Thursday, December 28, 2006

 

Tax Reform Pokes Holes in '08-'09 Budget

The tax reform package passed as part of the state fiscal year 2006-2007 state budget will create substantial difficulties for the new administration and legislature as they begin work on the 2008-2009 state budget. The chief culprit is the continued phased-in reduction of the personal income tax. This alone translates into a stunning $2.6 billion reduction in state revenues over the biennium. Remember that 25% of these tax cuts will go to the 1 percent of Ohio taxpayers who have taxable income of more than $274,000 a year.

The most recent monthly financial report from the Ohio Office of Budget and Management showed continued revenue weakness in several categories. Earlier this year, my colleague David Ellis estimated that total net new revenue available for budget writers would be $603 million from FY07 to FY08, and $662 million from FY08 to FY09. To put these numbers in context, just a 5% annual increase in state Medicaid spending could eat up roughly a third of these new revenues. Without additional state revenues most groups seeking additional state spending are likely to be disappointed. Of course if we hit another recession, all bets are off.

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