Ohio Prevailing Wage Costs Taxpayers, More Reform Needed

Posted on June 18, 2013 by Greg R. Lawson

The Buckeye Institute has long questioned the value brought to Ohio taxpayers by Ohio’s prevailing wage law.  As far back as 1996, we were making the case that a law that forces a state or local government to pay above-market wages on major construction projects makes little sense.  It is especially concerning that what is termed “prevailing wage” is anything but a market-based mechanism for determining adequate compensation.  Rather, it a bureaucratically developed rate based upon union wages in various geographic regions of the state.

Whenever an Ohio governmental entity sends out construction bids, it must include the relevant prevailing wage.  Further, the government entity then has to designate one of its own employees to serve as a “Prevailing Wage Coordinator” responsible for monitoring the operations of the contractor that secured the winning bid and enforcing the payment of the prevailing wage.

The origin of prevailing wage laws can be found in the problematic Keynesian responses put forward by both Presidents Hoover and Franklin Roosevelt in the wake of the Great Depression to artificially inflate prices.  In addition to this rationale, which would be appropriate for the dustbin of history, there was another, more insidious motivation guiding some in Congress when the Davis-Bacon Act, which created the federal prevailing wage, was initially passed.

In a report for the Mackinac Center, Dr. Richard Vedder comments on this,

“Another ‘argument’ for the original Davis-Bacon legislation and no doubt many of the state prevailing wage laws was Northern union contractors’ desire to be protected from competition from lower-wage, Southern, non-union workers. In fact, Rep. Robert Bacon was prompted to introduce his bill in 1931 after witnessing one contractor’s use of black Alabama laborers to construct a government hospital in Rep. Bacon’s Long Island district. A review of the legislative history of the Davis-Bacon Act makes it clear that the idea behind ‘prevailing wages’ was seen by some congressmen as a way to reduce out-of-state competition and discourage the use of non-white labor. One congressman who supported Davis-Bacon actually made reference to the ‘problem’ of ‘cheap colored labor’ on the floor of the U. S. House.”

Leaving aside the ignoble origins of the Davis-Bacon Act, the core problem today for taxpayers is that prevailing wage makes projects more expensive.  How much more?  Significantly more.  A 2010 CATO Journal article refers to multiple academic studies that highlight the increases.  For example:

 “A subsequent study in Michigan by Paul Kersey (2007) examined the difference between the “prevailing rates”—which in Michigan must be union rates—and the wages of workers in the same lines of work as determined by wage surveys conducted by the U.S. Bureau of Labor Statistics (BLS). He found that on average, the rates that were mandated on state construction projects were 39 percent higher than the median wages in the construction industry (Kersey 2007: 9). For example, the median hourly rate for carpenters in Wayne County (the Detroit area) in 2005 according to the BLS, adjusted to include fringe benefits, was $26.33, but the prevailing rate under Michigan law was $41.37 (Kersey 2007: 24). If the state had allowed competitive bidding, the costs for virtually every class of construction labor would have been significantly lower. Kersey (2007: 18) also estimates that if Michigan municipalities had not imposed prevailing wage requirements, they would have saved $16 million that year.”

Ohio has already seen significant savings by modifying its prevailing wage laws. For example, in 1997 the General Assembly specifically exempted school construction and renovation from the prevailing wage law.   A 2002 report on the impact of suspending prevailing wage for school projects by the non-partisan Legislative Service Commission found aggregated savings of $487.9 million. 

“A distribution of estimated savings by county indicates that 36 percent of the savings occurred on projects located in rural counties and 64 percent occurred on projects located in urban counties.”

