Aging Ohio - The Center for Community Solutions

Aging Ohio:

The Impact of Demographic Change on State Fiscal Policy Jon Honeck, Senior Fellow Matt Bird, Public Policy Assistant Regionomics LLC October, 2014

Prepared with support from The Cleveland Foundation

Executive Summary Executive Summary Ohio will undergo an unprecedented demographic transformation over the next 20 years. By

Ohio will undergo an unprecedented transformation the next 2035, seniors—people age 65 ordemographic older—will comprise nearly over one-fourth of 20 theyears. state’sBy 2035, seniors— 1 peoplepopulation, age 65 or older—will comprise nearly one-fourth of the state’s population, the same proportion the same proportion as children. The number of working-age adults will decrease. as 1 These willofhave a profound impact the state’s fiscal condition, creating a scissorschildren. Thetrends number working-age adults willon decrease. These trends will have a profound impact on the that will lower revenue and increase spending. Thisrevenue report provides a detailed analysis state’s effect fiscal condition, creating a scissorseffect that will lower and increase spending. This of report theaimpact ofanalysis these trends the sales and income taxes, state’s Medicaid program, and Medicaid the provides detailed of theonimpact of these trends on the the sales and income taxes, the state’s homestead property tax credit. tax credit. program, and the homestead property Overall, the factors analyzed in this report will create a net $1.9 billion shortfall in the state Overall, the factors analyzed in this report will create a net $1.9 billion shortfall in the state budget by 2035 budget by 2035 (measured in 2012 dollars). Since the state budget must be balanced annually, (measured 2012will dollars). the state budget must be balanced annually, these costsefficiencies. will have to be baltheseincosts have Since to be balanced by spending cuts, tax increases, or increased anced by cuts, tax increases, increased efficiencies. The largesttax single from a decline Thespending largest single impact comesor from a decline in the state income baseimpact (federalcomes adjusted in the state tax (federal adjusted gross income) of nearly $1.2 in billion in potential revenue. Increasgrossincome income) ofbase nearly $1.2 billion in potential revenue. Increases state-share Medicaid es in state-share spending will amount to nearly $680 annuallyfavorable by 2035, assuming spending Medicaid will amount to nearly $680 million annually bymillion 2035, assuming trends in favorable care costs. trends long-term in long-term care costs.

Estimated Impacts of Demographic Change on Major State Tax and Spending Programs Estimated Impacts of Demographic Change on Major State Tax and Spending Programs (Millions of of 2012 2012dollars) dollars) (Millions State Tax Impacts Sales Tax Collections

Change in Annual Revenue, 2015 - 2035 $52.3

Income Tax Base

($1,175.2)

Social Security Deduction

($133.4)

Medical Expense Deduction

($48.4)

Military Retirement Deduction

($4.3)

Senior Credit

$2.1

Retirement Income Credit Total State Spending Homestead Credit (all ages) Medicaid Long-term Care (age 60+) (State share – low utilization) Medicare Part D Clawback Medicaid – Medicare Savings Programs (QMB/SLMB) (State share – all ages) Total

$49.9 ($1,257.0) Change in Annual Appropriations, 2015 - 2035 ($11.9) $192.1 $307.2 $179.4 $666.8

Source: Source:The TheCenter Centerfor forCommunity CommunitySolutions Solutions

Tax Implications

Tax Implications • The number of individuals in Ohio’s working age population between ages 25 and 64

• The numberwill of individuals in Ohio’s age population between agesstate’s 25 andoverall 64 willlabor fall by 452,000, or fall by 452,000, or 10 working percent, between 2010 and 2035. The force 10 percent, between 2010 rate and for 2035. The state’s labor force participation rate fortopersons over age 16 participation persons over overall age 16 will fall from 64 percent in 2010 an 57in percent 2035. will fall fromestimated 64 percent 2010 toinan estimated 57 percent in 2035. 1 • The sales taxgrateful is the largest single source of state General Revenue Fund (GRF) tax revenue. On of average, We are to the Scripps Gerontology Institute at Miami University for providing estimates Ohio’s future populationspend trends.less than those at younger ages and their purchases are less likely to be senior-headed households taxable items. Consequently, estimated sales tax receipts from consumer purchases will barely increase over the 2015 to 2035 period. This result may be overly optimistic given that the model does not factor in higher The Center for Community Solutions 2|Page inflation rates of medical services, which are largely untaxed at the consumer level.

