Saving Ohio’s Services:
AFSCME Ohio’s Revenue Options To Fix the State Budget Crisis
A Revenue Crisis. Ohio’s state budget picture is grim. The state has already come up
$3.5 billion short during this biennium, and faces another $720 million shortfall to make
up before June 30. The next biennium looks just as bad, with deficits predicted as great
as $4 billion.
The budget shortfall is largely a result of the national economic recession and tax cuts
enacted during the economic boom of the 1990s. Now that the economy has come back
to earth, the true cost of those cuts to the state and local jurisdictions is clear.
Furthermore, no economic revival is going to rescue Ohio’s structural imbalance in the
near future. The economic recovery’s timeline is uncertain, and resumed growth will not
benefit state budgets for 12 to 18 months after it begins. Plus, the state will have tapped
all of its one-time resources to balance this year’s budget.
The Impact of Budget Cuts. Budget cuts have already had a significant impact on state
services, but the full impact has yet to be felt. The first cuts were focused on needy
populations, such as the physically and mentally disabled, at-risk children and dislocated
workers, and areas where the impact is delayed, including corrections, natural resources
and local government aid. More recently, even popular services relied upon by many
state residents have been targeted. For example, double-digit tuition increases at state
colleges reflect state funding cuts of more than one hundred million dollars.
State workers have been impacted by the cuts. Ohio has already cut 3,000 state
employees in two years. Local services have also been affected by a freeze in statutory
aid payments in 2001. In response, some cities and counties are cutting back on services
and paring their workforces, while others have raised taxes and fees to compensate for
the loss of state funding.
Important public priorities were already insufficiently met when the state’s revenues
declined and caused budget shortfalls, especially the state’s education system. And state
and federal mandates have expanded in recent years, including Medicaid, minimum
prison sentences, the No Child Left Behind Act, and most recently, Homeland Security.
These mandates have increased costs for local governments while providing neither the
funds to pay for the services, nor even the freedom for local governments to raise those
AFSCME Ohio is comprised of three affiliated public employee labor unions representing over 115,000
members. The Ohio Association of Public School Employees (OAPSE) represents over 36,000 members in
Ohio's Schools, Libraries, MR/DD's and Head Start Agencies. The Ohio Civil Service Employees
Association (OCSEA) represents 38,000 State of Ohio and local government employees. AFSCME Ohio
Council 8 represents over 43,000 members in cities, counties, hospitals, universities and boards of
education. AFSCME is a 1.3 million member international labor union.
As great as the impact has been from cuts the state has already made, it does not compare
to the damage that will result from an additional $4 billion in budget cuts to meet the
coming deficit. Major cuts in K-12 and higher education, health care, and local services
such as public safety and sanitation will be unavo idable. These cuts would simply be
more than Ohioans can bear without serious disruption in public services and reduction in
Revenue Options. New revenues will be needed to avoid those cuts. A range of possible
solutions exists, including corporate taxes, income taxes and sales taxes. Other revenue
options can be included, but any solution must include some combination of these broad-
based taxes to have a serious impact on the state’s deficit.
Corporate income and franchise taxes ha ve declined for decades as a share of the state’s
budget. This means that an increasing proportion of the bill for state services is being
carried by individuals. To reverse this trend, Ohio can:
?? Require combined reporting to negate certain tax avoidance schemes, level the
playing field for small businesses and raise $200 million in new revenue.
?? Impose a 10 percent corporate income tax surcharge to generate an estimated $77
?? Eliminate the franchise tax cap on net worth which benefits only the largest corporate
Ohio’s personal income tax makes up a majority of the tax cuts granted in the 1990s. The
wealthy benefited most from those cuts. Yet the income tax is critical for Ohio to
generate adequate revenues in a fair and progressive manner. To help meet the state’s
budget deficit, Ohio can:
?? Raise income taxes on top income earners. A new top income tax rate of 8.5% on
joint incomes above $260,000, affecting the top one percent of taxpayers, would
generate $255 million.
?? Raise income taxes across-the-board. Increasing taxes on all taxpayers by 10 percent
would generate $900 million.
The sales tax is Ohio’s second- largest source of revenue. But Ohio’s sales tax, like that
of many states, is becoming obsolete because it is not keeping up with changes in the
economy, especially the shift from the consumption of largely taxed goods to largely
untaxed services. In addition, states are losing billions of dollars in sales tax revenue
from remote sales via mail order and e-commerce. To reverse this trend, Ohio can:
?? Expand the sales tax base to include a package of exempted goods and services to
generate $750 million.
