EMBARGOED UNTIL AT 11 a.m. An Equalization Fund for Counties

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1 Contact: Gene Krebs EMBARGOED UNTIL AT 11 a.m. An Equalization Fund for Counties Too many Ohioans are prisoners of geography. Where they live too often determines the amount and quality of services they receive, the rate of taxes they pay, and economic opportunities and amenities available to them. This is increasingly the case in Ohio s hundreds of small towns and the rural counties around them, where health and social problems have come to exceed that of our larger cities. This is an upstream issue one that in turn drives such problems as our drug epidemic. The issue is national in scope. Yet, it is one that demands the response of state governments, which determine how state and much federal tax revenue is distributed to local governments. The parameters of the issue in Ohio were addressed in part by John Begala for The Center for Community Solutions in these studies: er_publications/hubcitiesfinal _jb pdf and 1

2 er_publications/troubledprospects_begala_final_ pdf. Here are a few highlights: The proportion of the civilian labor force who were employed in rural small towns and cities during the first five years of the decade averaged 51.9 percent, lagging the state as a whole (57.7 percent), big cities (55.5 percent), and suburbs 63.4 percent). Over 16 percent of working age adults in small rural towns are disabled, a higher proportion than in Ohio s big cities (about 14 percent) and one-third more than the state as a whole. Only 15 percent of those age 25 or older in small rural towns have college degrees, compared to about 25 percent in big cities and the state as a whole. Thirty-four percent of children in small rural towns live in poverty, compared to 23 percent statewide. Children in small rural towns are almost four times more likely to live in poverty than suburban children. Almost 75 percent of a small rural town s primary and secondary school students participate in the federal school lunch program, which covers both below- and near poverty students from families with incomes up to 185 percent of the poverty level. This exceeds the statewide rate by over 25 percent. Teenage birth rates in small rural towns are 31 births per thousand for 15 to 19 year olds, higher than big cities, college towns or suburbs, and nearly double the statewide rate. While violent crime rates in small rural towns and cities are about the same as the state as a whole and considerably below those of big cities, property crime rates in small rural towns, at 41 per 2

3 thousand, are nearly as high as rates in big cities (45 per thousand). The data points above do take your breath away. How do we begin to reverse this problem? How do we push back against the coastal elites like the conservative National Review writer Kevin Williamson who wrote in March, 2016 that the truth about these dysfunctional, downscale communities is that they deserve to die. Economically, they are negative assets. Morally, they are indefensible. Morally, I think Mr. Williamson s comments are indefensible, not to mention very irritating. Let s help those rural communities help themselves with first identifying those counties that are not generating a sufficient amount of tax revenue from economic development activities, and then giving them targeted state funding so they can deal with the drug problem, increase their economic base, and keep their lights on, doors open and sheriff cruisers patrolling. When I served as a Preble County Commissioner I quickly learned how important the county piggyback sales tax is to funding county government and how state financial assistance from the local government fund and other sources were critical components of county finance. Today virtually every county s greatest source of revenue for the county general fund is the sales tax; Ohio s Local Government Fund has essentially been cut in half, and counties and other local governments have also experienced significant reductions in reimbursements for tangible and public utility personal property taxes. When I was an executive at my first research group, we developed an analysis of the abilities of counties to generate enough sales tax from 3

