“We have become to some extent, I think, economic hypochondriacs. You get a wiggle in a statistic...and everyone runs to get the thermometer.”
Paul McCracken
Former member, US Council of Economic Advisors

First, here is a little background on this issue: On February 11th, the House and Senate approved House Bill 697 (H.B. 697) after deciding that an archaic, never used, and questionable constitutional provision could be used to get the issue through with a majority vote. The final vote was 59-39, with one member absent due to a life threatening illness. This places a one-cent sales tax increase on the May 5th ballot. I voted against the bill.

Through H.B. 697, the estimated $1.1 billion that would be raised by a one-cent hike in the state's present five-cent sales and use tax would be split 50% for support for school operations, equipment and facilities and 50% for residential property tax relief. As written, the proposal makes a vague reference to providing homestead property tax relief and reserves the right of the Legislature to determine the level and qualifying criteria for the additional tax relief, which has caused some concern in many quarters.

The $550 million in additional funds for schools will be apportioned among Ohio's 611 school districts based upon a revised school funding formula contained in House Bill 650 (H.B. 650), which was recently signed by Governor George V. Voinovich.

I should take a moment and discuss H.B. 650. The Supreme Court stated in the DeRolph decision that Ohio must have a system where primary and secondary education are “first at the public trough”, and that we could not fund primary and secondary education in a residual manner in the future. By this, they meant it appears primary and secondary education get the “leftovers” in the state budget. H.B. 650 sets a rational basis for determining how much each child in Ohio’s public schools must receive from local and state dollars. The legislation also sets up a phase-in period of four years. This coming fiscal year, and for the next three fiscal years, there will be an annual 7% increase to public schools in Ohio. Attached please find an analysis of HB 650.

The tax increase is a premature method of solving the issue of funding. Here are some of the reasons why this is true:

Ohio has a $863 million rainy day fund. Proponents of the tax say that this amount of money will only last the state 17 days, in the case of a recession. This is only true if all other sources of revenue dry up. In other words, this would only occur if no one in the state of Ohio was issued their paychecks, and therefore, no one was able to buy anything. Frankly, a total economic collapse would have to occur in order for the rainy day fund to run out in this short amount of time. If that happens, I doubt we will be concerned about a rainy day fund, anyway. Instead, during a recession there is a shortfall below expectations on the revenue side. For example, right now the state plans to have an income of, and plans to spend about $49 million per day. In a recession more severe than the one we had in 1991, our income would be about $2 million a day short. Therefore our rainy day fund would last about 431 days.

In addition, we are experiencing revenue above expectations for this fiscal year of $155 million, or about $750,000 per day. Also, our expenditures are about $253 million less than expected this fiscal year, or about $1.2 million a day. Both are very positive for the state.

In a recession, certain expenditures rise, including welfare and higher education. In August of 1997, the state legislature changed the welfare system. One of the things we did was change the law so that if you went off welfare you could keep your medical card for one calendar year. Last year our welfare rolls plummeted, so that means sometime this summer our costs for medical cards will also plummet. Therefore, we could be looking at hundreds of millions of dollars in lower costs. (However, keep in mind that 60% of our Medicaid money goes to the elderly population, and in all honesty, sometime around the years 2010-2015 these costs could increase substantially. But the current, relatively new, PASSPORT program has begun to keep nursing home costs down by encouraging people to stay in their own homes much longer.)

You’ll also find attached a spreadsheet that outlines the government revenues and expenditures since 1975. There are several things to note. Generally speaking, revenue grows about 5% a year. (Remember when reading the spreadsheet that there was a 90% tax increase in 1983 followed by an oddly structured tax rebate. That tends to throw the flow.) The growth in revenue is at least partly caused by Ohio’s progressive income tax system pulling people into higher brackets by inflation. (Ohio’s income tax rate is ninth in the United States.) Note that on the attached spreadsheet, the 1998 growth is set at 2%. Normally this is set at 5%. This change is due to the estimated 0% growth tax revenue streams and bookkeeping shifts dealing with the income tax reduction factor. The Legislative Budget Office agrees that the 2% number needs to be increased substantially.

Please note that since and including 1994, higher education has been given increases far above inflation with student enrollment declining! Also, spending for primary and secondary education since 1990 has risen far above the rate of inflation with spending up 47% and inflation up 27%. The one-half of 1% cut that higher education took in HB 650 had no impact because the Board of Regents has both the largest monetary line item and the highest percent unused budget. (In other words, they always have more leftover money than any other agency.) The Board of Regents will never miss it, because they would not have spent it.

Let me also add a wrinkle to this whole debate on the voters determining a tax increase. A colleague of mine in Columbus told me he was voting “yes” on the tax increase ballot issue so that when the voters said “no”, it would tie the hands of the legislature in the future, so we would not try to impose future taxes. I think it odd that he would think to do policy in this manner, but he does open a line of thought. What happens if the tax passes, but a deep recession arrives and a new tax is proposed to continue funding certain programs like higher education? Wouldn’t it’s chances be hurt, as most people in Ohio would ask a variation of the question, “We gave you all that money, what did you waste it on?!? You told us it was going to education!!!” A legislature that now lacks the political will to discuss imposing a tax will have even less will to discuss the after effects.

Some of my colleagues are taking the attitude that we should let the voters decide. However, we are not a school board or township trustee organization. We are here to make hard decisions. We consult and confer with constituents, but the decisions and the votes, right or wrong, are ours. To think otherwise is, frankly, intellectually dishonest. That is governing by polling.

I should also mention that for the 27 border counties, this 1% sales tax will be devastating for their retail establishments when they are unable to compete with the lower sales taxes in states bordering Ohio. The schools in these communities will be hurt by the loss of inventory tax revenue when these retail stores have to close or move to states like Indiana or Pennsylvania. Estimates show that Ohio will lose 90,000 jobs and unemployment will rise from 4.6% to 5.2%.

There is also a paradox in this issue. The sales tax is meant to help the poor schools, yet the poor, low income Ohioans are the ones who will end up paying the disproportionate cost for the sales tax. They have less disposable income than middle class Ohioans, and their pain will be greater. A vast number of them are not home owners, and will therefore not receive the residential property tax relief. So more money is coming out of their pockets than the middle and high income school districts, therefore defeating its own purpose. Whether the sales tax succeeds or fails, schools will end up getting more money, because HB 650 spells out that the primary and secondary education line items will receive top priority in all future budget debates.

Finally, I want to mention the management style of one of my favorite presidents, Ike Eisenhower. He always believed that you should study all problems thoroughly and explore all options. You should not make any decisions until you have to make them. You should not have to look back or second guess your decision if you take the time to make the thorough, right one. Based on all that I know and don’t know about this issue, the call for raising taxes is at this time premature.

Sincerely,

Gene Krebs
State Representative
60th House District