?? Continue the effort to streamline state sales taxes, by implementing the Streamlined
Sales Tax agreement it agreed to in November. Together with other states, Ohio can
demonstrate that a simplified sales tax system will lower the collection burden and
facilitate Congressional action to give states authority to collect taxes on those sales.
Cost-Cutting Solutions. While a cuts-only approach to balancing the budget would be
harmful and unworkable, a close review of state spending is in order. We propose that
the state initiate reviews of spending on economic development incentives, consultants
and contractors, and closely examine the state workforce to determine whether agencies
are “top-heavy” with management employees.
Ohio’s Economic Development. Ohio can promote quality economic development and
improve Ohioans’ standard of living by investing in the state’s human resources,
infrastructure and technology. Development experts agree that these factors have a
greater influence on their success and profitability than marginally lower state and local
taxes. Ohio can do more to promote quality, long-term economic development by
protecting services and investments in its citizens and infrastructure than by seeking to
balance the budget shortfall with harmful cuts to those priorities.
A Revenue Crisis
Ohio’s state budget picture is grim. The state has already come up $3.5 billion short for
the FY02-03 biennium, and the state still must address another gap of up to $720 million
before June 30. What’s more, the FY04-05 biennium beginning next July 1 already faces
an estimated deficit as great as $4 billion.
Economic slowdown. The budget shortfall is largely a result of the national economic
recession and tax cuts enacted during the economic boom of the 1990s. However, Ohio
cannot expect an economic recovery to come to the state’s rescue in the near future. The
economy has kept forecasters waiting for recovery throughout all of 2002, but growth
remains sluggish. Even when the economy does revive, state revenues typically take 12
to 18 months to reflect economic improvement. The state’s leaders will have to balance
the current budget and present a balanced plan for the next two fiscal years well before
One-time resources. The state also has used nearly $3 billion in one-time resources to
close previous budget deficits. Governor Taft expects to use the last of the state’s Rainy
Day Fund to meet the current budget gap. The state has already used more than $600
million from its share of the national tobacco settlement – money which had been slated
to build schools and help people quit smoking, but which was needed instead to fill the
Budget Cuts Have Already Impacted Services to Ohioans
Budget cuts to meet the shortfall have already touched the lives of Ohioans, but the full
impact has yet to be felt. Many of the cuts have been focused on the disadvantaged, such
as at-risk children, dislocated workers and the disabled. Other cuts have been made in
areas where the impact takes time to develop, such as in corrections, natural resources
and local government aid. For example, the state has already closed one state prison,
Orient Correctional Institution, and plans to close at least one more. Already, the state’s
inmate population is running at 124 percent of capacity, up from 112 percent last year.
Corrections employees report that the understaffing is contributing to increased violence
in the prisons and threatening officer safety.
More recent cuts have affected the state’s most popular services. Cuts announced in July
2002 and in the Governor’s State of the State Address total one-half billion dollars,
?? $122 million cut from the State University system. Tuition increases at state colleges
and universities are this year up by 18 percent for new students and 9 percent for
others. This was half of what Ohio State sought in tuition increases, as the university
tries to make up a $73 million shortfall in funding. For the average family with
children in college, the increase in tuition has wiped out the benefit of earlier income
tax refunds. These tuition increases make a college education unaffordable for many
?? $57 million cut from Job & Family Services. The cuts are expected to impact
adoption placement, care for emotionally disturbed children, child abuse
investigations, and welfare to work support services.
?? The closure of at least two developmental centers that aid the mentally retarded and
?? The closure of two Youth Services facilities.
?? Total elimination of the Ohio Civilian Conservation Corps.
State workforce cuts. The dollars cut translate directly into fewer state and local
employees serving Ohioans. Ohio has already cut 3,000 state employees in two years.
The job cuts to date include:
?? 586 fewer jobs at Ohio State University due to budget cuts.
?? 450 correctional officers and other employees lost due to the Orient prison closing.
?? 50 jobs lost when the maximum- security psychiatric hospital in Dayton was closed.
?? 300 Job & Family Services jobs cut in a reorganization last year.
?? Dozens of jobs cut at agencies such as Natural Resources.
Local services cuts. State budget cuts have also impacted services at the local level. The
Governor and legislature have already frozen statutory aid payments to local
governments at 2000 levels. Other local revenues are tied to state tax revenue. And,
since the state has restricted localities in the way they can levy property taxes without a
public referendum, jurisdictions must rely on income and sales taxes – the same, more
volatile revenue sources that are straining the state budget.
