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Ohio budget 101: a basic overview

December 16, 2016

Ohio budget 101: a basic overview

December 16, 2016

An overview of the budget process, what goes into it and how money is spent

Ohio has four separate legislatively-enacted budgets.[1] The operating budget receives the most attention. It underpins most of the basic services provided by state government in education, agriculture, natural resources, commerce, health, human services, corrections and more.

Ohio’s legislative body, the General Assembly, has two chambers: The House of Representatives and the Senate. Ohio elects state representatives to 2-year terms and senators to 4-year terms. The 132nd General Assembly commences in 2017 with deliberations on a 2-year budget for state fiscal years 2018-19 (a fiscal year runs from July 1 to June 30. When we refer to years in this paper, we are referring to fiscal years, unless otherwise noted).

Ohio’s current budget, including all funds, adds up to $128.3 billion for the biennial (2-year) budget period used by the state. Broadly speaking, it is made up of three types of funds:

  • Federal funds make up 18 percent of the budget ($23.3 billion).
  • General Revenue Funds make up 55 percent of the budget ($70 billion). These come from Ohio taxes and federal Medicaid dollars.
  • Funds from fees or special taxes make up 27 percent of the budget ($35 billion).

Ohio budget 101: a basic overview

Ohio’s budget becomes law through legislation that lays out how much money will be used, and for what purpose. In other words, the budget bill “appropriates” funds for programs. The Governor starts preparing the budget about a year before it becomes law. This year, the governor’s version of the next budget, the “Executive Budget,” will be (electronically) delivered to the House of Representatives on January 31, 2017. Legislators will use this as the basis for a new bill. They’ll assign it a number and refer it to committees. The public will be invited to testify. They will pass the House budget bill toward the end of April and send it to the Senate for the same process. The Senate’s version will be passed by early June. A conference committee of Senators and Representatives will meet to settle the differences between the versions. It will be signed into law by the Governor by midnight, June 30 and will go into effect on July 1.

Ohio budget 101: a basic overview

Figure 2 shows some distinctions within the three broad fund categories shown in Figure 1.

  • Overall, 37 percent of the total (“All Funds”) budget is made up of federal funds.
  • Another 11 percent of the state’s budget is made up of “fiduciary funds,” which are collected by the state but passed through to other entities.
  • The focus of budget analysis is the 35 percent comprised of state taxpayer dollars in the General Revenue Fund (“GRF”).
  • State-only GRF funds totaled $45.4 billion over the current, 2-year state budget: $21.9 billion in state fiscal year (FY) 2016 and $23.5 billion in FY 2017.

Public Investments: Where Does the Money Go?

Ohio budget 101: a basic overview

Figure 3 shows investment by major category in the $46 billion GRF of the current budget.

  • Education receives the largest investment of state dollars in the GRF. The state spends $20.8 billion in primary and secondary education during the 2-year budget, and $5 billion in higher education (about half is spent in each year of Ohio’s biennial budget).
  • Health is the second largest investment of state-source GRF dollars. Medicaid covers a quarter of Ohioans – about 3 million people – and is the state’s largest insurer. The state’s share of Medicaid in the GRF is almost $10 million (about half in each year of the budget).[2]
  • Though not a GRF expenditure, Ohio’s tax expenditure budget (see tables 2 and 3) is about the same size as the state investment in K-12 education, on a yearly basis.

State expenditures as a share of the economy

State GRF spending has been constant relative to the state economy for years, hovering between 3.9 percent and 4.5 percent of gross domestic product since 2006 (Figure 4).

Ohio budget 101: a basic overview

Figure 5 shows that state investments declined sharply in 2011. Adjusted for inflation, expenditures are almost back to the level they were a decade ago, in the recession.

Ohio budget 101: a basic overview

The next set of figures show 10-year investment in major categories of the GRF budget between state fiscal year (FY) 2008, the first full year of the recession, and FY 2017.

