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Smoke and Mirrors

Gov. John Kasich says his new budget offers a fairer tax system and more money for schools, but it’s really just more of the same

By German Lopez · February 20th, 2013 · Cover Story
cover-kasich-2Gov. John Kasich as a magician. - Art: Julie Hill

In the big public push for his 2014-2015 budget proposal, Republican Gov. John Kasich has often sounded progressive. If his platitudes are to be believed, the budget will make the tax system fairer for everyone, help out the state’s poorest schools and provide health care to hundreds of thousands of struggling Ohioans.

But critics are now voicing disappointment. Deeper analyses of Kasich’s budget found that the governor was likely off with some of his claims and putting a progressive spin on a budget that might raise taxes on the poor and gives more funding to school districts that are already considered well-off.

Critics see Kasich’s progressive claims as short-term politicking in preparation for the 2014 gubernatorial election. With his new budget, Kasich is deferring attention from past budget cuts and putting the spotlight on ideas that seem universally good: fewer taxes, more education funding and health care coverage for many. It’s a political play that’s at the heart of the proposal, and it’s already seeing some success as media outlets highlight Kasich’s funding increases with little historical context.

But Kasich’s proposal is facing critics on all sides. Independent research groups have found numerous flaws with the tax plan. Schools and state officials have voiced concerns since Kasich’s administration revealed its own funding numbers. Kasich’s fellow Republicans heavily criticized the Medicaid expansion — the only major policy Ohio Democrats have endorsed.

The political maneuvering and shouts of criticism can be deafening, but the truth behind the budget will play an important role in Ohio’s future. If it passes, Kasich’s plan will establish the state’s blueprint for the next two fiscal years — granting tremendous importance to just one piece of legislation.

Taxing the poor

Flat approaches to the tax system often favor the wealthy, but they seem innocent enough that Republicans can tout “across-the-board” or “flat tax” proposals without public scorn.

It’s a fact the governor might have relied on when rolling out his tax plan. Kasich promised Ohioans a 20 percent across-the-board income tax cut, pairing the cut with a sales tax cut from 5.5 percent to 5 percent in order to give benefits to poorer Ohioans that don’t have to pay income taxes. Small business income taxes are also reduced by 50 percent.

To make up for lost revenue, Kasich’s plan suggests imposing a severance tax on oil-and-gas businesses and expanding the sales tax to apply to a variety of items, including cable TV services, coin-operated video games and admission to sports events and amusement parks. 

The oil-and-gas severance tax isn’t getting much criticism, but the rest of the plan is getting a close look from critics who are fearful it may hurt Ohio’s poor and middle class.

Policy Matters Ohio, a left-leaning policy research group, used a longstanding tax model from the Institute on Taxation and Economic Policy, another research group, to measure the impact of Kasich’s tax plan. The resulting report found the poor and middle class would pay more under Kasich’s plan, while the wealthiest Ohioans would pay much less.

The poorest Ohioans would see a tax increase of $63 per year, according to the report. On average, the bottom 20 percent of the income ladder would have their income taxes reduced by $8, but the expanded sales tax would actually increase their average sales tax burden by $71.

The report found the middle 20 percent fares slightly better. Under the budget proposal, they would get a $157 income tax cut on average, but their sales tax burden would go up by $165 — meaning they’d end up paying $8 more in taxes.

Meanwhile, the top 1 percent would get the most out of Kasich’s tax plan, according to the report. The sales tax expansion would bring up their average share by $781, but that would be overwhelmingly outweighed by an $11,150 income tax cut, effectively reducing the top 1 percent’s tax burden by $10,369.

Even the small business income tax cut will mostly benefit wealthier Ohioans. The Policy Matters report found that 53 percent of the revenue lost from the business income tax cut would go to the top 1 percent. The middle 20 percent would only get 4 percent of the business tax cut, and the poorest 20 percent would get nothing.

Even though the overall results are regressive, Zach Schiller, research director at Policy Matters, says his organization still supports broadening the sales tax.

“You need to have an adequate tax system, too,” he says. “You’re not just concerned about fairness.”

While sales taxes are generally regressive, Schiller argues the raised revenues can help fund programs that outweigh an increased tax burden for the lower and middle classes, including social welfare, college accessibility and infrastructure programs.

