Budget in focus: Tax cut that’s a hike, $2B rainy day fund


By Julie Carr Smyth

AP Statehouse Correspondent

COLUMBUS, Ohio – It always takes a while for the dust to settle after passage of Ohio’s voluminous operating budget. With a couple weeks’ perspective, the bigger picture emerges, the occasional glitch surfaces and the fiscal trade-offs contained in the document become clearer.

Here’s a look at a few elements coming to light about the $71.2 billion, two-year spending blueprint that took effect July 1:



An intended tax cut for Ohio’s small businesses was touted as a big boost to the state’s “job creators” and overall economy. But due to an apparent oversight during the frenzy of budget negotiations, a mistake was made. Instead of a tax cut, many small businesses will see a tax increase in the budget’s first year.

The bill sets the flat tax rate on small business income at 3 percent going forward. It also initially provided a tax exemption for the first $250,000 in small-business income, delivering a cut even to those who paid minimal taxes. But a last-minute change exempted only 75 percent of that $250,000 from income taxes next year. So for businesses paying less than 3 percent to begin with, for example, having to pay taxes on some of the first $250,000 they make will represent an increase.

Lawmakers have signaled they could return to Columbus to fix the error.



Another provision of the spending plan raised the amount Ohio may deposit in its rainy day fund, set aside to cover expenses in hard times.

The ceiling on the fund was raised from 5 percent to 8.5 percent of the state’s general revenue, money raised mainly through taxes. The change is good for the fund, which reached a record $2 billion after a big deposit Thursday of close to $527 million. But raising the fund’s cap means less goes into the income-tax reduction fund meant to reduce future tax rates.

The change was slipped into a budget that already reduces Ohio’s income tax rates by 6.3 percent, lowering the top income tax rate to just below 5 percent. That is less than what Gov. John Kasich wanted, but remained a selling point for the bill among Republican lawmakers.



Take a look at the bottom line for this budget, and the Medicaid spending figures leap out.

For years, Ohio officials have predicted the government health insurance plan would overtake the state budget and this cycle it appears that it did. More than $37 billion of the $71.2 billion in state and federal general revenue that’s spent in this budget goes to Medicaid, or more than K-12 education, health and human services, higher education, corrections and general government spending combined.

But that figure does need to be taken in perspective. More than $25 billion of that total comes through the federal government, far more than any other program. An additional $77 million in federal general revenue is spread throughout the entire state budget. State Medicaid spending this year totals $5.8 billion in the first year and $6 billion in the second, according to budget documents.



One tax change vetoed by Kasich meant about 100 of Ohio’s school districts considered wealthier – mostly in the suburbs – will lose $79 million allotted by lawmakers, a move he said was in the public interest because it removed “guarantees” to districts that undermine the state’s ability to get education money where it’s most needed.

What was less widely discussed was that the found revenue from that veto was needed to offset another of Kasich’s vetoes. He scrapped a proposal that would have created two new lottery games – EZPlay Keno and EZPlay Bingo – at bars and liquor-serving restaurants across the state. Any revenue from those games would have gone to the state lottery, with an estimated $60 million in proceeds going to schools.

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