While advocates for prevailing wage argue that the higher costs benefit taxpayers by ensuring that the various projects are constructed in a “safer” or higher “quality” manner, it is dubious that prevailing wage, rather than existing regulatory requirements and market incentives, is responsible for safety and quality outcomes.  The regulatory requirements for workplace safety such as OSHA apply even in the absence of inflated prevailing wage rates, and every contractor has a significant incentive to avoid accidents that will drive up their worker’s compensation insurance rates. As for the quality argument, the LSC Prevailing Wage study found that 91 percent of school administrators that had used competitive bidding between 1999 and September 2000 did not notice a difference in quality.  In fact, 6 percent noticed an improvement compared to only 3 percent that noticed a decline.Continuing down the path to reform, Ohio lawmakers significantly increased the thresholds for which application of prevailing wage applies in the previous biennial budget bill, House Bill 153 of the 129th General Assembly.

The threshold for new construction of a public improvement other than roads was increased from $78,258 (the previous statutory amount was $50,000 as adjusted by the Director of Commerce over the years) to $250,000 over three years.  The dollar threshold for repairs, reconstruction or improvements was increased from $23,477 to $75,000 over three years.

While this was a further positive step, more reform is needed.  In an era where tax dollars are ever more important and Ohio’s tax burden still places it at an overall economic disadvantage, policymakers should be seeking every way possible to do more with less.  Ohio no longer needs a prevailing wage law and it is doubtful that it ever did.  It would be good public policy to move towards its elimination.

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Reminder: Prestigious Health Journal Undercuts Medicaid Expansion Arguments

Posted on June 17, 2013 by Greg R. Lawson

We have mentioned this report previously, but it is critical Ohioans understand that expanding Medicaid is unlikely to yield the positive health outcomes promoted by most advocates.  A new study from the prestigious New England Journal of Medicine  (NEJM) further validates concerns raised by the Buckeye Institute and others regarding the long-term health benefits that accrue to those on Medicaid.

The NEJM study is a randomized and controlled study looking at the health outcomes of those in Oregon who obtained Medicaid coverage through a 2008 expansion to those that were eligible for Medicaid but placed on a waiting list.  In other words, it was a direct comparison of those enrolled in Medicaid vs. those without coverage.The conclusion?  From the study,

“This randomized, controlled study showed thatMedicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years…”

As those following the ongoing saga of Medicaid expansion in Ohio know all too well, one of the arguments used by expansion advocates is that by offering health coverage through Medicaid to those that currently have no insurance at all, we will be able to facilitate better health care outcomes.  The NEJM study undercuts this argument.  Of course, it is not the only one that does so.

The Buckeye Institute cited a major study by the University of Virginia (UVA) in our 2010 Crushing Weight report.  The UVA study was one of the largest studies of its kind and looked at nearly 900,000 major operations across the US to compare surgical outcomes of those covered under Medicare, Medicaid, and private insurance to those with no coverage whatsoever.

It found that,

“…surgical patients on Medicaid were 13 percent more likely to die in the hospital than uninsured individuals, controlling for demographic factors and health status.”

The report included data from across the nation including Ohio.  It accounted for various health conditions across the populations.

Ohio does not have to make expanding a Medicaid program that studies show not to provide positive health outcomes.  Ohio can tailor any number of state-based programs to deal with very real challenges in providing coverage to the proposed expansion population.

Let’s have that debate and base it on ALL the facts.

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Medicaid Expansion is a Bad Long-Term Decision and Here’s Why

Posted on June 11, 2013 by Greg R. Lawson

The Buckeye Institute was recently invited to participate in a roundtable discussion with the editorial board of the Cincinnati Enquirer regarding Medicaid expansion.  Along with the Buckeye Institute, Chris Littleton of Ohio Rising and Sen. Bill Seitz (R- Cincinnati) raised serious questions on the wisdom of expanding Medicaid in Ohio.

While the Enquirer gave opposing views reasonable coverage  in the roundtable overview article, the accompanying editorial fails to offer the same level of balance.   In especially unfortunate phrasing, the editorial argues that those in opposition were “twisting” themselves in knots in order to oppose expansion.

