Ohio Governor Ted Strickland recommends delaying a 4.2 percent cut to the state income tax that is scheduled to take place this year as the best option to restore balance to the state's budget.

The two-year, $50.5 billion state operating budget passed in mid-July is likely to come up $851 million short of revenue as a result of the Supreme Court of Ohio's ruling on video lottery terminals.

Crafting the final details of the budget, Strickland and the Ohio General Assembly came up with a plan to install up to 17,500 video lottery terminals in the state's seven horse racetracks.
Asserting that they did not need voter support and that the plan was not subject to voter referendum, the video lottery terminal program was a last ditch effort to raise an estimated $851 million needed to implement Strickland's proposed education reforms.

Overriding Strickland and the Ohio General Assembly, the Supreme Court of Ohio ruled 6-1 that the state's video lottery terminal program is in fact subject to voter referendum, as alleged by the group LetOhioVote.org.

"That decision by the state Supreme Court made it a practical impossibility to utilize video lottery revenue in the current budget and reopened an $851 million hole, placing our schools at risk of funding cuts and our budget at risk of imbalance," Strickland said during a press conference held in Columbus on Sept. 30.

"Waiting for a November 2010 referendum, even if it is successful, still denies the state the revenue necessary to protect our schools from devastating funding cuts in this biennium. Some have suggested placing video lottery terminals on the ballot at an earlier date, such as May. That would still be too late to generate the necessary revenue to fund education," Strickland said.
The video lottery terminal program called for 80 percent of the terminals to be installed and operational at the state's horse racetracks by May for the $851 million revenue estimates to hold up.

Speaking on Sept. 30, Strickland laid out three basic options to rebalance the state's budget. The options include increasing the state sales tax, cutting $851 million from the state's public schools, and postponing a 4.2 percent state income tax cut that is scheduled to take effect this year.

Education Cuts

Strickland said he sees education cuts as the worst possible decision to rebalance the state budget.

"We crafted a lean budget that prioritized education because improving our schools is the single most effective thing we can do to attract new jobs to Ohio and prepare the next generation of Ohioans to fill those jobs," Strickland said.

The $851 million of lost revenue represents more than 10 percent of the state's total allocation for education funding over the next two fiscal years. Strickland noted that the cuts could also put at risk the state's ability to draw down federal funding. "That means absent a federal waiver every school district would be cut an average of 10 percent in the current fiscal year and 15 percent in fiscal year 2011 for a total shortfall of $2.3 billion," Strickland said.

Cutting education would mean tens of millions of dollars of cuts for the state's largest school districts, especially if they lost their ability to draw down federal funds as predicted by the Ohio Department of Education.

"The end result would be the same across the board – hundreds of teacher layoffs, diminished curriculum offerings, and likely suspension of athletics and other extracurricular activities," Strickland said.

Higher Sales Tax

Strickland said he also opposes raising the state's sales tax, even though that move has often been the preferred response in the past when the state was confronted with less severe recessions.

"A half-penny sales tax increase would provide enough revenue to balance the budget and spare education," Strickland said.

"But I am concerned that a sales tax increase, even a temporary one, could have the effect of depressing consumer spending, prolonging the recession, and delaying Ohio's recovery. This is especially true within the manufacturing and automotive sectors of our economy," Strickland said.

Delayed Income Tax Cut

Instead, Strickland recommended the state postpone for two years the last of a series of 4.2 percent state income tax cuts that is scheduled to take place this year.

House Bill 66, legislation passed in 2005, called for 4.2 percent cuts in the state income tax each year through 2009, reducing the tax by a total of 21 percent over five years.

"If the legislature adopts this proposal, Ohio taxpayers will continue to pay at a tax rate 16.8 percent less than it was in 2004. The state will collect approximately $844 million in revenue, close to the $851 million needed to protect education funding and balance the budget. The rest will be made up in cuts if necessary," Strickland said.

"I believe postponing this last part of the scheduled income tax reduction will protect our schools from destructive cuts while avoiding a sales tax increase on Ohio families and businesses during this recession. Of course, some will try to score political points by branding this delay as a tax increase. But again, tax rates are staying the same as last year," Strickland said.

"What I am proposing today requires the legislature's approval. If no legislative action is taken, our schools will, by default, be forced to absorb $851 million in state cuts and perhaps much more if federal resources are lost. The cost of not acting is clear," Strickland said.