Why is government transparency important?

According to the Tax Foundation, Ohioans pay approximately $4,217 per person in state and local taxes each year.  In total, the State of Ohio will collect just under $22 billion in revenue from in-state sources in 2015, and billions more will be collected by various local governments.  These same officials also have great power to make policies—from local zoning decisions to statewide occupational licensing rules—that affect a taxpayer’s ability to make a living and stay out of prison.  These facts invite several important questions, including:  How is this money being spent?  Would those funds have been put to better use in the hands of private citizens and businesses?  Who gets to make these policies, and who do these policies really benefit?

None of these questions can be answered without a comprehensive and well-enforced system of government transparency.  That is why The Buckeye Institute created a first-of-its-kind transparency database in 2010.  Concerned Ohio taxpayers have searched this pioneering database over 12.3 million times since its inception.

The Buckeye Institute has continued to make government transparency a top priority by partnering with the office of Treasurer Josh Mandel to help create the Ohio Checkbook.  This online, searchable database is a best-in-class state transparency tool that is promising to shine sunlight into the most opaque parts of the state’s coffers.  Additionally, Buckeye’s Statehouse Liaison and Policy Analyst, Greg Lawson, recently testified on two major pieces of transparency legislation.  One testimony was in regards to Representative Dovilla’s OpenOhio bill, which would allocate funds to maintain the Ohio Checkbook.  Lawson also testified on the benefits of Representative Duffey and Hagan’s DataOhio bill, an initiative to create a local government spending database.  [s1] Both of these bills would offer great leaps forward in making Ohio’s governments more transparent for citizens.

Aside from The Buckeye Institute and Ohio Treasurer Josh Mandel’s office, Auditor of State Dave Yost continues to be a strong watchdog over government waste and abuse.  His office provides downloadable local government financial data, public records training for government employees, and cost-saving resources.

And last but not least, Ohio Attorney General Mike DeWine’s office continues to be an important resource for Ohioans who need help obtaining public records from obstinate government officials.  The Attorney General’s office also publishes the Ohio Sunshine Manual, an essential document for any citizen hoping to arm themselves against public officials who don’t want to comply with sunshine laws.

As James Madison said, “[a] popular Government, without popular information, or the means of acquiring it, is but a Prologue to a Farce or a Tragedy; or, perhaps both. Knowledge will forever govern ignorance: And a people who mean to be their own Governors, must arm themselves with the power which knowledge gives.”  The Buckeye Institute is proud to carry on its legacy of arming the people of Ohio with the power of this government knowledge.

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Welfare reform in Maine provides lessons for Ohio

Ohio, like many other states, has had its welfare rolls expand while its labor force has declined.  A new report from The Buckeye Institute highlights several welfare program reforms championed by Maine Governor Paul LePage that could serve Ohio and other states well.  Governor LePage’s efforts are aimed at ensuring that limited resources are better targeted to reach those with the most need while avoiding misuse that keeps individuals trapped in government-run assistance programs and out of employment.

Welfare reforms critical to Maine’s development include:

  • Requiring drug testing for anyone receiving TANF Program cash assistance who had a previous drug conviction and connecting likely drug users with assistance to get clean;
  • Tracking and blocking the use of TANF cash benefits, especially electronic benefit cards (EBT), at locations such as casinos or liquor stores;
  • Beginning a pilot program that includes a photo ID on EBT cards to reduce fraud;
  • Hiring additional fraud investigators;
  • Enhanced coordination between the Maine Departments of Health and Human Services, Labor, and Education to get those on Food Stamps employed more rapidly.

Report author Greg R. Lawson said,

“Moving people into jobs is not merely a matter of dollars and cents, it is also a moral issue.  We should be empowering Ohioans to break out of poverty while assuring government assistance remains a safety net rather than a safety hammock.”

 

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Ohio’s Severance Tax Policy Should Look Beyond 17th Century Economics

In his 2015 State of the State Address, Governor Kasich argued that Ohio needed to increase the tax on oil and gas extraction—the severance tax—because removing oil and gas from the ground makes Ohio poorer.  Is this true?  Is Ohio poorer because of oil and gas extraction?  This debate isn’t new.  In fact, there was once a school of thought, the mercantilists, who made similar arguments in the 16th and 17th centuries. Fortunately, the work of great economists such as Adam Smith soundly proved the error of this thinking. What was true in the days of Adam Smith is true today.  Ohio benefits from the economic growth induced by the shale boom.  Increasing the severance tax will discourage shale-drilling activity, which will be the true culprit in making Ohio poorer.

