The time for local governments to skinny up is now

The next biennial budget in Ohio has a billion-dollar hole in it thanks to the federal prohibition on a complex Medicaid financing scheme previously, and unwisely, embraced by Ohio. Local policymakers are also facing a fiscal challenge in light of this prohibition.

Since Ohio counties can charge a “piggyback” local sales tax on top of the state sales tax, local governments have been raising hundreds of millions of new dollars as a result of the Medicaid expansion. But with the sales tax on Medicaid managed care organizations now disallowed, the state estimates that counties and transit authorities will face a hit of nearly $400 million.

No doubt there will be full-throated calls for additional taxes at the local level. Public transportation advocates are likely to be particularly vocal since the sales tax is often used as a revenue stream for transit authorities.

Those calls should be resisted.

The Buckeye Institute has long maintained that Ohio has an inefficient system of local governments. This leads to the duplication of services and frequent inefficiencies that cost taxpayers. Instead of the usual calls for higher taxes, now is an opportunity to find greater savings that will benefit taxpayers and continue to improve Ohio’s economic climate.

Our call, echoed by the Kasich Administration, for a greater sharing of services needs to be heeded by local officials.

Auditor of State Dave Yost has been leading the way with solutions by promoting his SkinnyOhio and ShareOhio web pages where locals can learn where they can share equipment.

There are sure to be calls by local governments to again increase distributions from the Local Government Fund (LGF) in the wake of the loss of Medicaid sales tax dollars.

These calls should be resisted too.

The Buckeye Institute has argued for an end to revenue sharing where Columbus uses state tax dollars as a subsidy to local governments through the LGF.

As articulated in my 2014 report on the subject,

“Ultimately, the long-term fiscal health of the state’s local governments will be determined by Ohio’s economic growth, not by perpetual state subsidies or the redistributive preferences embodied in revenue sharing. By slowly beginning to reform Ohio’s revenue sharing system, Ohio policymakers are embracing a new approach to government spending that will empower local taxpayers to assert greater control over local decisions and facilitate local governments’ re-thinking on how they operate.”

Locals should have prepared for this contingency instead of hoping the federal government would never do what the federal government promised it would do. However, given that sales tax growth has been a bright spot for counties as the state has pulled out of the Great Recession, the loss of the new Medicaid sales tax dollars comes as a legitimate hit. Rather than simply increasing LGF distributions to make up for the reduction in revenue, state and local leaders should sit down and re-examine how the remaining LGF can be better targeted to communities in need but see no significant net increase in the LGF overall.

Under no circumstance should this turn into a giveaway; otherwise, the incentive to embrace further reforms at the local level will decrease.

There will be no easy or “silver bullet” solutions to the challenges raised by the looming shortfall in local sales tax revenue. Yet by working creatively across governmental jurisdictions, Ohio leaders can turn this into a long-term victory.

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Ohio’s Medicaid Expansion: How to Win When We Lose

$1.136 billion: That’s the budget gap that Ohio policymakers must face in the upcoming state budget cycle. This fiscal train wreck is no surprise—in fact, The Buckeye Institute warned policymakers in 2013 that such deficits were bound to happen. Soon, Ohio taxpayers will be on the hook for higher taxes, receive fewer public services, and suffer from less infrastructure.


In February 2013, the Health Policy Institute of Ohio, The Ohio State University, the Urban Institute, and Regional Economic Models, Inc., issued an influential joint report (hereinafter “Health Policy report”) arguing that Medicaid expansion would actually help Ohio’s budget. Most of the Health Policy Institute’s imagined budget benefits relied on a tax scheme that allows Ohio to foist a portion of its Medicaid costs onto the federal government while lowering its own expenses and keeping the tax revenues for itself.

Not surprisingly, once aware that states might try such a scheme, the federal government criticized the practice and determined it to be illegal under federal law. A Buckeye Institute report alerted Ohio policymakers that the federal government was on to its fiscal shell game and that most of the so-called financial benefits of Medicaid expansion would likely disappear.

In our view, expanding Medicaid was always a bad idea for Ohio, but without any of these supposed financial “benefits,” joining the expansion has proven even more foolhardy. Unfortunately, Governor Kasich ignored our warning, successfully maneuvered around the General Assembly—which had opposed Medicaid expansion—and used the Controlling Board to sign Ohio up for the budget-busting program.

The “shell game” used to fleece Washington

Ohio’s fiscal trick worked like this: Ohio 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 that premium to the state sales tax, Ohio artificially inflates spending and thus boosts federal matching dollars. Consider the following hypothetical example:

In year one, Ohio determines that MCOs need a $475 capitated premium and there are one 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.

