Thursday, January 11, 2001

Earnings tax stall squeezes budget

Flat collections will require cuts

By Robert Anglen
The Cincinnati Enquirer

        The city of Cincinnati is preparing to trim spending by $8.3 million because earnings taxes have fallen flat for the first time in at least a decade.

        Cincinnati officials learned Wednesday that instead of growing by a projected 4.7 percent, earnings tax revenues grew less than 1 percent last year.

        Finance officials attribute the shortfall to a decline in corporate earnings.

        “We have a big problem,” Mayor Charlie Luken said, moments after receiving a memo on the tax revenues from the city manager.

        City officials, who adopted a new budget three weeks ago, will have to cut spending this year. That is on top of $52 million in cuts the city manager says is needed in the next six years in order to avoid budget shortfalls.

        Those cuts were already being debated privately by council members Wednesday. Republicans talked about programs the city can do without and Democrats looked at propping up revenues by maintaining the property taxes and other revenue sources that have recently been trimmed.

        Mr. Luken said he would ask City Manager John Shirey to prepare a list of mid-year budget reductions. The cuts should target areas that will not affect city services, the mayor said.

        Mr. Shirey told council members not to panic. He said the shortfall can be partially offset from yearly savings in other city departments, although he could not give any specifics.

        “I can't recall a year in which the city's earnings tax came in flat,” Mr. Shirey acknowledged.

        One thing he has already done is tell department heads that a hiring freeze started last year will continue indefinitely.

        Cincinnati's budget situation is being repeated in cities and states around the country. As many as 15 states in the Midwest and Southeast face lower-than-expected tax revenues, according to a survey from the National Association of State Budget Officers. A slowing national economy already has shut down some dot-com companies, sent stock prices tumbling and prompted a new wave of employee layoffs.

        “What this means is that the economic downturn has occurred more quickly than we anticipated,” Assistant Finance Director Bill Moller said. “We have no idea how long it will last.”

        Mr. Moller said the shortfall in city earnings tax is a result of reduced corporate profits. “Corporate earnings are not the same as what we have seen,” he said.

        Anyone living or working in the city pays 2.1 percent of their wages in city earnings taxes. Earnings of sole proprietors and partners and the net profit of corporations are taxed at the same rate.

        In a report to the mayor and council members, finance officials said taxes from employee wages grew by about 3.3 percent since 1999. Collections from sole proprietors and partners increased by 1.9 percent.

        But gross collections from corporate net profits decreased 13.7 percent, the report said.

        The city collected $247.9 million in earnings taxes in 2000 as compared to $247.4 million in 1999.

        In 2000, earnings taxes accounted for $183 million of the city's $300 million general fund. The general fund pays for basic city services, such as police, fire and snow removal. The city's overall budget for 2001 is about $937 million.

        “Obviously it is not good news for the city,” Republican Councilman Pat DeWine said. “It's clear that we have to begin cutting wasteful programs, such as the teen curfew center.”

        Mr. DeWine ticked off several programs that the council voted to fund when it passed a two-year, $2 billion spending plan three weeks ago. Those include city inspections of day care and nursing homes, money for some housing projects and the funding of the African American Chamber of Commerce.

        But Democratic Councilwoman Minette Cooper said the city would be better off not reducing revenues. That means maintaining property tax rates and not continuing rollbacks that have cost the city revenues.

        “The first thing we need to do is stop giving away income,” said Ms. Cooper, who chairs the council's finance committee.


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