Get in the game Featured

8:00pm EDT June 25, 2009

New projects and initiatives have been springing up in Ohio, as money from the Economic Stimulus Act is distributed. Ohio received $8.2 billion when the act was passed, along with more than 24,000 applications for funds.

“The state budget is relying in large part on the stimulus money (about $5 billion) to balance it,” says Michael Caputo, director of government affairs and chair of the government affairs group at McDonald Hopkins LLC. “One-time money is key to balancing the budget, but that’s all going to be gone in two years. Businesses have to be aware of the impact that will have in the coming years.”

Smart Business spoke with Caputo about the stimulus money’s impact in Ohio, what’s going on with the state budget and its relationship with the stimulus money.

How has the stimulus act impacted Ohio?

The governor’s office is sorting through applications, trying to leverage as much funding as possible. Due to federal guidelines, this has caused certain projects, such as those dealing with transportation and water quality, to move to the top of the list. The blessing for Ohio is that we have a lot of needs in these areas, such as highway renovation, so we’re starting to see the fruit of this package in the form of jobs and projects. There should be many announcements in the coming months about additional projects that are funded through the stimulus effort.

What projects have received stimulus money?

The most significant one to date in Northeast Ohio is $200 million for construction of a new Innerbelt Bridge. The Opportunity Corridor economic development project has also received $20 million. Over the summer, new projects will be awarded in areas such as institutions and nonprofit organizations. Public housing and government buildings will be another major benefactor from this process. While they may not eclipse the Innerbelt project in terms of regional significance, they will certainly provide ample work for Northeast Ohio businesses and contractors.

What is happening with the state budget?

It is a complete mess. The budget for the FY 2010-2011 biennium has revenue projections equal to what they were in 1999-2000. Because of the growth of government over these last ten years, getting government spending back to that level requires major cuts to just about every government program. Primary and secondary education, Medicaid and virtually every other area of spending that once was viewed as ‘untouchable’ is very much on the cutting block. I do not see this legislature or the governor raising taxes to balance this budget. Getting there via cuts, while extremely painful, can be done. Unlike the federal budget, the state budget has to be balanced by June 30 of every year, and deficit spending is not allowed. So if the state projects receiving $2 billion less, $2 billion has to be cut or raised. The voters will ultimately need to decide which course they would like their state government to follow: balancing this budget by making major cuts to just about every state program, or raising revenue through tax increases.

How does the state’s stimulus money impact the budget now and in the future?

All of the money being used to balance the budget is going to be gone in two years, causing the state to look at major tax increases. If the deficit had to be made up through a sales tax increase, it could go up 4 or 5 cents, which almost doubles the rate at the state level. That is just going to offset the one-time money being used and does not include the growth in spending that will most likely occur through federally mandated increases in Medicaid rates and education increases or possible downward revenue projections.

How does this affect businesses?

A few years ago, Ohio underwent a major overhaul of the tax code. New taxes like the Commercial Activity Tax were created, and others like the tangible personal property tax were eliminated. The conversation will most likely be about which taxes to bring back or raise to offset this deficit. If you are a company with a large amount of tangible personal property, you should be worried about the possibility of the tax being reinstituted. Another possibility is increasing the sales tax or the personal income tax on income earned over a certain level. Frankly, it may be a combination of multiple tax hikes to get the revenue needed for future state spending.

There is never a good time to raise taxes, and now is about the worst time possible, but it would take a miraculous turnaround to get through this period without a tax increase. Even if we went to full-blown casinos, they would only generate between $700 and $800 million a year in additional revenue, which is less than 10 percent of what is needed. We have major challenges from a state budgeting standpoint, and we cannot punt.

How can you prepare for these tax increases?

The biggest thing is accepting the premise that tax increases will likely be a key component of any effort to balance future budgets. People and businesses need to start planning, forming coalitions, building their cases and lobbying legislators and the administration as soon and as proactively as possible. If you want to have a say in how those tax increases look, you’d better get in the game right now.

A lot of the bigger businesses are more in tune with what is going on, but smaller companies don’t have the time or resources to follow this stuff. They need to take the time to understand the severity of the problem. We are going to hear suggestions on statewide tax increases, and everyone needs to know why that conversation is occurring. Get up to speed now; do not just sit on the sideline while your pocketbook is under attack.