MCO brief-table-1

In year two, Ohio raises the premium to $500 and assesses a 5 percent state sales tax—the proceeds of which it will keep. Total Medicaid spending now becomes $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 on Medicaid but receives $300 million in new revenue from the sales tax. In effect, Ohio fleeces the federal government for an annual $180 million bonus, and the MCOs still get the money they need.

Governments, of course, do not like to be fleeced. Federal regulators quickly thwarted Ohio’s sales tax scheme and now consider it illegal.

Medicaid expansion will bleed out

The Health Policy Institute and its co-authors had estimated that Medicaid expansion would yield net gains to Ohio’s budget. These gains, they wrongly predicted, would (depending on the economic model) range from $1.82 billion to $1.85 billion by 2022.

Unfortunately, between one-quarter and one-third of the Health Policy report’s projected financial gains flowed from the now-illicit MCO tax revenues. The Buckeye Institute analyzed how the Health Policy Institute’s estimates would change if the MCO tax became ineligible beginning in fiscal year 2016 (July 1, 2016 to June 30, 2017). Without these crucial revenues, Ohio would likely lose $1.2-$1.3 billion in anticipated funding from 2016 to 2022—even using the Health Policy report’s own estimates. If the trends continue, we fear that any fiscal gains from Medicaid expansion will be lost by FY 2026 and the program will continue to hemorrhage money for the foreseeable future.

MCO brief-chart1

The problem goes beyond Medicaid expansion

Ohio used its “spend-then-tax” scheme before expanding Medicaid, but the expansion has made the coming loss of these now-illicit tax revenues much worse for two reasons:

First, as predicted, expanding Medicaid added people to Medicaid’s rolls, making the sheer magnitude of the tax revenue losses larger. The Health Policy report estimated that 498,000 to 609,000 newly eligible Ohioans would enroll in the expansion program by FY 2016, bringing Columbus $131-$139 million for FY 2016. Once again the Health Policy estimates were wrong, as more than 632,000 people were enrolled in the Medicaid expansion population by the end of FY 2016.

The additional 632,000 Medicaid recipients means that Ohio currently reaps even more illicit gains under its sales tax scheme—and will therefore suffer even deeper losses next year when the scheme expires.

Second, Ohio depends on this tax scheme even more to fund the expansion population than it does to fund the pre-expansion Medicaid population. The state pays for Medicaid but Washington reimburses Ohio for a certain percentage of its expenses. The reimbursement rate varies by program. The pre-expansion Medicaid program enjoys a 63% reimbursement rate, for example, while the expansion program receives a 100% federal reimbursement until 2017. Beginning in 2017, however, that rate will slowly decline to 90% reimbursement in 2020.

The higher federal match for the expansion population means that the state yields far more illicit (and soon to expire) MCO tax revenues per Medicaid expansion enrollee than per traditional Medicaid enrollee. At the 95% FMAP that Ohio receives in 2017, the state would take in $1.15 in illicit tax revenues for every dollar it spends on the expansion population. But for the traditional, pre-expansion population, reimbursed at a 63% rate, the state only gets 15 cents in MCO tax revenues for every dollar that it spends. Thus, Ohio relies much more on its underhanded tax scheme to fund Medicaid expansion than it does to fund traditional Medicaid.

Taking revenues from the expansion and pre-expansion Medicaid populations, the state expected to gain $558 million from the sales tax in FY 2018 and $578 million in FY 2019—for a total biennial gain of more than $1.1 billion. That expectation has been dashed, leaving more than a billion-dollar hole in the state’s future budget. Filling that hole by FY 2019 will not be easy.

What we can do

Even these dark fiscal clouds come with a silver lining: The looming budget shortfall gives Ohio policymakers a real opportunity to fundamentally reform Medicaid. The federal government sets stringent rules for how states spend Medicaid dollars, and what kinds of policies and reforms states can pursue to mend their Medicaid programs. Ohio should use this pending fiscal crisis to convince Washington that the state needs more flexibility to develop innovative new plans for Medicaid.

Other states that implemented this tax-and-fleece scheme have, or have considered, hiking state taxes on all health insurance premiums (not just Medicaid premiums) in order to cover the lost revenues. But driving up health insurance costs with a broad new tax would only hurt taxpayers more. Instead, lawmakers should embrace other state-level health care reforms that will reduce costs and improve quality, such as expanding telemedicine, charity care, and licensing reform.