Early education (preschool, pre-K)

Funding for preschool increased in the current budget, but we have a long way to go to catch up with other states.[3]

Ohio budget 101: a basic overview

  • Just 5 percent of Ohio’s low-income 4-year olds and 2 percent of 3-year-olds attend pre-school. Nationally, it’s 29 percent and 5 percent, respectively.[4]
  • Ohio spends $4,000 on preschool per-pupil, compared to $4,521 nationally – affecting quality.
  • This is part of a much longer trend: By 2012, Ohio’s legislators had disinvested from early education more than any other state.[5]

Public Childcare

Ohio’s public childcare program relies mostly on federal dollars. With more state investment, we could do better.

Ohio budget 101: a basic overview

  • In 2010, families earning about $40,000 a year for a parent with two kids (200 percent of the federal poverty line) were eligible for childcare assistance; today it has dropped to about $26,200 (130 percent of poverty).[6]
  • It is easier to get childcare aid in 44 other states than in Ohio.[7]
  • Reimbursement for public childcare is very low, affecting quality.[8]

Secondary Education

Funding for K-12 was deeply cut in the budget for 2012-13, with restoration over the next two budgets. Figure 8 shows core, formula funding over time, which is slightly less, adjusted for inflation, than in 2008, although overall K-12 funding has been restored.

Ohio budget 101: a basic overview

  • Core funding that goes out to schools remains nearly $600 million below what is was in 2010, adjusted for inflation, although agency appropriations will be 6.9 percent above 2008 by 2017, in inflation-adjusted dollars.
  • A decade of boom and bust funding at the district level has left schools cautious about rebuilding.[9]
  • A legacy of harm, from pay-to-play[10] to reduction in librarians and other educators, persists.[11]

Higher Education

State investment in higher education fell with the recession and has not been completely restored.

Ohio budget 101: a basic overview

  • Funding remains about $500 million below what it was a decade ago (adjusted for inflation).
  • Ohio’s tuition at a 4-year public university is, on average, higher than in 36 other states and the District of Columbia. Tuition at 2-year campuses is pricier, on average, than in 38 other states and Washington, D.C.[12]

Medicaid

Medicaid spending has increased, but largely through expenditure of federal dollars.

Ohio budget 101: a basic overview

  • Medicaid, Ohio’s largest insurer, covers about 3 million people, or a quarter of all residents.
  • Ohio is among the states with the highest share of insured residents, in part because of Medicaid expansion. Almost 700,000 Ohioans gained coverage through Medicaid expansion.
  • State spending has not grown as rapidly as caseload because the federal government has covered the cost of Medicaid expansion. This drops to 95 percent next year and levels off at 90 percent by 2020.[13]

Health and Human Services (Non-Medicaid)

Non-Medicaid health and human service funding in the GRF has continued a long decline that started almost two decades ago.

Ohio budget 101: a basic overview

  • Non-Medicaid human service spending hit a low point in 2013, $680 million below inflation-adjusted funding in 2008.
  • Local human service providers feel the cuts most deeply. Other local government cuts compound the harm.
  • For example, state share of the Community Service Block Grant has not been restored; as a result, senior nutrition programs like “Meals on Wheels” have been curtailed in some places.[14]

Local Government

Local governments receive about $1 billion less in inflation-adjusted funds in 2017 than a decade earlier due to cuts in revenues sharing and state-imposed changes in revenue sources.

Ohio budget 101: a basic overview

  • The Local Government Fund was cut in half, tax reimbursements phased out, and the estate tax eliminated.
  • Casino revenues and other new sources have not compensated for loss in many counties and virtually all cities.[15]

Public Transit

GRF funding for Public Transit peaked in 2000-2001 at about $40 million a year (not adjusted for inflation).[16] Since then, GRF funding for transit has trended downward, particularly in recent years.