This has led to cuts in local services and other unintended consequences, such as:
?? Local libraries are cutting jobs, hours, services and acquisitions of new materials due
to funding decreases of $40 million, or 8 percent of their budgets. That is the amount
by which revenues are down in the Library and Local Government Support Fund,
which is tied to the state income tax. The City of Cleveland and the Cuyahoga County
library systems face a shortfall of a combined $4.1 million this year.
?? Ohio cities have dealt with serious revenue shortfalls this year. The City of
Columbus has left hundreds of job vacancies unfilled this year in order to cut more
than $16 million from its budget. A new round of cuts to home health services and
recreation programs will lead to more than 100 layoffs.
?? County workforce and family services agencies are cutting back on assistance
services just as more people begin to require help. Cuyahoga County Job and Family
Services are being forced to eliminate programs that assist individuals moving from
welfare to work. The County is suing the Taft Administration for shifting funding
away from the programs. The Pickaway County Department of Job & Family
Services has laid off more than 10% of its workforce, eliminated an employment
assistance program for the disabled and cancelled computer classes for job-seekers
because of a funding cut of $165,000.
?? Counties are also cutting a range of other services and are handing out layoffs and
furloughs of employees. Seneca County, faced with a $2.5 million drop in revenue,
cut employee hours and pay by 20 percent and cut agency budgets an additional 15
percent. The County Commissioners’ Association of Ohio held a seminar to instruct
county commissioners on how to lay off employees.
?? Some local governments also have attempted to make up for lost aid and shared
revenue by raising taxes and fees at the local level. The City of Chillicothe has
doubled its trash-collection and other fees and has examined charging for ambulance
service. Delaware, Marysville and Worthington are considering income tax increases
to make up their shortfalls.
Ohio’s unmet needs. Important priorities of Ohioans were already being addressed
insufficiently before these deficits and budget cuts. For example, education has been
inadequately funded for years, according to the Ohio Supreme Court. In the fourth ruling
of DeRolph v. State of Ohio, issued in December, the Court affirmed that the state’s
school- funding system is in need of “complete, systematic overhaul.” Any plan to reform
the unconstitutional education funding system will require a greater contribution from the
state to address local funding inequities. In addition, state and federal mandates have
expanded in recent years, including Medicaid, minimum prison sentences, the No Child
Left Behind Act, and most recently, Homeland Security. These mandates have increased
costs for local governments while providing neither the funds to pay for the services, nor
even the freedom for local governments to raise those funds themselves.
The impact of additional cuts. Further cuts on top of those already made will have a
devastating impact on the core services Ohioans need and expect from their state
government. If $720 million were cut from this year’s budget, plus another $4 billion
from the biennial budget, priorities such as education, health care and local aid simply
could not be held harmless from reductions. Larger class sizes, lower student
achievement, and higher tuition would result from education cuts. Health care cuts will
lead to larger numbers of uninsured, longer waits at emergency rooms, and soon, greater
financial stress on our hospital system. And local revenue sharing cuts will leave
localities hard-pressed to continue providing basic health, recreation and sanitation
services. As Brian Hicks, Governor Taft’s chief of staff put it in his January 9 press
statement, “it’s going to be very difficult, if not impossible, to cut our way out of the
problem in this fiscal year.”
Revenue Options to Fix Ohio’s Budget Crisis
Additional revenues, not additional cuts in services, are what is needed to solve Ohio’s
budget crisis. The main reason is simply that further cuts would be more than most
Ohioans can bear without serious disruption in public services and reduction in their
Where should those additional revenues come from? The fairest and most sensible way
to raise taxes to solve the current revenue crisis is to obtain a greater contribution from
those that benefited the most from the most recent tax cuts. Upper- income individuals
and businesses received the greatest amount of tax relief in recent years. Just as it would
be wrong to let the true cost of those cuts be borne by low- and middle- income Ohioans
in the form of service cuts, it would be similarly unfair to balance the budget only by
raising taxes that impose a greater burden on those groups.
A range of possible solutions exists, including income taxes, corporate taxes and sales
taxes. Other options can be included, but any solution must include one or more of these
broad-based taxes to have a serious impact on the state’s deficit. And some of these
options are better than others.
Close corporate tax loopholes. The share of state services supported by the corporate
income tax has eroded steadily since the 1970s, from more than 16 percent in 1972 to less
than five percent today. To raise additional revenue and maintain the viability of the
corporate income tax, Ohio must reverse this decline, and corporations’ declining
effective state income tax rate. The state can:
?? Impose a 10 percent corporate income tax surcharge to generate an estimated $77
?? Require combined reporting by corporations, to disallow the shifting of income
earned in Ohio to other states through related entities. This reform would increase
corporate income tax collections under current law by $200 million, according to
state tax officials cited in one study.