Given the complexity of the issue, it is understandable that some intricacies of the debate may have to be simplified, however, it does not do the public an appropriate service to allow Ohioans to entertain the mistaken impression that there are no legitimate concerns with respect to Medicaid expansion.  Only after these concerns are openly discussed and debated can a fully informed decision on this issue be reached.  Ohio has not really had this debate.  If it had, many more Ohioans would be aware of the following:

*  Medicaid expansion transforms Medicaid from a program to help the impoverished elderly, disabled, pregnant women, and families with children into an expansive welfare program that provides benefits to adults with no dependent children.  Indeed, the liberal Urban Institute indicates that 89.7% of those proposed to be covered under the expansion are adults with no dependent children.   Under the Kasich Administration’s initial proposal, there were NO work requirements–just an ongoing income-based benefit.  The nation’s experience with federal welfare reform demonstrates that tying work requirements to benefits is necessary to prevent long-term dependency, and to encourage individuals to become more productive members of society.  Yet even current recommendations to add a work requirement to Medicaid expansion depend upon obtaining a federal waiver that by law must be temporary.  Such a waiver will be subject to non-renewal in subsequent years, at which point Ohio will be obligated to continue the expanded Medicaid program, even if the waiver is denied.

*  Once you expand, you can’t get out, no matter what the Administration says.  Sen. Seitz made this point clear in the roundtable.  We have made this point repeatedly in testimony before the House and here is a document outlining just how much like “Hotel California” the expansion really is. The Supreme Court said the that federal government could not force the states into expansion with the threat of losing all Medicaid funding, BUT once a state freely agrees to the expansion, the existing law, which is the Social Security Act, applies.  That allows the Secretary of HHS to withhold the first dollar of Medicaid funding if a state fails to comply with federal law.  Verbal assurances are not legally binding.  Q and A documents from CMS are not binding.  Only a change in Federal law passed by Congress can guarantee a state could back out of the expansion.

*  The Obama administration has ALREADY proposed reducing the enhanced federal matching rates that Ohio counts on in its rosy economic projections.  In the FY 2013 proposed budget, the Obama administration threatened to renege on its enhanced matching rates “promises”—a “slight” change that would have cost Ohio $2 billion over the next five years alone. The Obama administration reversed course on the proposed cuts only AFTER the Supreme Court decision gave states the option to opt out of the expansion, and admitted that the reason for the change was to incentivize states to sign up for the expansion.  In other words, they went from coercing states to bribing them. Given that this promised funding level is a cornerstone of the assumption that Medicaid expansion will be economically beneficial to the state, it seems odd that the media continually omits this from its coverage of the debate.  For more on the uncertainty of federal funding levels, including the previous proposal to modify rates, click here.

Imagine what will happen ten years from now should the Feds dial the flow of funds back.  At this point Ohio policymakers will be put on the horns of a true dilemma: cut spending to other state priorities like education or raise taxes and risk the state’s economic competitiveness.

* ALL individuals at 100 percent of FPL will be able to receive heavily subsidized health coverage through the Federal Health Exchanges WITHOUT Medicaid expansion.  Those at 100 percent of FPL cannot be asked to pay more than 2 percent of their annual salary towards premiums.

An individual making the Ohio minimum wage of $7.85 an hour in 2013,  would be over the 100 percent FPL threshold by working 30 hours a week for 50 weeks a year.  Or, they could work 40 hours per week for 36 weeks per year.  To reiterate, this means they would qualify for Federal subsidies under the Health care exchange WITHOUT Medicaid expansion.

*  The cuts to hospitals’ uncompensated care have been delayed.  The cuts proposed by the Affordable Care Act to what is known as the DSH (or Disproportionate Share) are being delayed by one year by the Obama Administration.  This severely undermines the claims of proponents and rent-seeking hospital lobbyists who claim that expansion is needed immediately, and affords more time for serious reflection.

*  Many hospitals in Ohio actually receive a very small amount of their revenue from “charity care” Reimbursements. A review by Media Trackers Ohio of publicly available tax returns for multiple Ohio hospitals indicates that most hospitals will be only slightly impacted even if the dreaded DSH cuts do materialize.

