Strickland Proposes Freezing Income-Tax Cuts

COLUMBUS, Ohio—Ohio governor Ted Strickland has proposed freezing income tax cuts to fund education in the wake of a court decision that could halt his plan to put lottery slot machines at racetracks.

NBC 4 reported from the 11 a.m. press conference.

Strickland proposed three options to balance Ohio’s budget Wednesday; freezing income tax cuts was the governor’s recommended option.

Strickland on Wednesday suggested postponing the final year of the overall 21-percent tax cut for at least two years, raising about $850 million.

The Ohio Supreme Court last week ruled that the slot machine proposal is subject to voter approval, stopping the state’s plans to place machines at horse racing tracks by May.

Strickland had been counting on the slot machines to contribute about $850 million to help balance the two-year education budget.

Strickland said he doesn’t agree with the Supreme Court’s ruling and said he plans to ask for clarification—to see if he can put them into place without legislative approval.

Strickland said he doesn’t feel he made a mistake and still wants to pursue slots but it’s too late to wait for that income.

Strickland outlined three different solutions to fill the nearly $1-billion budget gap: a statewide tax increase, cut $851 million from education or freeze the income tax rate (the 2008 income tax level) and postpone a planned reduction.

That planned reduction took place in January. The plan would be retroactive. People would have to go back and pay 2008 rates.

Seventy-five percent of Ohioans pay more than necessary anyway, Strickland said, so the change won’t affect most people’s paychecks. Their refund will be smaller.

The postponement should generate $844 million in revenue, and he will make up the rest in cuts.

Strickland also said licensing fees paid by racetracks for the video lottery terminals was to be refunded. 

GOP RESPONSE

State Reps. William G. Batchelder (R-Medina), Lou Blessing (R-Cincinnati), John Adams (R-Sydney), and Cheryl Grossman (R-Grove City) called a news conference for 1:30 p.m. Wednesday.

GOP said Strickland’s plan is a retroactive tax increase.

They said the problem has nothing to do with the education budget and that money can be pulled from other places.

They said the Supreme Court ruling on video lottery terminals was constitutional.

The GOP said they have introduced other ideas that have been ignored, including House Bill 25. HB 25 would make cuts in state government to save $2.2 to $2.4 billion. Another bill would have cut back the expense of Medicaid.

The GOP said if Strickland wants their support, he needs to hear their ideas.

Read House GOP Leaders’ Alternatives to Tax Increases

House Republican Leader William G. Batchelder released the following statement in response to this morning’s announcement from the governor who has proposed rolling back income tax increases for the next two years, costing tax payers nearly $850 million.

“Recently there has been much discussion in regard to tax increases as a means to fill the shortfall.  House Republicans have agreed with Governor Strickland’s past statements that tax increases will hurt the economy and we encourage the Governor to stand by his decision this budget season to continue with the tax reforms of the 126th General Assembly. This is not a revenue problem; it’s a spending problem, and tax hikes are not the solution. Today, Ohioans face increases because of a more expensive, out of spending control and less efficient government.

Republicans offered up to eight amendments and two bills to ensure stability within the state budget. The proposals included $3 billion worth of savings by streamlining state government operations, and improving the Medicaid system. All of these amendments were tabled on the floor when Republicans offered them.

Instead of offering sound solutions to an economic crisis, the governor chose to increase fees by more than $1.1 billion, essentially the same as taxing the people of Ohio.  Spending is out of control on all fronts; even now the state controlling board has spent $219 million on top of the budget passed by the legislature. While families are struggling to make ends meet, a tax hike imposed by the governor would just add a bigger bill to the pile and create less efficient government.”

Read Strickland’s prepared news conference remarks:

In July I signed a balanced budget.  Although we faced the worst decline in state revenue in at least 50 years – a direct result of the national economic downturn – we were able to prioritize our limited resources to invest in a reformed education system by cutting spending and resizing state government.

In fact, we reduced state government spending by nearly $2 billion compared to actual spending in the last budget.  That actual spending reflected more than $1.5 billion of cuts already made in response to the recession.

Still, those cuts were not enough.  Even after those spending reductions, the legislature and I had a gap of nearly $900 million to solve.  At the time, we had three essential choices to fill the gap: raise taxes, cut more or find another source of revenue.

I did not believe a tax increase was wise during a recession.  I also did not believe that further cuts were a viable option because that would have hurt the most vulnerable Ohioans.  Further cuts, for example, would have meant Ohio children would go without guaranteed access to health care, or that those who need medical oxygen would have had to go without.  That was simply intolerable. 

Further cuts would also have made it impossible to prioritize education as we did.  We could not have initiated 21st Century school reforms, kept college tuition costs down or helped workers acquire the skills they need to find and keep jobs.  These are the exact priorities that will position Ohio for growth after the recovery.  They are where we must invest.

So I put forward a plan to authorize video lottery terminals at Ohio’s seven racetracks, which we conservatively estimated would have brought in the revenue to appropriate $851 million for our schools.  Those resources also ensured a balanced budget.

Video Lottery Terminals
Last week, the Ohio Supreme Court ruled the video lottery terminal proposal is subject to referendum, a decision I disagree with but I am obligated to abide by. 

That decision by the state Supreme Court made it a practical impossibility to utilize video lottery revenue in the current budget and reopened an $851 million hole, placing our schools at risk of funding cuts and our budget at risk of imbalance.

