quotes Gov. Kasich saying he could not “conceptualize or even imagine” why legislators would seek funding to restore local services and schools cut in his biennial budget.”[12] In fact, virtually every community has been hurt by budget cuts in the past few years, with more harm on the horizon. Children’s classrooms have become more crowded, trash collections are now bi-weekly in some communities, police and fire protection has been cut, potholes are not repaired and senior centers have been closed. New revenues could be used to replace those lost, to ensure that Ohio can provide the basics that have historically made this a good place to do business, raise a family, and be part of a community.

The oil and gas industry is vociferous in its opposition to the Kasich proposal. This is not unusual, as business usually fights taxation. But imposition of the tax won’t discourage oil companies that have spent billions on land leases. The leases already create a contractual obligation to drill, and expire after three to five years; although they may be renewed, there is a cost to renewal. Crain’s Cleveland Business interviewed attorneys representing landowners in Ohio’s growing oil patch, and concluded: “As a result of those potential costs, lawyers say, even if the state raises the taxes it collects on the production of Ohio’s gas and oil, the energy companies still will need to drill if they want to keep their leases and avoid paying for them all over again.”[13]

Natural resources are not footloose: where the resource is rich, the extraction company will drill or mine. Studies of the oil and gas industry over the past 40 years make clear that state tax rates have miniscule impact on oil and gas production. A University of Wyoming study found that a 2 percentage point reduction in the state’s oil severance tax would increase production by only 0.7 percent over 60 years while dramatically decreasing government revenue. However, the study also found that raising taxes had a negligible effect on production, and that “the main effects of the tax increase would be to dramatically increase Wyoming’s severance tax revenues and to reduce federal corporate income taxes paid by producers.”[14] A study in Utah found similar results; that even significant changes to severance tax rates had large impacts on government revenue, but very little effect on industry production.[15] A Penn State study found that every $100 million in severance tax imposed on oil and natural gas companies would create a “net gain” of more than 1,100 jobs and would slightly boost gross state product. The study found this was largely because the negative effects of the imposed severance tax on employment, output, and income did not offset the increased spending of severance tax revenue by state and local government.[16]

A proposal to strengthen the severance tax is needed in Ohio and the administration is right to offer one. However the Kasich administration’s proposal is too low, too complex, contains big tax loopholes, and plans to spend the revenue raised on an income tax cut that will mostly flow to the wealthiest. Figure 2 compares revenues that could be raised under the Kasich proposal, at 5 percent (without tax breaks) and at 7.5 percent (without tax breaks).[17] 

Although the Kasich plan has flaws, it is a step in the right direction. Unfortunately, the legislature has refused to consider the proposal. At a time that local governments and schools have just spent down their reserves and face a new and deeper round of cuts in the second year of the two-year state budget, legislators should be working to bring relief and restore jobs to communities. 

Proposed uses of funds
Under the Administration proposal, severance tax revenue from horizontal wells will be held in a new fund, the Horizontal Well Tax Fund. Revenues equaling what would be collected at current severance tax rates (3 cents per mcf of dry gas and 20 cents per barrel of oil) would be used for the regulation, oversight, and management of oil and gas resources and extraction by the Ohio Department of Natural resources. Extra revenue would be used for income tax cuts. (Figure 3.) 

If those income tax cuts were implemented, Ohio households in the middle quintile – around the median income – would see on average a yearly benefit of $42 in years that the income tax give-back fund is $500 million. In years that it is smaller, they would see less. Households in the top 1 percent – those making more than $321,000 per year – would see $2,300 on average as a result of the proposed income tax cut in years when the severance tax raises $500 million. This is 55 times what a household in the middle-income quintile would receive.[18] The state already has a mechanism under which income taxes are reduced if the rainy day fund is fully funded.[19] There is little reason to set out an additional mechanism to cut income taxes, particularly when the state is underfunding key services and remains a long way from having an adequate financial reserve.

Funding local services in impacted communities
Our 2011 report, Beyond the Boom: Ensuring Adequate Payment for Mineral Wealth Extraction, recommended that severance tax proceeds be used to deal with high local costs associated with drilling. Kasich’s proposal adds a refundable $25,000 fee per well for local impact, calibrated to expenses related to roads, and it adds natural gas liquids to valuation of mineral reserves for property tax purposes. Property tax collections from mineral reserves has a significant lag, as a well must be drilled and production must commence and be evaluated before reserves are added to the property tax rolls; in addition, property tax collections lag by a year. By the time the local property tax collections are rising, the local impact fee must be paid back to the well owner. 