We warned Ohio policymakers not to rely on an illicit tax scheme to keep the Medicaid program solvent. Expanding Medicaid under the Affordable Care Act only made this risky decision even riskier. Unfortunately, some state leaders ignored our warnings. But all is not yet lost. We now have an opportunity for Ohio’s leadership to negotiate with Washington to structurally reform the state’s Medicaid program with new policies that would expand innovation and competition.

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The Buckeye Institute files brief defending Ohio’s early voting law in the U.S. Court of Appeals for the Sixth Circuit

COLUMBUS — The Buckeye Institute’s Legal Center submitted a brief today to the U.S. Court of Appeals for the Sixth Circuit defending Ohio’s generous and nation-leading early voting law. The filing supports Secretary of State Jon Husted’s defense of Ohio’s absentee voting period.

“Ohio’s policies make voting far easier than in most other states,” Robert Alt, president and CEO of The Buckeye Institute, said. “And Ohio’s policy regarding pre-registration protects the voting rights for all Ohioans by ensuring electoral integrity.”

On May 24, a federal judge overturned an Ohio General Assembly law, which set the state’s early voting at 29 days. Challengers alleged that federal law requires Ohio to offer even more days of early voting. Secretary Husted noted that Ohio’s 29-day period for casting absentee ballots puts the state in the top 10 nationwide for early voting.

Representing The Buckeye Institute in the case is Michael Carvin, an election and appellate law expert with the global Jones Day law firm.

“Plaintiffs argue that a federal law that has been on the books for 34 years suddenly requires Ohio to extend its already generous early voting and requires Ohio to permit same-day registration. The law does no such things,” Carvin said. “Nor does it invalidate the laws of the 40 states that offer fewer voting days than Ohio.”

Click here to read the full brief filed by The Buckeye Institute.

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Founded in 1989, The Buckeye Institute is an independent research and educational institution–a think tank–whose mission is to advance free-market public policy in the states.

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Government transparency grows in Ohio with online state budget

The Kasich Administration recently joined Ohio Treasurer Josh Mandel, and the Ohio Checkbook, at the forefront of public transparency.

The Office of Budget and Management (OBM), which is responsible for creating and monitoring how Ohio spends billions of taxpayer dollars, just unveiled an interactive budget, allowing state revenues to be tracked down to the line item.

This new tool will be particularly useful to citizens wanting to examine their state government and researchers wishing to take a deep dive into Ohio’s finances – and doing so with the most up-to-date information. It also contains ready-made searches that allow users to look at a wide range of spending categories, including Medicaid, school funding, debt service, capital funding, and many others.

Best of all, it’s easy to follow. The site incorporates engaging graphics to help those not used to reading dry budget documents. It also offers a very informative state employee database that includes salaries by agencies and separates base salaries, overtime, and any amount paid for leaving state employment, such as sick leave or vacation payouts.

While much of the data is available on both sites – the OBM interactive budget and Ohio Checkbook – there are some key differences. For example, the Ohio Checkbook is reaching out to higher education institutions and, most crucially, to local governments too. These areas are not included in the OBM interactive budget, but represent major areas of taxpayer spending that should be open to inspection. Meanwhile, the interactive budget offers up-to-date state revenues, changes to budget line items, and includes additional information on public salaries than what is available elsewhere.

The Buckeye Institute has stood for years at the forefront of government transparency. We were the first major organization in Ohio to have public salary databases, recognizing this information is a pillar of good government. It is only by understanding where taxpayer dollars are being spent that “we the people” have an understanding of what their government is doing on their behalf.

The expansion of transparency is a welcome sign that state leaders have heard the message The Buckeye Institute and taxpayers have long preached. In fact, they are going even further and giving even more robust tools that all Ohioans can use to empower themselves and hold officials to account at all levels of government.

Advocates of government accountability should give a round of applause to both the Kasich Administration and Treasurer Mandel for their efforts. And when they’re done clapping they should start clicking, exploring the OBM interactive budget and Ohio Checkbook to see where their tax dollars are being used.

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Latest jobs report shows Ohio is a national leader

COLUMBUS — Increases in Ohio’s employment and labor force participation rates last month make the state a national leader, according to a policy analyst at The Buckeye Institute. The state’s latest jobs report showed Ohio’s unemployment rate fell for the first time in nine months.

The Ohio Department of Job and Family Services’ May employment report, released Friday morning, shows the state’s unemployment rate dropped to 5.1 percent in May from 5.2 percent in April. Labor force participation increased slightly in May to 63.6 percent from April’s 63.5 percent. Buckeye’s Joe Nichols said both combined make Ohio a national leader.

