Budget Director Says Income Tax Cuts Coming In Budget, Though Tax Revenues Are Down

Jan 12, 2017

Last month, Gov. John Kasich has warned that a tough budget process is ahead. But other state officials have questioned the use of the word “recession” and have said they think the state’s economic situation is strong. In an interview for "The State of Ohio", the state budget director says all this is true, in a way.

Gov. John Kasich seemed pretty clear when he spoke to the Ohio House during the lame duck session last month – saying the state has gone through big changes, and more are coming. “We’re going to have hang together on that because it is going to be tough. We are on the verge of recession in our state.”

Kasich says that because the tax money the state is bringing in is falling behind projections – income tax revenue in particular is down nearly 4.5% over the last six months. But that word “recession” carries a lot of weight, especially after the great recession of 2008 cost Ohio hundreds of thousands of jobs, more jobs than every other state except Michigan. However, Ohio’s gross domestic product has been growing – only at about 1 percent a quarter, but still growing – and its most recent unemployment rate is just slightly over the national unemployment rate of 4.6 percent. So why is Kasich saying the state is on the verge of recession?

“Growth rates at this slow pace look and feel like a recession. Nationally, we’re not in a recession. But there’s tremendous uncertainty as to where we’re going,” said state budget director Tim Keen. “I think in Ohio we’re not in recession. But again, the governor said we’re at the verge of recession. And if you look at some of that slowdown and how it’s flowing through the economy, that’s what he was referring to.”

Keen reiterates what Kasich has said about the upcoming state spending plan, especially as compared to the spending in the last two budgets: “This next budget will not be like that. It will be very restrained. It will be very challenging.”

In its monthly reports, Keen’s budget office has written three times since October that the income tax revenue decrease is: “the result of an ongoing shift in taxpayer behavior to reduce estimated payments to better match lower expected tax liability due to rate cuts and the expansion of the small business deduction.” But Keen says that doesn’t mean tax cuts over Kasich’s last three budgets have caused the problem. “We do not believe that the small business tax cut or the rate cuts that all Ohioans enjoyed are the cause of the shortfall that we’re seeing in revenue this year. It is more a result of the fact that our income tax withholding – really, for reasons that we are not completely sure about – is growing at one-tenth of one percent over the first six months, when the income growth that we’re seeing really would not indicate that that’s the case.”

Keen says there’s a strong belief that tax cuts spark economic growth, and that some economic growth ought to be reserved for tax reduction. And he says that will be evident in the budget that will be released at the end of the month – even though tax receipts have been coming in lower. Could Ohio be headed the way of states such as Kansas, which has had problems with too many tax cuts creating imbalances? “Ohio has not had that problem yet,” Keen said. “And I do not expect that we will allow ourselves to fall into that problem in this, based on what we do in this next budget.”

Keen says the lower income tax revenue that’s been coming in for the last six months will be offset with what he expects will be substantially smaller income tax refunds – so he expects a turnaround starting in April.  But he confirms that state agencies were told to prepare spending plans based on 10% less funding in this budget.