Debate over the next two-year state budget won't start for seven months, but state officials already are wrestling with a looming billion-dollar budget hole, plus a $400 million local funding hit that includes bus services. Federal regulators are putting an end to a state sales tax structure that allowed Ohio to collect hundreds of millions of dollars per year in federal Medicaid matching funds.

Debate over the next two-year state budget won�t start for seven months, but state officials already are wrestling with a looming billion-dollar budget hole, plus a $400 million local funding hit that includes bus services.

Federal regulators are putting an end to a state sales tax structure that allowed Ohio to collect hundreds of millions of dollars per year in federal Medicaid matching funds. That has Gov. John Kasich and legislative leaders staring at a $1.1 billion state funding loss in the next two-year budget.

Plus, the average county is looking at a loss of 7.5 percent of its sales tax collections, based on 2015 state figures. A number of rural counties, including Pickaway, would see sales tax losses exceeding 10 percent.

Meanwhile, the Central Ohio Transit Authority stands to lose about $8 million a year.

�The dollar amounts are considerable,� said Suzanne Dulaney, executive director of the County Commissioners Association of Ohio, noting that 60 percent of county budgets are spent on criminal justice and safety.

�The (Kasich) administration told our members that they understand the impact on counties and plan to take that into account," she said. "We�ve also heard from lawmakers who have cautioned counties to budget conservatively because of this issue.�

Tim Keen, the state budget director, said the change essentially will wipe out half of the state's projected tax revenue growth and could mean significant county cuts that �we must take into account.�

�This is a significant budget issue for the state, counties and transit authorities that we have to try to work through,� he said.

Since 2005, Ohio has been charging taxes on services provided through Medicaid managed-care organizations to take advantage of federal matching funds. A portion of the money is returned to the managed-care organizations to hold them harmless.

The state started off charging a 5.5 percent franchise tax, until federal officials said in 2009 that was no longer permissible. So then-Gov. Ted Strickland switched it to a sales tax, which is now 5.75 percent.

That allowed counties and transit authorities, through their piggyback sales taxes, to also benefit from the expansion.

But in July 2014, the federal Centers for Medicare & Medicaid Services said applying a tax only to managed-care companies dealing with Medicaid was not allowed. Ohio has until the end of this budget cycle to fix it � June 30, 2017.

�People have been aware of the fact that it was at risk,� said John Corlett, Ohio�s former Medicaid director who is now executive director of the Center for Community Solutions, a policy research group based in Cleveland. �There are ways to address it. None of them will be universally popular or easy.�

Starting July 1, 2017, Ohio will no longer charge a Medicaid sales tax that is expected to net the state $558 million in fiscal year 2018. Over the two-year budget, the net state loss is projected at $1.1 billion, plus nearly $400 million in county and transit authority sales taxes.

Roughly 80 percent of the local funding loss hits counties � Franklin County would see a hit of about $20 million per year. Ohio's eight regional transit authorities would lose about $39 million per year, as critics note that the state already ranks 47th in public transportation funding, spending 63 cents per person on transit.

The annual loss for COTA would top 6 percent of its total sales tax revenue. Based on 2015 figures, the loss equates to more than 70,000 hours of service, said Marty Stutz, COTA spokesman.

�We would have to be proactive about budgeting to make sure the implications are considered,� he said. �It will be a challenge for us.�

Since the Great Recession, not only have counties grown more reliant on sales tax revenue, but those sales tax receipts have increasingly been made up of Medicaid services. In 2013, counties got $81 million from Medicaid sales taxes, 4.9 percent of their total sales taxes. But with Kasich's expansion of Medicaid coverage and the push to increase managed care, that revenue rose to $148 million by 2015, 7.5 percent of the total, and would reach about $160 million by 2018.

While sales tax revenue has seen steady growth, other county revenue sources have been largely flat, adding to concerns about the looming cut.

The state has options to make up its money. Corlett pointed to the hospital franchise fee, which also draws down federal dollars.

�If you look around the state, I don�t think there�s a hospital that�s losing money,� he said.

Last year, Kasich�s initial two-year budget proposed increasing the hospital fee from 2.66 percent to 3 percent. House Republicans pushed it to 4 percent, which would have netted the state $1 billion over two years.

Senate Republicans later stripped out the fee increase, and the rate was left unchanged.

Keen would not comment on the hospital fee or other options, such as increasing the health-insuring corporation tax or expanding the sales tax to private managed-care operations.

�We�re assessing a range of potential solutions, but we�re very early in our analysis,� he said.

Ohio is not alone in its troubles. Pennsylvania, Michigan and California already have addressed how they tax Medicaid managed care in various ways over the past seven months.

Keen said his office is looking at those states, while counties keep an eye on Keen.

�Redistributing a new revenue stream back to 88 counties is more challenging than sending it into one state general fund,� Dulaney said.

jsiegel@dispatch.com

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