“Ohioans want to work, as evidenced by the continued increase in the state’s labor force participation, which is outpacing the national average,” Nichols said. “The fact unemployment finally dropped after nine months of stagnation means workers are starting to find jobs.”

Over the last year, the United States labor force participation has remained virtually flat at 62.8 percent. By comparison, Ohio’s labor force has grown nearly 1 percent over the last year to the current rate of 63.6 percent. Nichols says the state should continue to pursue policies to meet that rising demand.

“We should look at any policies or regulations that are barriers preventing Ohioans from finding meaningful work,” Nichols said. “Gov. Kasich’s recent signing of a measure that will allow cosmetologists to move up in their careers is representative of the types of reforms Ohio workers need.”

The May report shows educational and health services added the most jobs last month (+7,900). The biggest losses came from manufacturers of durable goods (-5,200). Local government also continued to shrink, with 4,700 job losses.

The Buckeye Institute analyzes Ohio’s unemployment rate to identify policy solutions for increasing job opportunities and strengthening the state economy.

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Founded in 1989, The Buckeye Institute is an independent research and educational institution – a think tank – whose mission is to advance free-market public policy in the states.

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Prescribing state health care solutions for 2017

Health care has again made news with many states reporting large increases in proposed health insurance premiums. Some insurance companies like United Health have announced they are pulling out of certain insurance markets due to large financial losses. These issues all but guarantee that health care will again be a flashpoint in an election year.

No matter who is elected president or controls Congress, states will have some big decisions on health care in the next few years. A new paper I coauthored with Brian Blase from the Mercatus Center gives an overview of looming health care issues that governors and state legislatures need to be ready to address.

A Republican president would likely repeal part of the Affordable Care Act, and state lawmakers need to be prepared to regain oversight of their state health care markets. Many states passed state legislation to duplicate part of the ACA. A first step for any state lawmaker would be to see how they separate their state from some of the ACA requirements.

No matter who is president, Medicaid spending is going to be an important concern for states. National leaders for both parties have looked at reducing Medicaid payment rates, and federal auditors are trying to reduce Medicaid gimmicks that states use to garner more funds.

While state lawmakers may not control federal health care policy, they can control state licensing restrictions. Lawmakers should look at state health care regulations like certificate of need that will restrict competition and increase costs. Ohio, and other states, is trying to use civil society through charity care to help provide medical care to its citizens. These state solutions will become more important health care costs continue to increase.

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Buckeye Institute announces appointment of Orphe Divounguy as economist and Jeff Reed as communications director

COLUMBUS — Two new staff members have joined The Buckeye Institute, the Ohio-based free-market think tank announced today.

Orphe Divounguy (OR-fee DEE-voon-GEE) has been named Economist in The Buckeye Institute’s Economic Research Center, and Jeff Reed will serve as the organization’s new Director of Communications.

Divounguy’s research at The Buckeye Institute’s Economic Research Center will analyze current economic issues, including public assistance programs and labor policies, and will allow Buckeye to complete “dynamic” scoring and analysis of budgets in Ohio and other states. Reed will lead the organization’s state and national press relations and marketing.

“We are excited about the ideas and experience Jeff and Orphe bring to The Buckeye Institute and to Ohio,” Robert Alt, president and CEO of The Buckeye Institute, said. “The expansion of our Economic Research Center will make Buckeye the go-to resource for economic analysis of legislation. And Mr. Reed’s extensive background in marketing will assure that our ideas are seen around the state and across the country.”

Divounguy joins The Buckeye Institute after earning his Ph.D. from England’s University of Southampton, where he also obtained his master’s degree. After receiving his Ph.D., Divounguy served as a teaching and research fellow and international economic consultant. Divounguy’s research focused on labor markets, migration patterns, and economic development.

Before his time in higher education, Divounguy interned at the United Nations Department of Economic and Social Affairs in New York, NY, and Cato Institute in Washington, D.C.

Reed previously served as the Global Communications Leader for Corporate Responsibility at Cummins Inc., an Indiana-based Fortune 250 manufacturing company. At Cummins Reed promoted the company’s community engagement activities among its 60,000 global employees.

Prior to Cummins, Reed directed communications for the Friedman Foundation for Educational Choice, the national nonprofit started by Nobel laureate Milton Friedman. Reed also held public relations roles at the American Legislative Exchange Council in Washington, D.C., after graduating magna cum laude from Ohio University.

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Founded in 1989, The Buckeye Institute is an independent research and educational institution — a think tank — whose mission is to advance free-market public policy in the states.

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