Ohio budget 101: a basic overview

  • The Ohio Department of Transportation estimates the state should provide $120 million starting in 2015 to meet market demand for public transit.[17]
  • The Governor’s Workgroup to Reduce Reliance on Public Assistance identified lack of transportation as a major barrier to employment in Ohio.[18]

Corrections

Corrections funding has fallen by $150 million over the past decade.

Ohio budget 101: a basic overview

  • The rate of overcrowding in Ohio’s state prisons increased from 114.8 percent in 2005 to 132.1 percent in 2016.[19]
  • Ohio’s prison population reached 51,064 in November, 2016 – down slightly from its peak at 51,273 in 2008.[20]
  • The U.S. Supreme Court ordered California to reduce crowding to 137.5 percent of capacity, not much higher than where we now are in Ohio.[21]

Where does the money come from: Revenue sources

In 2016, almost one-third of Ohio’s GRF revenues came from federal funds. The pie chart in Figure 15 includes the federal revenues in our budget.

Ohio budget 101: a basic overview

  • The sales tax constitutes the largest source of state funds, providing 29 percent of GRF revenues.
  • Personal income tax, which used to be the largest source of Ohio’s GRF funding, now generates 23 percent of revenue.
  • Ohio is one of just six states without a corporate income tax. Ohio’s general business tax, the Commercial Activity Tax (CAT) on gross receipts, accounts for just 3.5 percent of the GRF (some CAT revenues go to uses that are not in the GRF).

State Revenue Sources

Figure 16 shows state-only revenues.

Ohio budget 101: a basic overview

  • In 2017, the sales and use tax will make up 46 percent of state-source revenues in the GRF. Its share has grown by 7 percentage points since 2010. The personal income tax has shrunk from 40 percent in 2010 to 36 percent in 2017.
  • The sales tax weighs heavier on low-income people who spend a higher proportion of their income than wealthier earners.

Growing Inequity

As state tax policy has changed, Ohio’s taxes are becoming more inequitable. Figure 17 shows state and local taxes as a share of income by income group.[22]

Ohio budget 101: a basic overview

  • Those making the least money – the bottom fifth of the income spectrum – pay about twice the share of income in state and local taxes compared to the richest 1 percent.
  • Non-income taxes such as sales and property tax, take almost 12 percent of the income of the bottom fifth of taxpayers. The wealthiest fifth, on the other hand, pay just more than 3 percent of their income in the same taxes.
  • The state personal income tax helps balance the inequity, but only partly. The bottom fifth of earners pay just 0.2 percent of their income in state personal income tax, but the wealthiest 1 percent pay 2.8 percent in state personal income tax.

Tax policy: cuts and breaks

In the current budget, the General Assembly reduced personal income tax rates and expanded a tax break for business owners. Together, these changes will drain billions of dollars in revenue from the state system over the next few years. The legislature paid for these tax cuts in two ways: by using revenue the state expects to be generated from projected growth over the next two years, and by raising the cigarette tax and means-testing a couple of small income-tax credits.

Ohio budget 101: a basic overview

The net result is a further shift in who pays Ohio’s taxes, so that each year affluent residents on average pay thousands of dollars less; middle-income Ohioans see tax cuts of about $20; and some of Ohio’s poorest residents pay an average of $20 more than they have in the past. Even those making between $58,000 and $89,000 would receive an average annual income-tax cut of just $65.

The cost of tax policy changes

Figure 18 shows the cost of the tax changes during the 2016-17 budget period: a net $1.9 billion.

Ohio budget 101: a basic overview

  • The 35-cent cigarette tax increase cuts the rate of smoking, which saves lives, but as a flat tax, it falls most heavily on the lowest-income Ohioans.
  • The bottom four-fifths of Ohio residents will get just 15 percent of the value of the tax cuts.
  • The top fifth gets the other 85 percent.

Who Benefits?

Ohio has been cutting income taxes since 2005. These and other changes have reduced revenue available to invest by more than $3 billion a year.