Schiller says having too many broad exemptions leads to an unfair system that brings up tax rates: “To not tax (so many) services over the long term is a policy that will result in the slow erosion of the sales tax. The only way to avoid that would be to increase the rate, which is, of course, what’s happened.” According to Schiller, it’s better to keep the rate lower and expand the sales tax to apply to all non-essential goods and services. 

Gary Gudmundson, communications director at the Ohio Department of Taxation, told CityBeat that the administration’s unreleased tax numbers will “speak for themselves,” but he did not confirm or deny whether Kasich’s tax plan benefits the wealthy over the poor and middle class. The administration’s numbers were not released before press time.

Kasich claims his tax plan is all about spurring Ohio’s economic recovery and job creation, but prioritizing the wealthy with a regressive tax plan likely goes against that goal. A previous analysis from the Congressional Budget Office (CBO), which measures the budgetary and economic impact of federal policy, found letting tax cuts expire on the wealthy would barely dent the economy. The same report also found the economy greatly benefits from tax and social welfare programs that disproportionately benefit the lower and middle classes.

Another report from the Congressional Research Service (CRS) similarly concluded that tax hikes on the rich would have a negligible economic impact. The findings made national Republicans so angry that they pressured CRS to pull the report. CRS later re-released the study — except this time it had nicer language to appease Republicans.

Schiller says Kasich’s proposed business income tax cuts also won’t create jobs: “Large numbers of business owners who don’t employ anyone are going to get the benefit of this, and the reduction in tax that most of them will pay isn’t enough to hire anybody, anyway.”

Schiller’s claims are backed by some economic research. A 2011 study from University of Chicago researchers Erik Hurst and Benjamin Pugsley found many small businesses “have little desire to grow big or to innovate in any observable way.” Instead, many small businesses are led by skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers and restaurateurs who are content with remaining small.

Schiller says Ohio’s history also proves across-the-board income tax cuts aren’t the job-creating machine Republicans play them up to be.

He points to 2005, when Ohio, under the charge of Republican Bob Taft at the time, cut the state’s income tax by 21 percent. Following the cuts, Ohio’s employment situation remained relatively stagnant, even as U.S. unemployment modestly decreased.

“We saw this movie before,” Schiller says. “Did it create a renaissance of small businesses in Ohio? Look around you.”

History of defunding

At the forefront of Kasich’s progressive claims was his education reform plan, which the governor and staff members insisted would level the playing field for Ohio’s educators.

Without any context, it’s hard to dispute the governor’s claim that he’s increasing school funding. It’s absolutely true Kasich’s plan will not cut funding to Ohio schools.

But since Kasich took office, his administration has reduced the amount of funding for many Ohio schools. In the tentative numbers released for the 2014-2015 budget, Cincinnati Public Schools (CPS) is getting $8.8 million in the 2014 fiscal year — a 6.8 percent increase from the year before. But that’s not enough to make up for the $39 million in funding the school district lost in the 2012-2013 budget.

Of that money, $11.5 million was lost when federal stimulus funds expired between 2011 and 2012. The other cuts are from reductions in the state budget — mainly the phase-out of the tangible personal property reimbursements, which the governor’s office says disproportionately benefited some school districts, including CPS.

But CPS isn’t alone. Statewide, Kasich’s budget cut $1.8 billion in education, according to the website Cuts Hurt Ohio. In Hamilton County, the loss in education funding came to $117 million.

The cuts were so extensive that local communities felt compelled to react with school levies. A report from Innovation Ohio, a left-leaning policy research group, found voters approved 40 percent of school levies placed on ballots between May 2011 and November 2012, which added up to $487 million. These levies are essentially direct income and property tax increases for local communities — meaning cities and townships are now making up for state budget cuts with their own dollars.

Kasich’s 2014-2015 budget proposal does little to make up for the $1.8 billion in cuts. Originally, the administration said it was adding $1.2 billion to school funding with the new budget. But the tentative numbers show an increase of only $564 million, with 60 percent of districts not getting any increased funding.

The governor’s office has repeatedly said the original budget cuts were necessary to make up for an $8 billion deficit they inherited from the previous administration. The state government is required by law to balance its budget.

Beyond the broader context, critics are now claiming Kasich’s new school funding formula is not as progressive as the governor let on — meaning the formula will do little to further support poor school districts over wealthy school districts.

