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After years of plenty, Ohio lawmakers anticipate ‘tighter’ state spending ahead

COLUMBUS, Ohio — For the past three years, the state of Ohio has been awash in money, thanks to billions in federal COVID relief funding and better-than-expected tax revenues.

But there are signs that the state’s salad days will soon be over. Since July 2023, state tax revenue has been nearly $430 million less than expected, and state officials have to finish deciding how to spend Ohio’s share of federal coronavirus aid.

Officials and analysts say the state is still in decent financial shape right now, thanks to better-than-expected revenue from state investments and a drop in spending. But with state lawmakers preparing a variety of expensive spending proposals for next year’s budget plan – from boosting K-12 school funding to abolishing the state income tax – they and Gov. Mike DeWine may soon face some hard choices about which of them to pass.

Overall state tax revenue has fallen short of expectations for four of the last six months, though in May the state took in about $17.3 million more than projected, according to preliminary data the state’s Office of Management and Budget released last week.

The main reason that state tax revenue has fallen short of expectations so often recently is because the state has taken in a total of nearly $487 million less than expected in income taxes between July 2023 and the end of last month, the data shows. The reason for that, in turn, is because two tax changes that recently took effect – last year’s state income tax cuts and a 2022 law allowing pass-through entities to withhold more in taxes – resulted in a far greater drop in state revenue than expected, according to the state budget office.

Another factor, analysts say, is that Ohio’s economic growth has slowed somewhat over the past three years. The state’s unemployment rate, which hit historic lows last year, crept back up to 4.0% in April.

The income tax is the state’s second largest source of tax revenue. That has trended 5.4% below projections since July 2023. But growth in a combination of other, smaller pieces of the state’s tax revenue pie has blunted the overall impact of those disappointing income tax receipts. Overall, state tax revenue is down 1.7%, the preliminary figures show. Sales tax revenue, the state’s biggest source of tax dollars, meanwhile, has been close to what was expected in recent months.

At the same time, the state also earned nearly $215 million more than predicted on its investment portfolio between July and the end of April , thanks in large part to interest rates remaining high.

In addition, the state has spent a total of $1.8 billion less than expected during that same period. That’s mostly because the state Medicaid spending has been about $1.3 billion below estimates, as about 462,000 Ohioans have dropped off state Medicaid rolls as a coronavirus-era expansion of Medicaid eligibility came to an end, according to OBM statistics.

State Budget Director Kim Murnieks, in an interview, said she anticipates the state will end its fiscal year on June 30 with a balanced budget.

“In total, we are on a good path,” she said.

Murnieks said she isn’t surprised that the state’s recent tax changes have resulted in a greater-than-expected dip in revenue. The changes, she said, led taxpayers to change their behavior and their decisions about when to pay their taxes, which can be difficult to predict.

“I wouldn’t say that it was unanticipated as much as this is complexity that is challenging to forecast,” she said.

However, Ohio House Finance Committee Chair Jay Edwards, an Athens County Republican who played a leading role in crafting the current state budget, had a different answer when asked why the tax changes had a greater-than-expected impact.

“I can tell you that no one knows,” he said in an interview. “There has not been a satisfying explanation on why any of the (income-tax) refunds were so much higher than estimated.”

Edwards, who is departing the legislature at the end of the year because of term limits, said he anticipates that next year’s state budget is “going to be a little tighter” than last year’s current budget, when lawmakers had billions in unexpected state tax dollars and federal COVID funding at their disposal.

During the past year, state legislators and others have put forward a lengthy list of expensive policy proposals to address a wide range of issues, including fully implementing the state’s K-12 school funding plan, expanding state-funded vouchers for private schools, addressing the state’s childcare crisis, creating more affordable housing, and phasing out the state’s income tax entirely over the next few years.

State Rep. Adam Mathews, a Lebanon Republican who’s been a leading proponent of abolishing the state income tax, was asked in an interview whether, given that last year’s income-tax cuts had a larger-than-anticipated effect on revenue, making further tax cuts would also have unanticipated consequences.

Mathews replied that, at some point, he expects that the tax cuts will generate enough new economic activity that the state will make up or even surpass losses in income-tax revenue via other taxes, such as the state sales tax. In addition, he said, as lawmakers continue to simplify the tax code, it’ll become easier to predict how state finances will be affected by getting rid of the income tax.

Mathews also noted that, under his plan, the state’s income tax would be phased out over a period of several years, giving lawmakers multiple opportunities to pause the reduction if needed.

Ohio Senate Education Committee Chair Andrew Brenner, a Delaware Republican, said he doesn’t think recent state finance trends will make it difficult to increase K-12 funding next year.

“We’re still sitting on a $4 billion surplus. We’re not going into recession anytime soon. I think it’s fine,” Brenner said in an interview.

State Rep. Andrea White, a Dayton-area Republican who has introduced several bills that would provide state funding to help make childcare more available and affordable, said lawmakers will “need to see how the dust settles on all the tax changes we made” before deciding how to spend state money.

“But in the meantime, we need to look at what are the priorities of the state, and fund those priorities,” White said. “I think there’s lots of opportunities for us to look at what we fund, adjust it and make the changes we need.”

Jeremy Pelzer covers state politics and policy for Cleveland.com and The Plain Dealer.

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