What led to the state income tax increase we are now paying?


How and why did state government get to the point where it increased state income tax rates by 4.2 percent for last year and this year?

That can be a long and tangled story, but I'll offer a shorter version here.

It starts in 2008 and 2009, when state spending -- primarily on health care services paid for by taxpayers -- was increasing substantially while state tax revenues were declining. The increase in Medicaid spending can be attributed to two primary factors: expansion of eligibility in multiple ways, and economic conditions that pushed more citizens into financial conditions qualifying them for tax-supported Medicaid health care services. Declining tax revenues was occurring mainly because of decline in Ohio's economic activity and secondarily because state income tax rates were 4.2 percent lower than they were the year before.

The state income rate reductions were part of a five-year lowering of rates by a total of 21 percent in an effort to take Ohio out of the ranking of top 10 highest income tax states in the nation. The policy was enacted, with a major leadership role on my part, in 2005 as part of a major overhaul of Ohio's tax policies.  This included phasing in the 21 percent lowering of state income tax rates over five years at reductions of 4.2 percent per year.

In response to the budgetary situation, the Strickland administration repeatedly made cuts to roughly 15 percent of the tax-supported operating budget, while continuing spending as usual in the remaining 85 percent of the budget.

While this was unfolding, preparation of the new two-year budget plan was under way. This plan is for July, 2009 through June 2011. The growing gap between spending and revenues was dealt with in the administration's recommended budget by projecting tax revenues unrealistically high levels, by seeking and using billions in federal state temporary bailout dollars and by proposing sweeping new and higher fees -- especially on health care providers.

Near the end of the budget-making process, when the magnitude of the drop in state tax revenues became obvious, the state officials had to scramble to lower their revenue projections and spending authorization. Even I did not expect to see the budget year on June 30, 2009 with state tax revenues down 12.2 percent compared to the previous year. 

A package of budget balancing recommendations was made by the administration. It included a plan to dramatically expand the Ohio lottery by installing electronic slot machines at horse race tracks around our state. This was included in the budget that was passed, over my vocal objections, in mid-July. This "video lottery terminal" plan was very controversial and was immediately challenged in court and by a citizen initiated referendum. 

As it became clear that the lottery expansion was not going to increase gambling revenue any time soon, Governor Strickland proposed last Fall that state income tax rates be changed back to the 2008 level for all of 2009 and 2010 as a way of helping to balance the state budget.  This was eventually passed by the legislature, over my objections, last December.

And that's the short version explaining how it is that your state income tax bill is now running 4.2 percent above what is being withheld if you and your employer are following the tax withholding tables that continue to be published by the Ohio Department of Taxation.