• The income tax is now the second largest contributor of GRF tax revenue. The inflation-adjusted income tax base as measured by total federal adjusted gross income (AGI) reported by Ohio residents will fall by 13.5 2

Aging Ohio: The Impact of Demographic Change on State Fiscal Policy • October, 2014

percent in real terms from 2015 to 2035, driven in large part by a 21 percent decline in the amount of wage and salary earnings. Over this period, potential annual revenue falls by nearly $1.2 billion before taking into account credits and deductions. • A portion of Social Security benefits is taxable at the federal level for higher-income taxpayers. Ohio income tax law allows taxpayers to deduct the total amount of benefits reported on federal forms. In the space of 20 years, the total amount of the deduction will grow by 56 percent, costing the state an additional $133 million annually by 2035 when compared to 2015 levels. Fourteen states currently tax some portion of Social Security benefits. • Ohio allows deductions for excess medical expenses, unsubsidized long-term care expenses, and health insurance premiums. These deductions are combined on the state return. In 2012, 46 percent of senior returns used one of these deductions. The total estimated cost of the combined medical expense deduction will grow by $49 million, or 43 percent, between 2015 and 2035. • The state retirement income credit for pensions and retirement account distributions is capped at a maximum of $200. The senior credit is limited to $50 per return. Assuming these limits stay in place, their cost to the state will be eroded by inflation despite the increase in the number of seniors and retirees. • Currently, the homestead tax credit exempts senior and totally disabled homeowners from property taxes on the first $25,000 in market value of their homes. The state reimburses local tax districts for their losses. Recent changes to the homestead tax credit created an income eligibility threshold of $30,000 in Ohio Adjusted Gross Income for new applicants. Current recipients continue to receive the benefit. Although the number of senior homeowners will slowly increase over time, the costs of the program will not grow in real terms.

Medicaid Implications

• In 2006, the federal government assumed responsibility for Medicare Part D prescription drug benefits for full benefit Medicaid-Medicare “dual eligibles.” As part of the bargain, states were made responsible for making continued monthly payments to CMS for a share of the costs of their state’s dual eligible population. The cost sharing arrangement is known officially as the “phased-down state contribution,” but is often referred to as the “clawback.” The Medicare Trustees predict a 5 percent annual increase in drug prices over the long-term, which we have used in modeling. With this assumption, the annual cost of the program doubles in real terms from 2015 to 2035, so that the annual cost is $307 million higher in 2035. • The state Medicaid program provides both institutional and home-and community-based long-term care options for low-income disabled individuals. We estimated two scenarios for long-term care utilization by the age 60 and over population. Both scenarios use the same cost projections and constant federal medical assistance percentage (FMAP) rates. By 2035, the high utilization scenario has 26,600 more consumers receiving long-term care. The cost difference between the two scenarios is significant. The high utilization scenario is $243 million per year higher in 2025 and nearly $400 million higher in 2035 (state share). The low utilization scenario by itself will increase state share Medicaid costs by $192 million. • The Medicaid program assists over 117,000 individuals (not all are seniors) with Medicare premium and deductible costs for certain low income recipients with incomes below 120 percent of the federal poverty line (FPL). Some of these individuals are “partial duals” without full Medicaid coverage. Based on Medicare Trustees’ long-term projections, adjusted for inflation, annual state share program costs will more than double with an increase of $179 million by 2035. Rising health care prices are a more important driver of costs than demographic change. Coping with these challenges requires a long-term perspective and a sense of balance between revenues and expenditures. Taxes cannot continue to be cut without regard to long-term trends and the needs of the state. Likewise, the state should continue its efforts to control health care costs in ways that improve quality and provide adequate services. We are grateful to the Scripps Gerontology Institute at Miami University for providing estimates of Ohio’s future population trends.

