The prosperity of the past few years has all but erased from our minds the inherently cyclical nature of the economy. But cyclical it is, and a general slowing of the economy will eventually, certainly follow the recent demise of never-profitable Internet companies and the widespread cutbacks in other technology-oriented fields.
Recognizing the inevitability of these fiscal ups and downs, Ohio is one of 45 states that squirrel away money when the economy is chugging along. State law mandates the budget-stabilization fund, more popularly know as the rainy-day fund, must equal 5 percent of the prior year1s general revenue. Each year in which a budget surplus exists, money is transferred into the rainy-day fund to bring its balances up to this statutory level. But the Center on Budget and Policy Priorities (CBPP), a nonpartisan public-policy research organization, thinks most states, including Ohio, are not saving enough to weather even a mild recession, such as the one that started in July 1990. Although that recession officially lasted only nine months, the effects of the economic slowdown that preceded it, along with the recession1s lingering effects, hammered state governments from 1989 to early 1992. In 1989, the 48 states studied by CBPP � the study excludes Alaska and Hawaii, whose economies depend on one industry, oil and tourism, respectively � held cumulative rainy-day fund balances of $12 billion. By the middle of 1991, the reserves of 30 of these states had shriveled, and they collectively faced a budget deficit of $15 billion.
To make up for these shortfalls, the 48 states passed $27 billion in tax increases between 1989 and 1992.
Even short, relatively mild recessions deliver two harsh blows to state finances. First, the sputtering of the economic engine results in less retail and wholesale consumption, which in turn leads to poor business performance and layoffs. Consequently, individual income taxes and sales and use taxes, which make up nearly 65 percent of Ohio1s tax base, decline. Second, cutbacks lead to more demand for state welfare and social programs, increasing expenditures even as revenues drop.
Given the devastating effects of the mild 1990 recession on state finances, CBPP examined the states1 current fiscal readiness for an economic slowdown. By projecting onto the current economic scenarios of each state the effects of a downturn equal in duration and severity to the 1990 recession, CBPP predicts only three states currently hold sufficient reserves to withstand a mild recession without increasing taxes or cutting programs.
Ohio is not one of the fortunate few. According to the CBPP analysis, Ohio would need a rainy day fund of approximately $3.9 billion to get through a recession without raising taxes or reducing services. The state1s fiscal 2001 budget projects a rainy-day fund of approximately $977 million and an additional budget surplus of $121 million at the end of the fiscal year, just over one-quarter of the necessary rainy-day fund calculated by CBPP.
But CBPP may actually overestimate Ohio1s recession preparedness. The study, completed in March 1999, did not take into account the significant expense Ohio must pay to meet the standards set by the Ohio Supreme Court in DeRolph v. State of Ohio. The court found, among other things, the state relies too heavily on local property taxes to fund education and many of Ohio1s school buildings are in abhorrent condition.
Governor Taft has indicated his willingness to spend $10 billion to rebuild Ohio1s schools over the next 12 years. While $4.5 billion of this expenditure might be offset by tobacco-settlement payments, at least $5.5 billion, or $458 million annually, will drain the state1s tax revenues. These school-building repairs, along with the rest of the fixes contained in the DeRolph ruling, are court mandates that must be financed.
Even in the recent years of economic prosperity, Ohio1s lawmakers have tried to pass a sales-tax increase to finance school-building repair. As the tab for fixing Ohio1s education fiasco rises, talk of other tax increases continues to circulate. When the economy heads south, that talk will certainly grow louder.
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