Ohio leaders stand by tax reform in tough economy

COLUMBUS, Ohio (AP) -- A tax reform package passed in 2005 is compounding state budget difficulties during a tumultuous economic period, but both Republican and Democratic leaders say the changes are necessary for Ohio's future.

Republican leaders in 2005 passed a package that included a 21 percent reduction in the state's income tax over five years and phased out the state corporate franchise tax.

The Columbus Dispatch reported Thursday that state revenue has dropped each of the past three years since 2006. That only happened three times during the 50-year period that ended in 2006.

Estimates show that when fiscal year 2009 ends June 30, the $18.7 billion in general revenue tax collections will be a record $735 million drop from the previous year. Actual tax receipts are currently running behind projections because of the worsening economy.

Without the tax reform, tax revenue would have increased $675 million from fiscal year 2006 to fiscal year 2007, $785 million in 2008 and roughly $120 million in 2009.

"I don't have any regrets," said Senate President Bill Harris, an Ashland Republican. "I would argue that had we not done tax reform, things would be even worse."

Gov. Ted Strickland, a Democrat, has also said repeatedly that he wants to uphold the tax reform.

"Despite the immediate impact on the state's budget, giving it time to work and continuing the implementation is important for transforming the state's tax climate," Strickland spokesman Keith Dailey said.

Harris said crafting the next two-year budget is likely to be the most challenging budgeting process he's seen in his 14-year legislative career.

Strickland has already forced cuts and accounting measures to account for a $1.3 billion hole in the current budget, after the slowing economy sent less tax revenue to state coffers than was forecast when lawmakers crafted the budget.

Budget Director Pari Sabety told lawmakers last week that more cuts are likely early in 2009.

State agencies may be forced to cut their budgets by an additional 10 percent for the next two-year budget that begins July 1.

Fred Church, deputy commissioner for policy and budget for the Ohio Department of Taxation, said Strickland may have to take a completely different approach, rather than look back at what past administrations have done to trim the budget.

"It's different to manage through a year of decline when you expect some growth the next year," Church said. "You can use more temporary measures -- rather than facing a series of declines where you have to think about permanently changing what you do and having to shrink the government."

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Information from: The Columbus Dispatch, http://www.dispatch.com