?? Enact a measure to “throw back” corporate income from states barred from taxing it
under a federal law. Many corporations are able to declare certain income as
“nowhere” in terms of state taxation because of this rule. A “throwback rule” brings
the sale back to the state from which the sale was made. Ohio could gain significant
additional revenue by imposing this rule, just as 24 other states have done.
?? Eliminate the franchise tax cap on corporate net worth, currently at $150,000, to
protect against corporate tax avoidance and to improve the fairness of the tax for
?? Update Ohio’s definition of “business income” to include all income allowed under
the U.S. Supreme Court. Doing so would allow Ohio to apportion corporate income
earned in-state, instead of allowing corporations to shift it to other states. Five states
have already made such changes.
These actions raise new revenue to help fix the state budget crisis without raising tax
rates, and without raising tax liabilities for the many small businesses and other
companies who cannot afford the high-priced attorneys and consultants that help
corporations to avoid taxation. These actions simply restore a measure of fairness to the
corporate tax system and help level the playing field for businesses who already
contribute their fair share for state services.
Income tax options. Ohio’s income tax is a productive and fair tax. Its broad base makes
it the largest revenue source for the state. The tax is graduated and progressive, so rates
rise on higher brackets of income, though all families pay the lowest rate on their lowest
levels of income. This progressivity offsets other elements of Ohio’s state and local tax
system, which imposes a greater burden on low- and middle- income families than on
The income tax was the tax cut most in the 1990s. Wealthier families benefited the most
from those cuts, which were financed by growth in many sources, including more
regressive taxes. During this state budget crisis, the tax cut most in the 1990s would be a
natural first place to look for additional revenues to balance the budget. Ohio can:
?? Impose a new top income tax rate of 8.5 percent on income above $260,000. Only
the portion of income above $260,000 for joint returns (or $130,000 for single
returns) would be impacted by this increase, affecting only the wealthiest one percent
of taxpayers. This would generate an additional $255 million per year.
?? Increase income tax rates across-the-board by 10 percent. This proposal would
generate an additional $900 million per year. A 10 percent increase would match the
highest single- year refund granted during the tax cuts granted from 1996 through
These income tax increase options could be enacted so that they sunset when the state’s
finances improve. For example, the sunset could be triggered when the Rainy Day Fund
again has a balance of five percent of annual revenues for a full fiscal year. During the
recession and state budget crisis of the early 1990s, many states imposed temporary tax
increases that did expire or were rescinded a number of years later, after economic and
state financial conditions improved.
An additional benefit of raising income taxes over sales or excise taxes is that the state
income tax is federally deductible. Much of the added cost to citizens of an income tax
increase therefore is borne by the federal government in the form of deductions on
taxpayer returns. Sales and excise tax costs are fully borne by Ohio taxpayers.
Sales taxes. The sales tax, Ohio’s other broad-based tax, is a significant source of
revenue. Long-term trends present a problem for Ohio’s and many other states’ sales
taxes, however. For the past several decades, the nation’s economy has been shifting
from the consumption of goods, which typically are subject to the sales tax, to services,
which are not taxed. In 1960, only 40 percent of household consumption was for
services. In 2000, that number was 58 percent. For this reason, the sales tax has been
losing its revenue-generating power over time. Whereas the sales tax nationally
generated $4.99 in revenue for every $1,000 in personal income in 1979, and $4.34 in
1989, it now generates only $4.16 per $1,000 in income.
Ohio can help reverse this trend by:
?? Extending the sales tax base to include many exempted goods and services. For
example, Ohio could add a package of currently untaxed goods and services to the
sales tax base, generating $750 million per year in revenue at the current tax rate. 1
Expanding the sales tax base would also help localities by expanding their sales tax
base as well. Last year, Nebraska increased revenues by $22.5 million by adding a
package of services to its sales tax base, including building cleaning and maintenance,
security, pest control, automobile washing and painting, computer software training,
?? Pursuing sales tax simplification legislation in order to collect tax on remote sales.
Today, remote sellers without a physical presence in a state (such as e-commerce and
catalog retailers) are not required to collect state sales taxes, following a U.S.
Supreme Court ruling that deemed the administrative burden too great. Ohio lost an
estimated $447 million in e-commerce sales tax revenue in 2001 due to this
prohibition. The revenue loss is expected to grow along with the growth of e-
commerce, to $1.5 billion in 2006 and $1.8 billion by 2011.
