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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Why Ending the Renewable Energy Mandate is Good for Ohio Families and the Economy

The Pew Charitable Trusts recently reported, with regret, that investment in Ohio’s renewable energy industry fell from $750 million in 2012 to $100 million in 2013. But as The Buckeye Institute’s new report explains, ending the renewable energy mandates will only prove to help Ohio’s families and strengthen the economy.

Pew fears that so much lost investment could cost the state thousands of jobs and even wipe out the fledgling Ohio renewable energy sector, spelling disaster for the Buckeye State’s economic future. Their report points the finger for these woes at Senate Bill 310, a state law that temporarily suspended previous government mandates that forced utilities and electricity retailers to use renewable energy and implement energy efficiency measures.

Pew’s comparison of 2012 to 2013 investment is fundamentally unsound. 2012 investment was likely driven to artificially high levels by federal renewable electricity production tax credit policy, which incentivized renewable energy companies to begin projects before December 31, 2012. Pew is wrong to conflate the effects of federal tax policy and state energy policy.

But regardless of where the blame lies, SB 310 is a smart policy move for four reasons.

  1. It reduces crony capitalism that favors the owners and employees of renewable energy companies at the expense of other Ohioans.
  2. Any conspicuous harm to the jobs and renewable energy investment with which Pew is concerned masks other unseen benefits for the rest of Ohio’s economy.
  3. Eliminating the renewable energy standards will help the bottom line for all Ohioans by lowering energy bills.
  4. Forcing renewable energy companies to compete without subsidies will make them stronger in the long run.

Testimony by Peggy Claytor of The Timken Company illustrates the significant harm of these mandates on Ohio companies:

Consumers don’t need costly portfolio mandates to do what makes good business sense. Make no mistake about it: Ohio’s current mandates are costly. They are particularly costly for large energy users…Together, the portfolio mandates will cost Timken in excess of $2 million this year alone.

Such exorbitant compliance costs prevent such companies from focusing on growing their businesses, giving existing employees better pay and benefits, and creating new jobs. Scrapping these ill-conceived mandates, along with the unnecessary costs they impose on businesses and consumers, is a vital step forward for all Ohioans.

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New U.S. EPA Rules Will Crush Ohio Recovery

The U.S. EPA recently proposed two crushing sets of regulations—the Clean Power Plan aims to reduce CO2 emissions, while the other is a plan for ozone reduction. There are four major issues with these plans that should concern all Ohioans: (1) the costs imposed are extraordinary and will damage the economy; (2) compliance will make Ohio’s energy grid less reliable; (3) the centralization of power to the EPA will erode the free market forces which have slowed the growth of energy costs and improved services; and (4) the federal agency’s power grab will strip much of Ohio’s authority to make her own energy policy.

First, studies by NERA Economic Consulting found that the Clean Power Plan and the ozone proposal would cost the nation up to $73 billion and $360 billion per year, respectively. The worst-case scenario has the total cost of these two regulations nearly equaling the 2014 federal deficit of $486 billion.

In the Buckeye State specifically, NERA estimates the ozone regulations alone could impose compliance costs of more than $20.8 billion per year. Both regulations will also increase electricity costs—the Clean Power Plan by an average of 12 percent per year by 2031 after adjusting for inflation, and ozone regulations by about 15 percent through 2040.

Second, these regulations would impair electric reliability by reducing the use of coal to generate electricity. Less coal usage forces our state to rely more on natural gas, for which there is insufficient pipeline infrastructure, and renewables such as solar and wind, which are inherently unstable. This increases the likelihood of “widespread rotating blackouts,” according to Commissioner Philip Moeller of the Federal Energy Regulatory Commission, and could be catastrophic during severe weather events like the recent polar vortex.

Third, centralizing command over Ohio’s energy sector under the U.S. EPA also diminishes market freedom and consumer choice. The ability of most Ohio consumers to choose the best electricity provider among a variety of competitors would be restricted, leading to worse service at higher prices.

Finally, as the Buckeye Institute’s comments to the EPA explain, the Clean Power Plan is fundamentally a “national energy and resource planning policy.” It gives the EPA unprecedented authority over rightful state jurisdiction, and Ohio officials would often need permission from the EPA to change the state’s energy policies.

Ohio citizens have power to hold their state legislators accountable through the democratic process; however, they cannot hold bureaucrats at the EPA accountable for wrongheaded policies. Thus, the Clean Power Plan would severely curtail Ohioans’ political power over their own energy system.

Piling on $20.8 billion per year in regulatory costs is an economic growth killer that will also endanger the reliability of Ohio’s power grid. Worse, the rules leave Ohio vulnerable to future changes because increased EPA power strips Ohioans of control over their own energy system. These plans ignore economic prudence and disregard federalist principles. For these reasons the Ohio General Assembly should do everything in its power to mitigate both proposals.