Mercantilists did not see free trade as mutually beneficial because they thought one party could gain only at the other’s expense.  They were strong nationalists who wanted to maximize the national wealth by tightly controlling the economy.  These ideas and motives led them to implement misguided policies that restricted trade in order to hoard gold and silver.

But this was a flawed doctrine that only hindered its adherents in their stated goal of maximizing national wealth.  Adam Smith correctly explained that when producers and consumers freely trade, both parties win.  This leads to economic growth and true prosperity, regardless of how much gold is in the king’s vault.

Governor Kasich argued that, “Ohio’s being made poorer as a result of the depletion of our resources… Much of the wealth the shale boom is generating is being shipped out of our state, being shipped out of Ohio.”

His proposed remedy is to dramatically increase the state severance tax on horizontal drillers so that, like the mercantilist philosophers in days of old, the state can build up its savings with the tax revenue.  He views the shale oil and gas deposits sitting in the ground as part of Ohio’s wealth.  Because of this view, Kasich hopes to maintain this wealth by taxing shale production and saving the revenues.

But as Adam Smith ably proved, this economic view is erroneous.  Oil and gas deposits do not create wealth for Ohio by merely sitting in the ground beneath thousands of feet of rock. It’s the extraction of the deposits, thanks to new horizontal drilling technology, that makes them profitable.  Horizontal drillers add value to those oil and gas deposits by using advanced machinery, skilled labor, and technical know-how to bring them to the surface and make them usable.  In the process, these drillers generate business for Ohio-based companies and create high-paying jobs for Ohio citizens.  In turn, the state government, local governments, and local schools receive higher tax revenues as well.

Increasing the severance tax discourages shale-drilling activity, which consequently discourages growth.  Moreover, any surplus to the state from this tax increase will be more than offset by the loss of jobs, investment, and spending that would have been created by keeping those resources in the private economy.  Those who benefit directly from the shale boom re-invest some of their proceeds, resulting in even more wealth and job creation.  Their income also becomes their spending, which becomes income for people who then benefit indirectly from shale production.  In this way, all Ohioans share in the benefits of the shale boom without the need for state intervention.

The Kasich administration has repeatedly overestimated the level of oil and gas production in Ohio, and consequently, has repeatedly overestimated the amount of severance tax revenue the state would receive.  Significantly increasing the tax will surely maintain this pattern.  The Governor further argued for his proposal by emphasizing that, “If you don’t drill, you don’t pay.”  But the last thing that Ohio should want is for companies not to drill, and to instead take their valuable economic contribution elsewhere.

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Takeaway from State of State: Ohio Needs to Adhere to Sound Tax Principles

When DHL Express pulled out of Wilmington during the throes of the Great Recession in 2008, the Mayor said the city took a “gut punch.” That story is one of the big reasons Governor Kasich decided to take his annual State of the State speech to Wilmington. He wanted to highlight the difference his policies are making for Ohio and why the General Assembly should follow through on his latest biennial budget proposal. The Governor is right that many Ohio policies, specifically its troublesome tax code, hurt economic growth and prosperity.

While The Buckeye Institute did find some promising policy recommendations in the budget, there are numerous areas where improvement is definitely needed in order to turbo-charge Ohio’s recovery. Nothing that the Governor said in last night’s State of the State alters the following observations that we made in our overview of the budget when it was released earlier this month:

• “Efforts to continue reducing the personal income tax (PIT) and shift to consumption-based taxation should also be applauded from a long-term perspective. However, several of the mechanisms chosen to offset revenue losses will counter-act some of the positive impacts from the PIT reduction and violate the principle of tax equity. Among these are increases to the Commercial Activities Tax and the Ohio severance tax. Both will be harmful for businesses and should not move forward. The proposed tobacco tax increases will also lead to smuggling and evasion, thus not yielding the revenues projected by the Administration while also singling out a single class of taxpayers and violating the principle of tax equity. Further government spending restraint should form the basis of eliminating the income tax prior to any other increases.
• Education spending continues to grow rapidly despite little academic evidence that increased budgets benefiting bureaucracy yield significant academic gains.
• Medicaid continues to be what former Governor George Voinovich called the “Pac-Man” of the state budget, especially after the expansion. However, the Governor is wisely seeking to impose limited personal responsibility requirements on those over 100% of the Federal Poverty Level (FPL).
• The state is wisely continuing a reduction in revenue sharing by further reducing reimbursements to local governments for tangible personal property and kilowatt-hour taxes.
• Overall state spending is increasing faster than can be justified through either inflation or population growth. The largest increase comes from moving the Medicaid expansion costs back onto the General Revenue Fund (GRF) books. However, state-only GRF spending also eclipses inflation.”

