City of Cleveland Frank G. Jackson, Mayor Office of the Mayor Cleveland City Hall 601 Lakeside Avenue, Room 202 Cleveland, Ohio 441 14 2l6/664?399O Fax 2l6/420-8766 March 6, 2017 Hon. Chairman Scott Oelslager Hon. Chairman Ryan Smith Hon. Chairman Tim Schaffer Ohio Senate Finance Committee Ohio House Finance Committee Ohio House Ways and Means Committee Ohio Senate- Statehouse Ohio House of Representatives Ohio House of Representatives 1 Capitol Square, 1st Floor 77 s. High St, 13th Floor 77 s. High St, 11th Floor Columbus, Ohio 43215 Columbus, Ohio 43215 Columbus, Ohio 43215 Dear Honorable Scott Oelslager, Honorable Ryan Smith, and Honorable Tim Schaffer, On behalf of the citizens of Cleveland, I am writing to express opposition to the proposed FY 2018-2019 Ohio Biennial Budget. The proposed budget includes provisions that continue to erode charter cities? ?home rule? authority, further deplete the local government fund, and contribute to regressive tax shift. The proposed budget is yet another disservice to Ohio?s cities, such as Cleveland, due to provisions like Centralized Municipal Income Tax Filing. Centralizing this process removes the ability of municipalities to impose and collect tax revenues generated in their service areas. Granting the State Government this authority mirrors the recent cuts in Estate Tax, Commercial Activity Tax and Corporate Net Pro?ts that cities like Cleveland have had to compensate for. Any tax cuts offered in the budget are de facto ?tax shift,? and have the net effect of pushing a larger portion of the tax burden on to the lower income residents of Ohio. This is particularly harmful to urban areas like Cleveland with large populations living at or below the poverty line. The proposed tax cuts for those in the highest income bracket are not matched with comparable cuts for the lower income brackets. In addition, raising the state sales tax from 5.75% to 6.25% has a disproportionate impact on low wage earners who typically pay a larger percentage of their income in sales tax than higher income residents. The City of Cleveland?s key ?nancial concerns related to the biennial budget are more fully explained in the attached document (EXHIBIT A). Again, on behalf of the citizens of Cleveland, we urge you to amend or remove these budget provisions. If you have any questions regarding my opposition, please contact Valarie J. McCall, Chief of Government and International Affairs, via email at vmccall@city.cleveland.oh.us. Honorable Governor John Kasich Honorable Ohio Senate President Larry Obhof Honorable Ohio House President Cliff Rosenberger All Members of Ohio Senate and Ohio House of Representatives Honorable Kevin Kelley, President, Cleveland City Council Mr. Ken Silliman, Chief of Staff, City of Cleveland, Of?ce of the Mayor Ms. Valarie McCall, Chief of Government and International Affairs, City of Cleveland, Of?ce of the Mayor Mr. Kent Scarrett, Executive Director, Ohio Municipal League Mr. Alexander Lackey, Government, Legislative, and International Affairs Coordinator, City of Cleveland, Of?ce of the Mayor An Equal Opportunity Employer City of Cleveland Frank G. Jackson, Mayor Office of the Mayor Cleveland City Hall 60] Lakeside Avenue, Room 202 Cleveland, Ohio 441 14 2l6/664-399O Fax 2l6/420-8766 EXHIBIT A March 6, 2017 City of Cleveland Adverse Impacts of Proposed FY 2018-2019 Ohio Budget 1) Issues with Statewide Centralized Tax Collection i) In 2016, the City of Cleveland collected in Net Pro?t tax- the potential redirecting of this cash ?ow and any possible reduction or elimination of this tax would be extremely detrimental to the City?s ?nancial stability. The State has proposed the ??ow of municipal dollars? as follows: ii) Filers will ?le with their expanded Ohio Business Gateway. The State will distribute the tax receipts, net of a 1% collection fee, to the municipalities on a quarterly basis. iv) Municipalities will have no way of knowing if the amount received is accurate, as Cities will no longer have the ability to verify or audit the returns the State will take that authority. The State would continue to allow local authority (municipal authority) to impose the withholding tax (local income tax) on individual wages. However, the proposal is currently silent on collections. Currently, of course, the Central Collection Agency (CCA) collects the City of Cleveland?s local income tax (and 50 Other member communities) and advances these funds to the City on average three times a month. The annual total collection for withholding tax in 2016 was $326.3. Our total income tax collection (which includes the RIT distribution) in 2016 was $370.7 which is 59.8% (minus RIT) of our total general fund revenue! Any disruption to this consistent cash ?ow would result in an inability to fund payroll, healthcare, pensions, debt service and vendor payments when required. In earlier discussions, the State suggested that cash ?ow issues could be remedied by obtaining lines of credit or issuing Bond Anticipation Notes (BANS) borrowing against your anticipated revenue. There are of course no interest free options that would support this substantial gap. An Equal Opportunity Employer EXHIBIT A (Continued) 2) Additional State Proposed Changes to the Local Government Fund (LGF) b) The State proposes changing the LGF formula to reduce funding from municipalities deemed or evaluated by the State as ?prosperous? to those municipalities that are deemed or evaluated by the State as ?in need?. i c) The State is proposing to develop a ?capacity based? mechanism for distributing LGF ?inds to municipalities. This will be assessed based upon the entity?s taxing authority and ability to raise revenue. In 2017, 95% of the LGF will be disbursed through the traditional method and 5% under the new capacity index. The ratio will grow to 90/10 in 2020. The State will ultimately set the ratio at 80/20. i) This translates into a 5% reduction of the total amount prior to distribution Statewide. If the State determines the City has the ?ability to raise revenue? our LGF distribution will be reduced. The speci?c amount cannot be determined with the current information. However, we can anticipate that this reduction will grow as the ratio changes. . d) The State is also proposing to eliminate the additional LGF municipal distribution. This amount is received directly from the State and is a component of our LGF distribution. i) What this means for Cleveland: the City is budgeting 2017 Additional LGF at since the new State ?scal year will begin July the City would see a reduction of (second half . collections) in 2017 and the full eliminated in 2018 and thereafter. Note: Additional LGF Collections Information Prior to the State Proposal. e) Actual 2011 collections f) Actual 2016 collections g) Accumulated loss since 2010 174.1M h) Due to these accumulated losses of LGF the City of Cleveland had to increase income taxes in order to sustain a balanced budget and enhance services. Important Note: July 2015 the States Rainy Day Fund had $2 Billion, since Gov. Kasich took of?ce in 2011. Their goal is to have $3 Billion in the Rainy Day Fund. 3) State proposes to raise sales tax rate from 5.75% to 6.25% and expand tax base- The State proposed to expand goods and services subjeCt to sales tax and increase the rate. The expanded base will include but not be limited to cable tv, cosmetic surgery, landscaping design, interior design, repossession services, lobbying and travel agents most consumer services. 4) Proposed State Income Tax Reduction- Proposes reducing the number of income tax brackets from 9 to 5 while decreasing the income tax rate of the top bracket from 4.997% to 4.75% in 201.7 and 4.33% in 2018. The States proposed income tax reductions equate to state income tax revenue losses of and for 2018 and 2019, respectively. These tax breaks bene?t high income taxpayers.