During legislative hearings, Republican State Rep. Ryan Smith pointed out Kasich’s plan would give more money to well-off suburban school districts, but it wouldn’t do more for poor districts in the “heart of Appalachia.” Smith contrasted the affluent Olentangy Local Schools to the Appalachian districts he represents: “They have just a few things: German 1, 2 and 3; Jewelry 1; Ceramics 1; Sculpture 1; Stage Craft 1; Concert Orchestra — these are things that children of Appalachia don’t get exposed to.”

In comparison, the superintendent at Symmes Valley Local Schools, an Appalachian school district, had to lay off the board secretary, transportation director and curriculum director and consolidate their roles into his own job to open up some education money in the cash-strapped district, according to Smith.

Yet Olentangy is getting a 330-percent increase in funding — apparently to support increased enrollment — while Symmes is getting nothing.

The comparison between Olentangy and Symmes becomes even grimmer when looking at “guarantee funds” — money that comes in addition to what the funding formula dictates for school districts. When announcing his education reform plan, Kasich said he eventually wants to do away with guarantee funds because they create a lopsided funding system. But eliminating guarantee funds would cut money going to Symmes by $798,179 — about 16 percent of total funds going to the district — and leave Olentangy untouched.

Stephen Dyer, a former Democratic state representative and an education policy fellow at Innovation Ohio, argues the comparison between Olentangy and Symmes is consistent throughout the state budget. When looking at property wealth on a district-by-district basis, Dyer found the wealthiest one-third of districts are getting nearly $400 more per pupil. In comparison, the middle one-third are getting about $250 more per pupil, and the poorest one-third are getting nearly $150 more per pupil. 

The funding formula uses the three-year average valuation per pupil — basically, property value in a district divided by the amount of students — but Dyer argues this measurement is fundamentally flawed. By trying to fit every region, regardless of differences, into one measurement, the state is inherently building discrepancies like the ones seen between Olentangy and Symmes, says Dyer.

The problem is particularly exemplified by how much a school district can raise locally, according to Dyer. When looking at per pupil valuation, Dyer found the difference between Olentangy and Noble Local Schools, another poor Appalachian district, was small: $191,580 for Olentangy and $164,229 for Noble. When looking at property wealth through how much each district can raise with one mill of property taxes, he found the difference was enormous: $3,174,460 for Olentangy and $125,941 for Noble.

This massive discrepancy means Noble has to raise its property values by 25 times to match what Olentangy can raise on one mill of property taxes. So if Olentangy needs to raise $3 million in school levies, it would need to raise slightly less than one mill — a slight property tax increase. If Noble wanted to raise $3 million, it would have to pass 24 mills — a considerably larger tax increase. “Which one do you think is more likely to pass?” asks Dyer.

Dyer uses a Robin Hood analogy to describe the new formula: “They were telling everybody they were Robin Hood. They were going to go in, steal from the rich, and give to the poor. But it turns out they were Daffy Duck’s Robin Hood that couldn’t do it, not Errol Flynn’s Robin Hood, who was really good at it.”

In their defense, the Kasich administration typically argues that the school funding formula continues the trend of giving poorer schools more funding per pupil. In public testimony, Barbara Mattei-Smith, Kasich’s assistant education policy adviser, emphasized that Kasich’s plan would give Ohio’s lowest-wealth school districts 400 percent more funding than Ohio’s highest-wealth districts.

But critics argue that’s always been the case for Ohio’s school funding systems. The question for critics like Dyer is whether the system is being tilted in favor of the poor or wealthy, and the data so far implicates the wealthy are getting more.

The formula has also sparked bitter reactions from superintendents around the state. Arnol Elam, the superintendent of Franklin City Schools in Warren County, wrote a letter to parents when he found out his school district would not get more funding under the governor’s plan.

“By every measure, we are the poorest district in Warren County,” wrote Elam. According to Elam, 44.7 percent Franklin’s students are in poverty — a strong contrast to Mason City Schools’ 6.3 percent. His district’s median household income is $29,900 — much lower than Springboro Community City Schools’ $61,271. Franklin City also has the highest percentage of students with a disability at 16.1 percent. 

But Franklin City is getting no additional funding, while Mason, Springboro and Kings — Warren County’s wealthiest districts — are getting more.

Expanding Medicaid

For all the budget proposal’s perceived flaws, Ohio Democrats have found one policy they can stand behind: the Medicaid expansion. The Republican governor’s support of the expansion adds an unusual twist in the national argument over health care reform, which has been mostly split down partisan lines.