Ohio already is involved in a multistate effort to streamline state sales tax systems to
lessen the burden of collection and convince Congress to require remote sellers to
collect the tax. The next step is to enact the changes called for in the simplified sales
tax model adopted by Ohio and 32 other states. In addition to capturing lost revenue,
collecting sales taxes from remote sales would help to level the playing field between
out-of-state vendors who benefit from Ohioans as a market but do not collect that tax,
and in-state, “brick-and-mortar” companies who employ Ohioans and already collect
Sensible Cost-Cutting Solutions
Some have called for Ohio’s budget shortfall to be made up solely with cuts in
expenditures. But with extent of the budget gap as great as it is, a cuts-only approach
would quickly prove so costly to state services and infrastructure as to be unworkable.
The amount needed to make up the shortfall would require cuts many times greater than
the serious cuts already implemented, as described above. These would harm all
A close review of state spending is in order, however. Now more than ever, every public
dollar spent in a wasteful or inefficient manner is one less dollar needed for critical
services and investment. We propose that the state initiate reviews of spending on
economic development incentives granted to businesses. These subsidies, intended to
attract jobs and business investment, have a decidedly mixed record in Ohio. The
$750 million generated by adding cable TV, admissions, housekeeping services, home services, moving
services, pet services, accounting, legal services, personal services, magazines, newspapers, parking and
administration of grants has been prone to error, and the accountability for creating the
promised jobs has not been enforced. Ohio should:
?? Eliminate and recover incentive grants for businesses that have not met program
?? Examine feasibility of terminating grants that were granted despite failing to meet
state guidelines; and
?? Freeze new grants pending a cost-benefit review of state programs.
Ohio should also examine its spending on consultants and contractors, and review the
state workforce to determine whether agencies are “top- heavy” with management
employees. Despite years of effort aimed at getting front- line state employees to watch
costs and to do their jobs more efficiently, Ohio remains unaware of the total amount it
spends, and even less informed on the value it obtains, from contracts and consultants.
The state should:
?? Comprehensively review contractor spending and eliminate contracts unrelated to the
state’s critical services to its citizens; and
?? Survey agencies’ personnel rolls to determine where manager-to-employee ratios
exceed appropriate benchmarks.
These cost-saving initiatives could save significant dollars that could be redirected
toward restoring cuts in critical services or investments such as education or highways.
Ohio would be doing its citizens a real service by prioritizing these needs above other,
more questionable uses.
Taxes, Spending Cuts and Ohio’s Economic Development
Filling Ohio’s budget shortfall and restoring more fairness to the tax system does not
have to harm economic development. While some have claimed that Ohio’s business
taxes deter development, many business executives acknowledge that dozens of factors
other than state and local taxes play a greater role in businesses’ ability to succeed and
are of greater importance in their location decisions. Chief among these are the quality
and availability of the state’s workforce and the adequacy of its transportation and
Scholars widely agree with the executives’ view. And surveys of states’ economic
development performance bear them out. The most broad-based index of the economies
of the 50 states, published annually for 15 years, does not even include state and local
taxes as a measure of economic development performance. Among the Corporation for
Enterprise Development’s (CFED) “Honor Roll” states for economic development, 9 of
the top 10 collect a greater percentage of their state revenue from corporate income taxes
than does Ohio. The conservative Beacon Hill Institute does include state and local tax
burden as a measure of competitiveness in its state rankings. But in that group’s report,
only 12 of the 25 best-ranked states for tax burden rank among the top 25 states in overall
competitiveness. In fact, the 25 lowest-tax states are as likely to be among the 10 least
competitive states overall as among the 10 best.
In fact, Ohio can do more to promote quality, long-term economic development by
protecting services and investments in its citizens and infrastructure than by seeking to
balance the budget shortfall with harmful cuts to those priorities. An ample supply of
well-educated and adequately trained workers is the number-one criterion businesses use
to select new sites to relocate or expand businesses. As Governor Taft himself
proclaimed in his inaugural address on January 13, “a highly educated workforce is an
absolute necessity if Ohio is to succeed in the knowledge economy.” Cuts to these
investments do more harm than good because they cause Ohio to fall behind in the race
for economic development and the high-skill, high-value jobs it creates.
Protecting Ohio’s physical and social infrastructure is its highest priority in this budget
crisis. The only way for Ohio to do so while balancing its budget is to raise significant
new revenue. Sensible options exist to raise revenue in a fair and productive manner.
These options are a better alternative to the harmful cuts in services that would be
required to balance the budget without new revenues, on top of the deep cuts that have
already been made.