Tuesday, May 05, 2009

 

State rainy day funds may be needed now, throwing HB 1 further out of balance

Less than one week after the Ohio House of Representatives sent the FY 2010-11 budget to the Senate, a Strickland Administration press conference today highlighted the abysmal under-performance of the personal income tax in April. April is a crucial month when the Tax Department closes its books on the 2008 filing season. Tax Commissioner Richard Levin’s presentation showed that 2008 annual returns produced $192 million (22 percent) less than expected. The administration’s estimates were closer to the mark in estimating employer withholding for the month (just 2 percent below estimates) but were much too optimistic in every other income tax category. In total, the income tax produced $322 million less GRF revenue in April than had been expected. Ten months into FY 2009, income tax collections are 15.3 percent lower than in FY 2009. Commissioner Levin did not mention that some of the underperformance was due to the final round of income tax cuts.

OBM Director Pari Sabety discussed the implications of the shortfall for FY 2009. She expected the downward trend in income tax revenue to continue in May and June, contributing to a cumulative deficit between $600 million and $900 million. With only two months remaining in the fiscal year Director Sabety said that only a small portion of the shortfall, perhaps $100 – $150 million, could be addressed through additional cost savings – the rest would probably have to come from the state’s rainy day fund, which requires legislative approval.

Any substantial use of the rainy day fund in this fiscal year would throw H.B. 1 further out of balance, jeopardizing the gains made by human services advocates in the House for programs such as food pantries and child and adult protective services. H.B. 1 relies heavily on the rainy day fund as well as roughly $6 billion in other federal and state one-time resources.
The continuing shortfall in tax receipts also will impact H.B. 1. OBM will not have new revenue estimates available until the conference committee, but these are likely to be much lower even than the most recent estimates prepared in December.

There are still many pieces to the budget puzzle that we don’t know, but which may become clearer in the coming days. Strangely, today’s press conference only covered the income tax. OBM will release preliminary returns for other April taxes soon (perhaps as early as tomorrow) and then we can see the big picture for total GRF revenue. It is also possible that larger than expected state agency under spending could help to address part of the FY 2009 shortfall.

The bottom line, however, is that H.B. 1 was built on unrealistic assumptions. The House used an extra $100 million in unclaimed funds and more generous Legislative Service Commission revenue estimates to make it fit together. The estimates did not take into account lower revenues from the tobacco tax which will result from recent federal legislation. Let’s stop putting on the band aids and fix the patient -- the state needs to take steps to shore up its eroding revenue base. The 2005 tax change framework, which will cause a net loss to the GRF of $2 billion in FY 2010, simply cannot be maintained in this environment.

Note: Jon Honeck is the author of this post. He can be contacted at jhoneck@CommunitySolutions.com

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