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Governor John Kasich released his Executive Budget today, outlining his plan for $63.3 billion in General Revenue Fund (GRF) spending during fiscal years 2014 and 2015. Among the many policy initiatives included in the budget are Medicaid expansion, substantial changes to Ohio’s tax code, and bonding against future Turnpike revenue. Office of Budget and Management Director Tim Keen will provide testimony to the House Finance Committee on February 5, 2012.

Medicaid

As anticipated, the Governor’s proposal calls for expanding Medicaid coverage to low-income Ohioans. Under the plan, coverage will be extended to Ohioans earning up to 138 percent of the federal poverty level – $15,415 for single adults, $31,809 for a family of four. The federal government will cover 100 percent of this cost for three years, reducing that amount to 90 percent in 2020 and thereafter. According to documents released by the Governor’s office, Medicaid coverage would be reverted back to current levels should the federal government reduce the 90 percent share in the future.

In an effort to curb fraud, which the Administration says accounts for 10 percent of all health care waste, the state plans to increase Medicaid audit capacity and require personal responsibility. The budget would require Medicaid beneficiaries to share in the cost of emergency room visits for non-emergency care. Through a series of reforms, the proposal estimates the state will realize $74 million in savings over the biennium.

The budget will formalize the creation of the Department of Medicaid as a cabinet-level agency, effective July 1, 2013. The department will be the single state agency responsible for the administration of the state’s Medicaid program. Additionally, the proposal consolidates the Department of Alcohol and Drug Addiction Services and the Department of Mental Health into the Department of Mental Health and Addiction Services. Documents released by the Administration say the consolidation will provide efficiencies and improve support for local government partners, providers and clients who participate in the two treatment systems.

Changes to Ohio’s tax code

The Governor’s proposal includes sweeping changes to Ohio’s tax code, including cuts to the personal income tax funded by increasing the state severance tax. Under the proposal, the severance tax would be raised from the current 20 cents per barrel to 4.0 percent for horizontal wells producing oil, natural gas liquids and condensate following the first year of production – the rate would be 1.5 percent the first year to allow producers to recover the cost of preparing the well site and drilling the well. Tax rates would be 1 percent for horizontal wells producing natural gas.

Small, conventional natural gas producers – gas wells with average daily production of under 10 million cubic feet – would now be exempt from the tax. This is the Governor’s second attempt to increase the tax, which was stripped by legislators from the mid-biennium review bill upon introduction last spring. The severance tax changes produce an estimated gain to the GRF of $45 million in FY 2014 and $155 million in FY 2015. As production and pipeline capacities increase, the Administration projects the severance tax will grow significantly, reaching $305 million in FY 2016 and $415 million in FY 2017.

Personal income taxes would be cut by 20 percent for all nine brackets under the plan. The top marginal tax rate would be reduced from 5.925 percent to 4.74 percent. The cuts would be phased in over three tax years, from 2013 to 2015. These cuts would result in tax relief of $1.04 billion in FY 2014, $2.08 billion in FY 2015, and $2.15 billion in FY 2016.

Owners of pass-through entities or PTEs – which are mostly small businesses – would see a reduction in income taxes. PTEs pay the federal and Ohio personal income tax. Under the Administration’s proposal, these taxpayers would be allowed a deduction of 50 percent of their annual PTE income, up to $750,000 with the deduction capped at $375,000. This portion of the proposal would result in tax relief of between $600 million to $650 million annually.

Under the proposal, the state sales tax would be broadened to include a “wide range of services” and other economic activity not currently subject to the tax. According to documents released by the Administration, services would be taxable unless specifically exempted—medical services and education would continue to be exempt. The proposal would reduce the sales tax rate from 5.5 percent to 5.0 percent.

Turnpike

The proposal includes the Governor’s plan to issue $1.5 billion in bonds backed by future Ohio Turnpike revenue. The renamed Ohio Turnpike and Infrastructure Commission will issue the bonds – of which more than 90 percent of the proceeds will be directed to transportation projects in northern Ohio. Initial bond issuances are expected to total $1 billion over the next five to six years, from which a portion of the proceeds – about $70 million – will allow the Turnpike to accelerate its plans for a required and total reconstruction of the Turnpike’s base roadbed. A second bond issue of $0.5 billion is anticipated four to six years later.

Under the plan, tolls for local passenger trips that are paid with EZ Pass will be frozen at current levels for the next 10 years. Increases for longer passenger trips and all truck trips, will be capped at the rate of inflation, or 2.7 percent annually.

The proposal provides the Commission authority to authorize agreements with the Ohio Department of Transportation (ODOT) for funding of infrastructure projects that have been recommended by the director of ODOT. These are projects previously reviewed and recommended by the Transportation Review Advisory Commission.

The proposal follows the release of a study in late 2012, titled the Ohio Turnpike Opportunity Analysis. To view the study, click here: http://www.ohturnpikeanalysis.com/Ohio-Turnpike-Opportunity-Analysis-12-12-12-FINAL.pdf).

Legislation containing the Governor’s budget proposal will likely be introduced by next week.

To read the Governor’s proposal, click here: http://obm.ohio.gov/SectionPages/Budget/FY1415/Default.aspx.

For more information, please contact:

Michael Caputo

(non-attorney professional)

216.348.5770

mcaputo@mcdonaldhopkins.com

Rebecca M. Kuhns

(non-attorney professional)

614.458.0043

rkuhns@mcdonaldhopkins.com

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