The Medicaid expansion is part of President Barack Obama’s Affordable Care Act — popularly dubbed “Obamacare.” Originally, every state in the country was going to be required to expand Medicaid in a way that includes anyone at or below 138 percent of the federal poverty level. But the same Supreme Court ruling that upheld Obamacare also said the federal government was being too coercive with funding by requiring states to expand their Medicaid programs, which already take up a massive portion of state budgets.

The court’s decision made the Medicaid expansion optional for states. Until Kasich’s budget blueprint was unveiled, it was expected that the governor — a vocal opponent of Obamacare — would refuse to expand the Medicaid program, but the administration agreed to the expansion and claimed it makes financial sense for the state. 

Kasich is relying on the federal government’s financial incentives to expand Medicaid. As part of Obamacare, the federal government is carrying the full cost of the expansion for the first three years. After that, the federal government’s share is brought down to 95 percent and ultimately phased down to 90 percent. If the federal government reneges on its promise to pay for a bulk of the share, Kasich’s budget has a trigger to wind down the expansion.

The budget’s projections echo preliminary findings from the Health Policy Institute of Ohio, a nonpartisan health policy group. In a study released Jan. 15 and revised Jan. 18, the Health Policy Institute found expanding Medicaid in Ohio would generate $1.4 billion in the next decade by shifting costs from the state to the federal government and generating more revenue through economic security. After 2022, the state would end up breaking even. The study also found that the expansion would give health coverage to 456,000 Ohioans by 2022. In other words, the study found the Medicaid expansion would allow Ohio to insure nearly half a million people at no cost to the state. (The study is slightly outdated because it relies on old sales tax rates for its revenue calculations, but the rest remains true.)

If studies on other states’ expansions are anything to go by, Ohio’s Medicaid expansion would also be good for statewide health results. A 2012 study from Harvard researchers found 2001 and 2002 Medicaid expansions in Arizona, New York and Maine greatly benefited the states’ new Medicaid recipients. Findings showed decreased mortality rates, better self-reported health, better access to health care and improved coverage overall — particularly for older adults, minorities and residents of poor counties. Still, the researchers cautioned the results might not apply to every state.

Kasich’s support for the Medicaid expansion has created critics out of his fellow Republicans. Following the expansion’s announcement, State Treasurer Josh Mandel sent a letter to Ohio legislators urging them to not expand Medicaid. In the letter, Mandel wrote about concerns regarding the long-term feasibility of the expansion: “There is no free money. While expanding Medicaid may direct more federal dollars to Ohio in the next few years, in the long term Ohioans will have to repay the debt that is funding federal government spending. … If Ohio’s leaders take the bait today, I fear that generations of Ohio taxpayers will be on the hook for the long-term costs of expanding Medicaid.”

During budget hearings, members of the House Finance and Appropriations Committee reiterated many of Mandel’s points. Some legislators echoed concerns that the trigger won’t be enough if the federal government backs down on its promise to financially support the Medicaid expansion.

Greg Moody, director of the Governor’s Office of Health Transformation, responded at the hearings by arguing the trigger would be adequate. He said the trigger would immediately halt and retract the Medicaid expansion, providing a “clean slate” for lawmakers. Moody explained lawmakers could then decide whether the expansion can continue with purely state funds or reduced federal funds. “Is it ideal?” he added. “It is not ideal. There’s not much about this that’s ideal.”

The office of Gov. John Kasich did not respond to CityBeat’s repeated requests for comments regarding the Medicaid expansion and the governor’s tax and education plans. Multiple interviews were originally scheduled, but they all fell through.

A bigger plan

Based on his statements, Kasich set out to make his budget the moderate miracle that could win him re-election. But among the three big items touted in the budget, only the Medicaid expansion really speaks to Democrats. The other proposals have sparked bitter reactions and concerns from critics who have opposed Kasich’s re-election from the start.

Still, the three policies aren’t everything in Kasich’s budget. It also includes an Ohio Turnpike plan that leverages funds from the turnpike for a statewide infrastructure program. There’s also a proposal to privatize food services in state prisons. The budget blueprint makes some moves to increase funding to counties and universities after years of flat funding and cuts. As reporters and state officials comb through the massive plan, more little details will surely come to light.

But Kasich has decided to focus on the budget’s three major proposals, with promises of a fairer tax system, progressive school funding and a Medicaid expansion. But if critics are right, the final plan falls far short of the standard set by the governor. In some cases, the proposals might do the opposite of Kasich’s original promises. ©

 
 
 
 

 

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