Ohio budget 101: a basic overview

  • Between 2005 and 2014, as rates on the income tax have been cut and other changes made, the top 1 percent saw taxes reduced, on average, by more than $20,000 per year.
  • The poorest families paid more: the bottom fifth of earners paid, on average, $138 per year more in state and local taxes.
  • This is a trend: in which the wealthiest see large tax cuts and the poorest pay more, has continued for more than a decade in Ohio.

How does Ohio compare with other states?

Ohio budget 101: a basic overview

  • For all of the ongoing tax cuts at the state level, Ohio Department of Taxation’s data shows Ohio’s state and local taxes are in line with national averages.
  • Ohio ranked 25th in state and local taxes per capita (per-person in fiscal year 2012-13, the most recent year for which the Department of Taxation has data available). At $4,275, this was slightly below the national average of $4,604.
  • Ohio ranked 32nd in state and local taxes as a share of personal income. Yet at 5.9 percent, this was virtually the same as the national average of 6.1 percent.
  • Most states have very similar rates, grouped around the national average.

Ohio budget 101: a basic overview

In some budget years, state legislators have demonstrated concern about inequity in Ohio’s state and local tax system. In the budget of 2014-15, legislators implemented an earned income tax credit, which reduces the weight of taxes on poor working families with children. Although the new state EITC was doubled in the course of that budget, it remains smaller than the national average; it is capped at earnings of $20,000 a year and it is not refundable, so it provides little benefit to many of the lowest-income Ohioans. Almost every other state with an EITC makes theirs refundable.

Spending through the tax code

Ohio’s legislature is generous with tax breaks.

Ohio budget 101: a basic overview

  • In 2017, the state will spend the same amount on tax exemptions, credits and deductions (known as “tax expenditures” because they represent spending through the tax code) as on core (formula) funding for K-12 schools.
  • Some tax breaks are helpful to people of modest means: sales taxes are not imposed on groceries in Ohio. Prescription drugs are not taxed.
  • Business tax breaks are intended to encourage job creation. But many of them have not been reviewed to see if they are effective. House Bill 9, passed in December of 2016, will institute a review process for the first time.

Ohio budget 101: a basic overview

Ohio’s legislature has prioritized tax breaks and tax cuts. The claimed rationale has been that the tax cuts would generate job growth.

  • Ohio’s job growth has been slower than the nation’s. The nation’s employment base has expanded by 8.2 percent between June 2005 – when a big round of Ohio tax cutting began – and October of 2016. Ohio jobs, by contrast, have grown just 1.5 percent.
  • Ohio is sharing in the national economic expansion, but the state tax and budget policies that promised to boost job growth have not changed our economy’s underperformance.

Tax cuts and tax breaks have been prioritized instead of investment and upkeep of critical public services. As a result, college tuition is too high. There are not enough pre-school slots for low-income children. Deep cuts in state aid to local governments has slowed recovery in many communities.

The budget for 2018-19 presents the opportunity to change policies and start rebuilding. Expanded public transportation can widen the labor pool for employers and lower costs for working families. Better funding for education — from more pre-school to college — can expand opportunity and boost competitiveness. Restoring local government funds can help communities slow the drug epidemic and restore blighted neighborhoods and property values. The state could afford to do this by eliminating tax breaks that lack economic merit, restoring top income-tax rates and modernizing tax policy to harness new and emerging sectors.


Sources

[1] Ohio’s general assembly passes a separate budget for transportation, for capital expenditures, for the Bureau of Workers Compensation and for the operating budget.

[2] Although Medicaid comes in second in state GRF funds, federal matching dollars make it the single largest expenditure in the all-funds budget, accounting for 37 percent of the total budget at $46.7 billion in FY 2016-17.

