COLUMBUS, Ohio – Ohio Republican Senators, in proposing a 5% income tax cut in the two-year state operating budget, say they won’t use any American Rescue Plan coronavirus recovery funds to pay for the decrease.
The stimulus act prohibits the money from being used for tax cuts.
But could they still run afoul of the rules?
Complying with the rescue plan is just one of numerous concerns Ohio Statehouse observers have about the Senate’s budget bill. Another one is the school funding plan in the budget, which public education advocates are watching closely.
This week, the Senate Finance Committee is expected to adopt an “omnibus” amendment containing hundreds of smaller amendments and then send the entire bill to the Senate floor, where a vote could occur as soon as Wednesday. That would leave two weeks for the House and Senate to negotiate the differences in the budget before the next fiscal year begins July 1.
Here’s a look at some of the main issues.
Ohio recently received the first portion of American Rescue Plan money, around $2.7 billion. That money hasn’t been incorporated into HB 110, said Sen. Matt Dolan, the Chagrin Falls Republican who chairs the Senate Finance Committee. Instead, the plan is to pay for the tax cut from the Ohio General Revenue Fund – one of the largest accounts in state government – which receives revenue from income and sales taxes and pays for most state government operations. Most of the budget bill, House Bill 110, in fact directs how funds will go in and out of the fund.
This could keep Ohio out of legal trouble with the administration of President Joe Biden, which doesn’t want the stimulus to be used for tax cuts. However, to receive the billions in American Rescue Plan money, the state will be required to report any revenue changes- including tax cuts – made between March 3 and the end of 2024, said Michael Leachman, vice president for state fiscal policy at the left-leaning Center on Budget and Policy Priorities.
The U.S. Department of Treasury will examine Ohio’s revenues to ensure that they were generally high enough to pay for the tax cuts– assuming the legislature ultimately approves them, since the Ohio House’s version of the bill calls for a 2% income tax cut.
Federal officials will do this in part by comparing revenues that flowed into the state in 2019, a base year before the pandemic hit.
“If revenues grow a lot, then you’re fine, as you’re cutting less than the revenue growth,” Leachman said.
But if revenue growth turns out lower than lawmakers expect, then states are expected to repay the American Rescue Act funds, since they are supposed to be used to help keep states afloat during the pandemic, he said.
The state may nevertheless be in court, since Ohio Attorney General Dave Yost, a Republican, is suing the Biden administration over tax cut rules.
The Senate’s 5% income tax cut would cost the state $874 million, Senate President Matt Huffman said last week. The cut would be 3.5% in the first year of the two-year budget cycle and 1.5% in the second year. Each tax bracket above $22,151 would get a reduction, since those with lower wages pay no income taxes in Ohio.
But the tax cut doesn’t shake out fairly and benefits the rich the most, said Zach Schiller, research director of Policy Matters Ohio, which disagrees with the cuts. Schiller calculated the average tax reduction in each income bracket:
-Those making $22,152 to $41,000 would pay a $4 less a year
-People earning $41,000 to $64,000 pay $22 less.
-People earning $64,000 to $105,000 would pay $59 less.
-People earning $105,000 to $221,000 would pay $152 less.
-People earning $221,000 to $526,000 would pay $385 less.
-People earning $526,000 or more would pay $1,712 less.
“It’s nonexistent or non-noticeable for most people,” he said.
Schiller argued the money would be better used paying for lead abatement in Cleveland or broadband expansion across the state, which the Senate left out of its version of the budget bill, even though the House provided $190 million for broadband. DeWine had asked the General Assembly for $250 million.
Since 2005 the legislature has been in tax-cutting mode. By now the state has $7 billion less a year in revenue because of the cuts, he said.
“I think the economic evidence is clear. We’ve been doing this for 16 years. Why is Ohio losing a congressional representative? Our population is not growing as fast,” Schiller said. “The idea that our incomes are well below the national median, our job growth has trailed. I just don’t think you can argue convincingly the tax cuts have brought the economic success we were promised.”
Public education advocates are generally unhappy with the Senate’s version of the education funding overhaul.
It provides about a third of the $1.8 billion for public schools that the House version of the budget bill provides.
All the money would be delivered to districts in two years, versus the six-year House plan. Republicans in the Senate say they don’t want to tie future legislatures with funding mandates.
But the House’s plan was three years in the making, involving several revisions and compromises among teachers unions, school administrators and others, notes Scott DiMauro, president of the Ohio Education Association.
“It went through many changes and lots of public engagement,” he said. “In contrast, you have a Senate plan put together totally out of public view, without the opportunity for stakeholder input.”
GOP Senate leaders unveiled the plan last week. If the bill is passed out of the chamber by the end of this week, that’s less than 10 days for the public to digest and analyze it, he said.
The funding formula used in the Senate is different than in the House. When considering how much money the state and local taxpayers each are responsible for, the Senate continues to use property values, DiMauro said. The House uses property values and average incomes, because some urban areas may contain high property wealth but students from poor families.
Current law states that charter schools cannot be operated by a sectarian school or religious institutions. But in the Senate’s version of the budget, that’s removed.
There is a caveat in a Senate budget documents that states: “Community schools, as public schools, remain subject to the restrictions and requirements related to the Establishment Clause of the First Amendment of the U.S. Constitution.”
Dolan, the finance chairman, said he’s not aware of any religious entity that asked for the law to be altered.
“Some of our members believe that we shouldn’t worry about where a child gets educated, but make sure they get educated,” he said.
If charter schools are affiliated with a church but can educate kids in a non-sectarian way “at a high level, we should support them,” he said.
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Ohio Senate unveils its budget proposal with 5% income tax cuts, separate school funding plan