4 local economic activities to meet expectations of what they should receive if everyone who lived in that county actually shopped in that county. What we found was that many counties now lack the economic capacity to adequately provide a full range of mandated services. Here is the problem: The state created counties to serve as administrative agents of the state to implement the policies and laws of the State of Ohio at the local level. In short, counties themselves were the original unfunded mandate, but due to changes in shopping and lifestyle, many are now unable to fully locally fund their duties. For over a hundred years the delivery and funding of county services worked fairly well, as citizens conducted almost all their economic activity within five miles of where they lived. They lived where they shopped, lived where they worked and worked where they shopped. There was a logical nexus between taxation and activity and population that provided the funding for local governments, including schools. That has now fallen apart. Counties face a dilemma; in a typical county in Ohio about 40% of their revenue is derived from the local piggyback sales tax and many of those counties have enacted the maximum 1.5% permitted under state law. However, when the citizens of that county go and shop and dine out in another county, that sales tax revenue stays there. Some of that is defensible, as there are costs in economic development that the subsequent taxes offset. However, for the counties without extensive shopping opportunities, but still have residents living there, they begin to suffer. In response those counties that have not already enacted the full 1.5% piggyback tax often increase the rate, but they are increasing the tax on a 4

5 declining activity, so results are at best short term. Another challenge faced by all counties is the recent change related to the Managed Care Sales tax which will in the long run create additional fiscal challenges for counties. To illustrate how this new proposal deals with this problem, please refer to the table attached, which uses 2016 data. (Of course 2017 data is not yet available, and the yearly disbursement will change based on new annual data.). If everyone who lives in that county shopped in that county, and no one from the outside came into shop, it would receive a value of 1.00, or 100% of the expected revenue. If their citizens shop elsewhere, the number goes down. If the county is fortunate enough to have an outlet mall built, the number goes up. The proposal outlined here today is to create an equalization fund for counties that sets aside a pool of state money to bring these counties up to average, or a value of This is not Robin Hood; we are not proposing to reduce the piggyback sales tax revenue from the rich counties and give to the poor. This is also not county welfare; it is meant to help them get back up on their feet. While it may appear that the program is targeted to mostly smaller rural counties, the proposal is structured so that all counties are eligible, such as Montgomery, as all it takes is one new outlet mall fifty feet outside the county line to change the fiscal health of any county. The additional money can only be used for three purposes: 1. To combat the opioid and heroin epidemic, and fund the programs to deal with this in the court, criminal justice, human services and mental health systems. We aim to fix the problem, not the blame of drug abuse. 5

6 2. Economic development programs that increase sales tax revenues and workforce development in the county. This is not a hand out, but a hand up. 3. For general county purposes. We recognize that these counties need to keep the lights on in the short term. No more than half of the funds could be used for any one of the three purposes. The program would also sunset after ten years and be evaluated in years four, eight and after the program has ended, so the state and counties can evaluate in the fourth and eighth year whether or not it has achieved the desired purpose, or if different policies should be implemented. Ideally after ten years, the gap between the counties has narrowed, more counties are scoring in the.90s, thereby the costs are declining. Every year the Department of Taxation would prepare new charts for disbursement of money. The Auditor of State would, of course, perform the regular audits of the money in the courthouse to ensure it is used properly. This is the type of innovative program the state needs to deal with current fiscal and policy issues at the local level. It is my hope that this proposal will also serve as the basis for discussion at the state and local levels of how we can adequately fund our local governments now and in the future. Yes, all local governments. Where will the money come from, estimated to be about $110 million? Rather than specious statements about reducing waste and welfare fraud, the continuation of operations of the pilot Healthier Buckeye Program would be the key to help generate additional monies for the equity fund. That effort has just wound down; twenty one pilot 6

7 programs around the state are using $11.5 million to reduce the able bodied welfare burden and get those citizens into the workforce. If we can reduce able bodied welfare costs by 2% it results in $350 million in savings. One way to think about the Healthier Buckeye Program is as a public sector social impact bond. Economic development and tax revenue is mistakenly believed by many to be like soft butter spread on warm toast; it is evenly distributed. In reality it is more like cold butter on Wonder bread and is very lumpy. This is an effort to get a little butter on every spot of Ohio. Also making comments will be John Begala, former President and Executive Director of The Center for Community Solutions and Larry Long, former Executive Director of The County Commissioners Association of Ohio. Paid for by Committee to elect Gene Krebs, William Lutz, treasurer, 801 E Franklin Street, Troy Ohio ### 7