[3] Ohio is the seventh largest state, yet has far fewer pre-school slots than other large states, like California, Texas, Illinois, Pennsylvania, Michigan and Georgia. See Wendy Patton, “Ohio’s Childcare Program Still Needs Improvement,” Policy Matters Ohio, November 16, 2016 at http://www.policymattersohio.org/childcare-nov2016

[4] State of Preschool, 2015, National Center for Early Education Research, Rutgers University at http://nieer.org/wp-content/uploads/2016/05/Ohio_2015_rev1.pdf

[5] Jennifer Smith Richards, “Drop in public pre-school is the biggest in the nation,” The Columbus Dispatch, April 11, 2012 at http://www.dispatch.com/content/stories/local/2012/04/11/drop-in-public-preschoolers-in-ohio-is-biggest-in-nation.html

[6] Wendy Patton, “Ohio’s Childcare Program Still Needs Improvement,” Policy Matters Ohio, November 16, 2016 at http://www.policymattersohio.org/childcare-nov2016

[7] National Women’s Law Center, “State Childcare Assistance Policies 2015” at https://nwlc.org/wp-content/uploads/2015/11/CC_RP_Building_Blocks_Assistance_Policies_2015.pdf

[8] Ohio has among the largest gaps between what the state pays for infant care and the market rate, and state payment for toddler care and market rate. See appendix tables in National Women’s Law Center, Op.Cit.

[9] Wendy Patton, “Ohio Schools Cautiously Rebuild,” Policy Matters Ohio, 4/2015 at http://www.policymattersohio.org/wp-content/uploads/2015/04/Ohio-schools-cautiously-rebuild-AH.pdf

[10] Jackie Borchardt, “Ohio schools pressured to end pay-to-play fees, Clevealnd.com, 2/26/2016 at “http://www.cleveland.com/open/index.ssf/2016/02/ohio_schools_pressured_to_redu.html

[11] Wendy Patton, “Ohio Schools Cautiously Rebuild,” Op.Cit.

[12] College Board, Tuition and fees by sector and state over time (Table 5) at https://trends.collegeboard.org/college-pricing/figures-tables/tuition-fees-sector-state-over-time

[13] Expanding Medicaid in Ohio: Analysis of Likely Effects, Health Policy Institute of Ohio, March 3, 2013 at http://www.healthpolicyohio.org/expanding-medicaid-in-ohio-analysis-of-likely-effects/

[14] Area Agency on Aging Action Alert at http://www.ohioaging.org/Pages/Advocacy%20Advisory%20Alerts

[15] Wendy Patton, “State Cuts Still Hurting Local Government in Ohio,” Policy Matters Ohio, December 2016 at www.policymattersohio.gov.

[16] Ohio Legislative Services Commission budgets in detail, Ohio Department of Transportation annual fiscal reports.

[17] Ohio Department of Transportation, Ohio Statewide Transit Needs Study, 2015 at http://www.dot.state.oh.us/Divisions/Planning/Transit/TransitNeedsStudy/Documents/FindingsSnapshotLetterSize.pdf

[18] Workgroup to Reduce Reliance on Public Assistance Report to Governor John R. Kasich and the Ohio General Assembly April 15, 2015 at http://humanservices.ohio.gov/WorkArea/DownloadAsset.aspx?id=2147636202

[19] DRC Population Correctional Institution Inspection Committee, Ohio Department of Corrections and Rehabilitation, May 2016 at http://www.ciic.state.oh.us/docs/Population%20Brief%202016.pdf

[20] Current population taken from Ohio Department of Rehab ilitation and Corrections (ODRC) Weekly Population Counts, November 14, 2016 at http://www.drc.ohio.gov/Portals/0/Reentry/Reports/Weekly%20Population/11-14-16.pdf?ver=2016-11-16-135455-207. Highest ever figure taken from ODRC Monthly Fact Sheet for November at http://www.drc.ohio.gov/monthly-fact-sheets

[21] Sara Mayeau, “The unconstitutional horrors of prison overcrowding,” Newsweek, May 22, 2105 at http://www.newsweek.com/unconstitutional-horrors-prison-overcrowding-315640

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