* Studies show that Medicaid recipients have health results that are no better than, and are frequently worse than, individuals with no insurance at all.  Multiple academic studies raise serious questions as to the benefit of Medicaid for those on it.

For example, a brand-new study from the prestigious New England Journal of Medicine  (NEJM) validates concerns raised by the Buckeye Institute and others regarding the long-term health benefits that accrue to those on Medicaid.

The NEJM study is a randomized and controlled study looking at the health outcomes of those in Oregon who obtained Medicaid coverage through a 2008 expansion to those that were eligible for Medicaid but placed on a waiting list.  In other words, it was a direct comparison of those enrolled in Medicaid vs. those without coverage.

The conclusion?  From the study,

 “This randomized, controlled study showed that Medicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years . . . .”

This further confirms the results of previous studies, including a University of Virginia study of nearly 900,000 major operations in the United States, which found that surgical patients on Medicaid were 13 percent more likely to die in the hospital than uninsured individuals, even when controlling for demographic factors and health status.  It is not good policy to spend billions on a failing program which produces such poor health outcomes.

While reasonable people may weigh the evidence in favor of and against Medicaid expansion differently, the above concerns are far from the contortions of those seeking to oppose Medicaid expansion.  They are very real concerns that the expansion may look and feel good in the short-term, but is likely to yield a painful hangover in the long run.

It is time to stop the emotional rhetoric that obfuscates the underlying challenges. In short, it is time for Ohioans to have a full understanding of BOTH the benefits AND the risks of expansion.  If they understand this, they just might come to the conclusion that there is a better way to take care of those who truly need a hand up, as opposed to a hand out.

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Ohio’s Higher Education Budget: A Commendable if Modest Action Plan

Posted on May 30, 2013 by admin

The Buckeye Institute for Public Policy Solutions released its latest report, Ohio’s Higher Education Budget: A Commendable if Modest Action Plan, today.  The report, written by Dr. Richard Vedder and Anthony Hennen of the Center for College Affordability, provides an assessment of Governor John Kasich’s proposed higher education budget.

Robert Alt, President of The Buckeye Institute, said:

“The Buckeye Institute’s latest report finds that by tying a portion of public funding to graduation rather than just enrollment, the Governor’s higher education plan provides some much needed pressure on colleges to become more efficient.”

The report finds that the Governor’s plan takes a modest positive step toward aligning state support for its public universities with performance-based measures.  The plan makes 50 percent of state support, through the State Share of Instruction, contingent upon degree completions.  Fully implementing this plan would propel Ohio to a position of leadership in the nationwide effort to tie state support for higher education to achievement rather than enrollment.  Only Tennessee would make a larger share of its support contingent on performance-based funding at 100 percent.

The report raises questions about the long-term efficacy of the Administration’s proposed tuition freeze in the absence of stronger internal cost controls by higher education institutions, acknowledges the danger of schools lowering academic standards in order to inflate graduation rates, and suggests that a bolder plan would have disbursed funds to students rather than institutions.  Despite these caveats, the plan moves Ohio’s higher education system closer to achieving greater transparency and accountability.

 

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Medicaid Expansion and its Discontents

Posted on May 28, 2013 by Greg R. Lawson

The Buckeye Institute has been leading the way in Ohio by offering detailed critiques of expanding Medicaid in the state, and offering meaningful alternatives.

Long-time Heritage Foundation President Edwin Feulner frequently said, “There are no permanent victories in Washington.”  The same may be said for Columbus.  Although advocates of freedom and fiscal responsibility saw a major victory when the proposed expansion was stripped from the budget by the Ohio House of Representatives, make no mistake: it is not dead.

The door to Medicaid expansion was left open through an amendment in the House giving the Kasich Administration wide latitude to propose Medicaid reform including, potentially, expansion.  While the Ohio Senate is unlikely to drop expansion into the budget, a special committee focusing on reforming Medicaid and Ohio’s health system already has begun meeting.

Accordingly, the need for the Buckeye Institute to continue educating policymakers on the many pitfalls associated with expanding Medicaid, and the alternatives to give the disadvantaged a hand up, rather than a hand out, remains.