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Yes, Minimum Wage Hikes Cost Jobs

As the slow economic recovery continues, there are renewed calls to raise the minimum wage.  While the goal may be to raise the income of certain workers, the consequence is to price some workers out of the labor market and reduce their opportunities.  Recent scholarship from the nonpartisan National Bureau of Economic Research confirms that this exact flaw has undermined the effectiveness of federal minimum wage laws, which suggests calls for new laws in the same vein be met with skepticism.

The upswing in minimum wage activism likely owes some of its vigor to recent studies that attempted to challenge the well-established relationship between raising minimum wages and increases in unemployment. Studies performed in 2010[1] and 2011[2] argued that minimum wage increases do not increase unemployment, but a recent response to these studies points to the studies’ fatal flaws. In attempting to “correct” for regional biases in the existing scholarship, the 2010 and 2011 studies relied on new methodologies limiting their analyses to states neighboring each other.  The response illustrates that the suggested regional biases did not exist, and demonstrates that such a confined analysis produces results that understate the employment effect of minimum wage increases. After correcting for these errors, the new study shows that employment does decrease after minimum wages increase as previous economic studies have shown.

Another recent study, written by Jeffery Clemens and also published by the NBER, has reaffirmed the long-standing wisdom surrounding minimum wage increases. Dr. Clemens tracked specific workers over periods of time surrounding minimum wage increases, and found that in the long run these workers experienced a decrease in net income. In the case of younger, college-educated workers, this lost income was manifested in the form of an “internship effect;” entry-jobs that would have been paid were converted to unpaid internships. In other industries, specifically food service, the lost wages were manifested in the traditional form of lost employment. Over time these un-worked hours lead to further lost wages, as compensation in this sector of the labor market is highly tuned to experience.

A minimum wage increase means two things for unskilled workers: they will be replaced by workers with more experience, and it becomes harder for them to accrue the experience needed to secure a job. The downside of all this is that there is a decrease not just in employment, but also in workers’ total earned income. Perhaps the most salient statistic emerging from this analysis is that minimum wage increases have been associated with a 5% reduction in the likelihood that a worker will earn more than $1500 per month. More than any other observable statistic, this very clearly illustrates the utter uselessness of minimum wage increases as a tool to improve the lives of low-income workers.

[1] Dube, Arindrajit, T. William Lester, and Michael Reich. 2010. “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties.” Review of Economics and Statistics, Vol. 92, No. 4, pp. 945-64.

[2] Allegretto, Sylvia A., Arindrajit Dube, and Michael Reich. 2011. “Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data.” Industrial Relations, Vol. 50, No. 2, pp. 205-40.

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Is it Time to Get Rid of the Minimum Teacher Salary Schedule?

On December 2nd the Ohio House of Representatives passed HB 343, an omnibus of changes to Ohio’s education policy. Noticeably absent among these changes was a provision introduced in the House Education Committee to eliminate the rigid pay schedule for teachers. Under the current law, all teachers at all public schools have their base compensation tied to the number of years they have been teaching. An amendment was introduced to eliminate this process, called a “minimum pay schedule,” and to allow alternative compensation plans in innovative districts. However, the amendment drew enough opposition to be stricken from the bill.

As a matter of course we oppose all programs that automatically and unavoidably raise spending, but minimum pay schedules specifically cry out for reform. There is no reason for every individual teacher’s compensation to be based on the same metric, least of all when there are better metrics that could be used. School districts should be free to adopt incentive-based pay structures to attract and retain talented teachers, and teachers should be able to earn a premium wage if they excel in the classroom.

Other states have considered alternatives to inflexible seniority-based pay schedules. The North Carolina House of Representatives recently examined their state’s pay schedule, and found that it “does not align to the majority of current research on the impact of teacher experience on student outcomes.” The report recommended transitioning to an incentive-based system, prioritizing the retention of new and talented teachers. Their findings track heavily with testimony they received from Dr. Jacob Vigdor, a professor at Duke and an adjunct fellow with the Manhattan Institute. Dr. Vigdor pointed out that a teacher’s years of experience cease to meaningfully impact test scores past the 6-12 year mark, which suggests a disconnect between the basis of teacher compensation and a key metric of their performance.

Whether a district prefers issuing performance-based compensation, or instituting its own salary schedule, or using an entirely unique approach, the choice should be left to them. What is needed is experimentation and innovation, not across-the-board adherence to formulas that benefit no one. Critics of reform claim that the current pay schedule is necessary to protect teachers, but this is simply not accurate. Dr. Vigdor and the North Carolina House recommended increasing the starting salaries for teachers, enabling them to reach their peak salaries earlier and actually increasing the present value of their total career earnings. This approach can be expenditure-neutral with the salary schedule while creating more incentives for new teachers to remain in the profession. Shackling teachers’ pay to seniority does nothing to reward those who are effective, nor to attract and retain new educators to the field.

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