Waiting for a November 2010 referendum, even if it is successful, still denies the state the revenue necessary to protect our schools from devastating funding cuts in this biennium.  Some have suggested placing video lottery terminals on the ballot at an earlier date, such as May.  That would still be too late to generate the necessary revenue to fund education.  And this would not resolve the legal challenges facing the state today.

An outstanding question remains before the courts: Whether or not the Ohio Lottery has the authority to implement video lottery terminals without legislative approval.  We need to hear from the courts on this Constitutional question, and I will seek a Declaratory Judgment for clarification.  But while we wait for that clarification, we must find another way to balance the biennial budget.

Three Options to Balance Budget
The legislature and I find ourselves confronted once more with the shared responsibility to balance the budget.  Again, I believe there are three primary options before all of us to fill the budget gap.

One option is to raise taxes, such as the state sales tax.

A second option is to cut $851 million from Ohio schools over this biennium.

A third option is to freeze the income tax rates at the 2008 level, postponing the final 4.2 percent reduction while leaving in place the rate cuts made to date.

Education Cuts

Of these three options, I believe the worst possible decision is to cut education funding.  We crafted a lean budget that prioritized education because improving our schools is the single most effective thing we can do to attract new jobs to Ohio and prepare the next generation of Ohioans to fill those jobs. 

I have spent nearly every day for the past two months meeting with business leaders and workers to discuss how our education reform plan will help their businesses grow.  Not one business leader ever said we should be reducing funding for education.  Not one said our plan to modernize schools is the wrong way to move Ohio forward. 

Instead, they have told me that in this emerging 21st Century economy, jobs will go where the workforce is most educated, creative and innovative.  I am more convinced than ever that Ohioans understand the link between education and job creation. 

Underfunding education at this critical time would undermine our ability to position the state for growth after the economic recovery.  It would also be devastating to our schools in the near term.

According to the Department of Education, an $851 million cut to schools would put at risk the state’s ability to draw down federal funds.  That means absent a federal waiver every school district would be cut an average of 10 percent in the current fiscal year and 15 percent in fiscal year 2011, for a total shortfall of $2.3 billion.

Here is what the Education Department said those cuts would look like for Ohio’s largest school districts:

- Cleveland Municipal Schools:  $111.1 million
- Columbus City Schools: $60.3 million
- Toledo City Schools: $53.4 million
- Cincinnati City Schools: $37.9 million
- Dayton City Schools: $34.6 million
- Youngstown City Schools: $20.8 million

The list goes on, but the end result would be the same across the board – hundreds of teacher layoffs, diminished curriculum offerings, and likely suspension of athletics and other extracurricular activities.

Tax Increases

A second option is to raise taxes.  A half-penny sales tax increase would provide enough revenue to balance the budget and spare education.  A sales tax increase has been the preferred response in the past when our state was confronted with less severe recessions.  But I am concerned that a sales tax increase, even a temporary one, could have the effect of depressing consumer spending, prolonging the recession and delaying Ohio’s recovery.  This is especially true within the manufacturing and automotive sectors of our economy. 

Postpone Income Tax Reduction

A third option is to postpone the last part of the income tax cuts while leaving the cuts we’ve made to date in place. 

If the legislature adopts this proposal, Ohio taxpayers will continue to pay at a tax rate 16.8 percent less than it was in 2004.  The state will collect approximately $844 million in revenue, close to the $851 million needed to protect education funding and balance the budget.  The rest will be made up in cuts if necessary.

This would freeze income tax rates so they remain exactly the same as last year.  And if a family’s earnings are the same as in 2008, because of the slight increase in the personal exemption, they will still pay fewer taxes this year than they did last year.

Since becoming governor, I have worked to protect the tax reforms first enacted in House Bill 66.  I believe this delay will have a minimal impact on the totality of the tax reforms, which have established Ohio’s taxes as the lowest in the Midwest.

I believe postponing the last part of the scheduled income tax reduction will protect our schools from destructive cuts while avoiding a sales tax increase on Ohio families and businesses during this recession.

Of course some will try to score political points by branding this delay as a tax increase.  But again, tax rates are staying the same as last year.

What I am proposing today requires the legislature’s approval.  If no legislative action is taken, our schools will, by default, be forced to absorb $851 million in state cuts, and perhaps much more if federal resources are lost.  The cost of not acting is clear. 

I look forward to cooperative action and a bipartisan determination to do what is right for the people of Ohio.  The men and women who elected us to serve expect – and deserve – serious and constructive leadership. 

The budget is not in balance today.  We need to act quickly as our ability to balance the budget and protect our schools will become only more difficult with delays. 

The choice is clear: We can cut education, raise taxes or postpone the last phase of the income tax rate reduction.

Postponing the income tax reduction is my recommended solution.  If members of the legislature have other ideas, I encourage them to bring them forward for consideration.  My door will remain open to leaders of both chambers and both parties in the coming days as we work to address the challenge before us. 

Ohio Education Association Statement

Ohio Education Association President Patricia Frost-Brooks issued the following statement regarding Governor Strickland’s budget news conference:

“The Ohio Education Association commends Governor Ted Strickland for his proposal to resolve Ohio’s budget crisis. Thoughtful leaders have to make difficult decisions. OEA calls upon legislative leaders to support Governor Strickland’s recommendation to postpone the nal phase of the income tax reduction.

“This option will preserve critical state and federal support of K-12 education reforms designed to move Ohio’s economy into the 21st century. Without this option, the loss of state and federal dollars will force Ohio schools to slash vital academic programs and services such as transportation, staffing, and student activities. Ohio cannot turn the corner economically without a strong commitment to public education as the bridge to the careers and industries of the future.”

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