Continue reading →

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Ohio Makes Significant Jump In Rankings, but Still Needs Improvement in Annual Rich State, Poor States Report

Posted on May 24, 2013 by Greg R. Lawson

The American Legislative Exchange (ALEC) has just released its annual “Rich States, Poor States” report, in which it ranks all 50 states economic prospects.  Ohio has seen some serious improvement moving from 37 to 26 since last year’s report.  However, the report also echoes key themes Buckeye has been discussing for years: the need for further tax reform and the need to become a Right to Work state.

The annual report is written each year by Dr. Arthur Laffer, of “Laffer Curve” fame, Stephen Moore, the founder of the Club for Growth, and ALEC’s Jonathan Williams, who runs the Center for State Fiscal Reform.  It looks through a variety of policies that each state maintains in order to determine the states’ relative economic outlook.  These include 15 variables:

  • Highest Marginal Personal Income Tax Rate
  • Highest Marginal Corporate Income Tax Rate
  • Personal Income Tax Progressivity
  • Property Tax Burden
  • Sales Tax Burden
  • Tax Burden from All Remaining Taxes
  • Estate/Inheritance Tax (Yes or No)
  • Recently Legislated Tax Policy Changes (Over the past two years)
  • Debt Service as a Share of Tax Revenue
  • Public Employees per 1,000 Residents
  • Quality of State Legal System
  • Workers’ Compensation Costs
  • State Minimum Wage
  • Right-to-Work State (Yes or No)
  • Tax or Expenditure Limits

Looking at the decade between 2001 and 2011, the report echoes Buckeye’s Ohio by the Numbers reports by showing that the state was ranked 49th in economic performance and saw a 370,201 person loss in absolute domestic migration, for which Ohio ranked a dismal 45th.

Continue reading →

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Buckeye Testifies About the Critical Need for Tax Reform

Posted on May 10, 2013 by Greg R. Lawson
On Wednesday, Buckeye Institute offered testimony to the Ohio House Ways and Means Committee on one of the hottest topics in Columbus: municipal income tax reform.  This is a key issue for Ohio’s future economic competitiveness for several reasons.

First, Ohio’s tax burden is too high to keep us competitive in the global economy, but it’s not just our state taxes that are a problem.  Local taxes are just as bad or worse.  According to the Ohio Department of Taxation, Ohio ranks 13th in local tax burden as a percentage of income.  According to the non-partisan Tax Foundation, our business tax climate ranks a poor 39th while our overall state and local tax burden still puts us in the top half at 20th place.

To reform our tax system in the long run, we must address not only the rates we pay but also how we tax.  In the shorter term, there is something Ohio can do to alleviate serious burdens on Ohio businesses, particularly small companies: municipal income tax reform.

Ohio is one of only a few states that even allow municipalities to levy income taxes.  Of the states that allow municipal income taxes, the majority of these only see taxes assessed by major cities. By contrast, with 593 municipalities levying this tax, Ohio trails only Pennsylvania, with 2,492, in the number of taxing municipalities nationwide.

Unfortunately, Ohio is unique in the nation as the only state allowing each municipality to draft its own rules for withholding and the calculation of penalties.  This leads to absurd situations where contractors may have to file income tax returns for each jurisdiction in which they do business (there was testimony from small businesses that had to file over a dozen returns) no matter the size of the liability.  Often, the cost of complying with the labyrinth of paperwork exceeds the actual tax!  Remember, small and especially entrepreneurial businesses are the typical net job creators in America today.  Many of them are unable to afford the legion of accountants and lawyers necessary to assure compliance with these local taxes.

This raises the question of why Ohio would want to raise significant barriers to entry for these new companies.  The answer is that it doesn’t, but until it can simplify its uniquely complex and burdensome municipal income tax structure, Ohio will in effect be doing just that.  And until then, The Buckeye Institute will continue work to reduce barriers to business entry, and to create a simpler, flatter, more transparent tax system for Ohio.
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