Adhering to good tax policy of the kind we outlined in our Tax Principles report will move Ohio into a continuously improving economic condition. All reforms should be simple, transparent, pro-growth, and fair and equitable. Unwise tax shifting undermines some of the salutary effects of things like the large reductions in the personal income tax, including the elimination of that tax for many small businesses.

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The Buckeye Institute on State of Ohio Talking Taxes and Spending

Our Greg R. Lawson was on The State of Ohio news program opposite Policy Matters Ohio’s Amy Hanauer on February 20.  The video is below.

 

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Medicaid Expansion Relies on Uncertain Funding

Ohio stands to lose up to $1.3 billion in expected revenue by 2022 after a likely rule change by the Center for Medicare & Medicaid Services (CMS) that would close a Medicaid funding loophole. Buckeye Institute President Robert Alt cautioned policymakers against relying on these expected revenues to make Medicaid expansion feasible. Unfortunately, his initial success was thwarted when Governor Kasich bypassed the legislature to expand Medicaid through the Controlling Board.

Ohio exploits the loophole to game the federal Medicaid matching grant system. Here’s how it works:

The state pays per-member per-month or “capitated” premiums to private insurance firms called Managed Care Organizations (MCOs) that coordinate healthcare for Medicaid recipients. By increasing the capitated premium and subjecting it to the state sales tax, Ohio inflates spending and boosts federal matching dollars. Consider the following hypothetical example:

In one year Ohio determines that MCOs need a $475 capitated premium and there are 1 million Medicaid recipients. Total Medicaid managed care spending equals $5.7 billion per year, with $2.28 billion coming from the state’s coffers and—at a 60 percent matching rate—$3.42 billion from the federal government.

The next year, Ohio exploits the loophole by setting the premium to $500 and assessing a 5 percent sales tax. Total spending is now $6 billion per year, with $2.4 billion coming from the state and $3.6 billion from federal matching grants. The state spends $120 million more out of pocket but receives $300 million in new revenue from the sales tax. In effect, Ohio fleeces the federal government for a yearly $180 million bonus, and the MCOs still get the money they need.

A federal Inspector General recently investigated Pennsylvania for playing the same game and found the practice unlawful. The Center for Medicare & Medicaid Services responded by declaring its intent to bring the states back in line. This most likely means pulling the plug on Ohio’s own MCO premium tax scheme.

A report by the Urban Institute and The Ohio State University projected that Medicaid expansion would net a $1.85 billion gain to the state budget through 2022. However, if Ohio loses MCO premium tax revenue, their estimates imply that the program would run a $169 million annual deficit in 2022 and lose a cumulative total of $1.18 billion by 2032.

With a potentially adverse decision from CMS looming on the horizon, Ohio may soon learn that disregarding The Buckeye Institute’s warning was an expensive mistake. Fortunately, the coming biennial budget debate will afford state leaders the opportunity to reverse course before it’s too late.

To read more about this issue, please see our policy brief.

 

 

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Containing State Spending is Key for Tax Reform

Governor Kasich’s proposed budget for FY 2016-2017 contains some positive features, but overall it continues the trend of unchecked growth in state spending. The Governor’s proposal expends an additional $912 million of the state-funded portion of the General Revenue Fund. While an increase of this magnitude is hard to justify from an economic perspective, it is not unusual from a historic perspective.  GRF expenditures grew by over $1.6 billion in real dollars from 1996 to 2014, averaging 3.2% growth per year. For the last six years this growth has been closer to 5%, a trend that continues in this proposal.

It is hard to imagine a compelling reason for such a dramatic increase. From 1996 to 2014 Ohio experienced a very low rate of population growth, averaging  .18% per year. Inflation averaged a moderate 2.3% per year. If GRF spending per capita were confined to 1996 levels, and merely kept pace with historic inflation and population growth rates, state GRF expenditures would have totaled less than $19.4 billion in 2016. Unfortunately, though perhaps not unexpectedly, spending did not merely keep pace with inflation and population growth. With Kasich’s proposed $912 million increase, state GRF expenditures will total more than $22.7 billion. This is $3.3 billion above what inflation and population growth require, and continues the recent trend of raising state GRF spending by 4-5%.

Increasing spending by $3.3 billion forces Ohio taxpayers to pay $3.3 billion in additional taxes. While the governor’s commitment to cutting individual income taxes is laudable, claims of true tax reform ring hollow in the face of spending growth. Merely shifting the tax burden to businesses is not “reform” in any sense of the term, particularly given the systemic problems with how Ohio taxes businesses. Once spending growth is contained the tax burden can be lifted rather than shifted.

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