Fracking will impose new costs on communities. Horizontal drilling has unusual costs that recur as the well is stimulated over and over: swarms of workers, truckloads of supplies, well preparation, wastewater disposal or recycling. Moreover, oil wells in shale generate an initial rush of oil that declines quickly, meaning more wells need to be drilled to produce oil from shale compared to conventional sources. The “treadmill” of drilling and fracking activity means heightened and more continuous industrial impacts on rural infrastructure and stress on community services.[20]  Major energy states use the severance tax to provide local resources to help with the impact of drilling.  Colorado provides 63 percent of the severance tax to local government. Montana provides 39 percent; North Dakota, 11 percent; Wyoming, 35 percent.[21]

Other states have found it necessary to provide resources to impacted communities because the drilling has caused local costs that go beyond road upgrading and repair. The Pennsylvania Cooperative Extension program looked at communities impacted by drilling in the Marcellus Shale and found 43 percent of communities reported an increase in population and 39 percent saw higher school enrollment; 30 percent saw a rise in use of emergency services. Conflict was up in some places (21 percent); crime rose in some (17 percent). Environmental issues around problems in water quality (17 percent) and air quality (13 percent) and other issues (17 percent) were reported.[22] Road maintenance increased for 65 percent of responding communities. 

There is no room in Kasich’s local impact fee proposal to address the repeated treadmill of well stimulation. Given the ongoing impact associated with horizontal wells, and impacts that go beyond roads, different solutions need to be considered. A non-refundable up-front fee, combined with additional support from the severance tax itself, should be part of the solution for Ohio.

A permanent fund
Revenues from an adequate severance tax should be used to restore state services and to provide for impacted communities, but it should also provide for some very specific, long-term needs:

• To underwrite long-term planning for a diversified economy in impacted communities and regions after the minerals are depleted, and;
• To provide a cushion for risk management, in the case of sudden and unexpected liability in water contamination, poisoning of soil, animals, and land. 

Seven of the nation’s largest energy states use a financing tool referred to as a permanent fund to address this kind of financing expense. The state should use severance tax revenues to establish a permanent fund for these purposes and use combined earnings and ongoing revenues to address redevelopment and other specific needs emerging from or after the drilling or mining.

Summary
The Kasich administration proposal to increase the severance tax is a step in the right direction, but the proposed rates are too low, the structure is too complex, and there are too many tax breaks that erode collections. The proposed use: for income tax cuts – ignores the pressing needs of the state, local communities and places impacted by drilling.

The industry will drill where the resources lie. The huge volume of land leases already signed indicates the resource is here. It is the responsibility of elected leadership to strike the best deal that they can, and to use the funds as severance taxes are used around the nation: To boost the economy, create jobs, help impacted communities and build a brighter future for all Ohioans.

Recommendations 

• The tax rate on all oil and gas needs to be higher than 4 percent. A 5 percent severance tax rate should restore local jobs, schools and services and help impacted communities.  An additional 2.5 percent should be used to create a permanent fund – structured like the severance tax but dedicated to economic recovery from the drilling and to fully fund a comprehensive risk management strategy.
• There should be no tax breaks. Tax breaks for cost recovery were first used as horizontal drilling and pressurized extraction were under development.  Other states have such breaks, but they reflect years of legislative fights that oil company lobbyists won.  There is no reason to adopt the outcomes of those battles in a new tax structure in Ohio.
• All production from the well – dry gas, wet gas and oil – should be taxed at the same rate.
• Funds should not be used for tax cuts at a time when spending cuts have led to over crowded classrooms, lost jobs, higher university tuition, and sharp cuts to health and human services -  like the pending $6.2 million cut to drug and alcohol addiction services.
• Revenues should be reinvested to restore local jobs and services, fostering economic recovery and investing in the future.
• Revenues should be allocated to support local communities with up-front costs of drilling and to build a diversified economy for after the drilling is done.
• Revenues should fund a permanent fund to prepare for the future and to finance a robust risk management strategy.

Acknowledgements
Special thanks to Tim Krueger, research assistant, for double-checking the numbers in this report, and to Zach Schiller, research director, for his comments and suggestions. As always, any errors are the sole responsibility of the author.