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Table of Contents I. Introduction........................................................................................................................................................................5 Coming Demographic Changes........................................................................................................................................5 Work and Retirement in a Changing Economy..............................................................................................................7 Background on the State Tax System...............................................................................................................................8 II. Projecting Ohio Sales Tax Receipts............................................................................................................................ 11 Household Taxable Expenditures................................................................................................................................... 11 Projecting Households and Sales Tax Revenues over Time........................................................................................13 The Impact of Healthcare Spending...............................................................................................................................14 Projected Constant-Dollar Sales Tax Receipts...............................................................................................................16 III. Income Tax Estimates...................................................................................................................................................17 Recent Trends in Aging and Retirement-related Tax Expenditures...........................................................................18 The Social Security Deduction.....................................................................................................................................18 Military Retirement Deduction....................................................................................................................................20 Excess Medical Expense Deduction............................................................................................................................20 Senior Citizen Credit.....................................................................................................................................................21 Retirement Income Credit.............................................................................................................................................21 Lump Sum Retirement Credit......................................................................................................................................21 How an Aging Society Affects the Income Tax Base....................................................................................................22 Estimating the Number of State Income Tax Returns..................................................................................................23 Income Tax Scenarios........................................................................................................................................................24 Impacts on Aging and Retirement-related Deductions and Credits......................................................................29 Excess Medical Expense Deduction............................................................................................................................30 Military Retirement Deduction....................................................................................................................................31 Retirement Income Credit.............................................................................................................................................32 Senior Citizen Credit.....................................................................................................................................................33 IV. The Homestead Property Tax Credit.........................................................................................................................33 History................................................................................................................................................................................33 Current Law – Big Changes Start in 2014......................................................................................................................34 Estimating the Number of Eligible Households..........................................................................................................34 Value of Homestead Exemption.....................................................................................................................................36 V. Medicaid Expenses.........................................................................................................................................................37 Long-term Care.................................................................................................................................................................37 Medicare Part D – State Contribution............................................................................................................................40 Medicare Savings Programs............................................................................................................................................42 Summary: Fiscal Impact of Scenarios.............................................................................................................................44 Conclusion............................................................................................................................................................................45 APPENDIX...........................................................................................................................................................................47 I. SALES TAX ESTIMATE METHODOLOGY...........................................................................................................47 II. INCOME TAX ESTIMATE METHODOLOGY.....................................................................................................48 Background on State and Federal Tax Data..............................................................................................................48 Non-filers in the Population........................................................................................................................................49 ACS Estimates of Filing Status by Age Cohort.........................................................................................................50 Construction of Detailed Estimates for Specific Types of Income.........................................................................51 III. HOMESTEAD PROPERTY TAX ESTIMATE METHODOLOGY...................................................................53 4


I. Introduction In the coming decades, Ohio and the nation will undergo an unprecedented demographic transformation as the Baby Boom generation retires. The impacts will be profound and will be felt throughout our economy and society, and in both the public and private sectors. This report analyzes the potential impact on the State of Ohio’s tax revenues and public service costs. Some of the issues raised in the report are not new; for example, analysts have been concerned about the costs of long-term care for decades. Our goal, however, is to look at both sides of the ledger, combining an analysis of the impact on tax revenues and major expenses in a way that has not been done before. Such breadth has required difficult choices about where to focus attention, trusting that a sound analysis of several major problems is the most effective way of opening discourse about myriad related issues. Thus, our analysis of tax policy encompasses the effects of demographic change on the following: • The state income tax, which will be affected by fewer individuals in their prime earning years and will see retirement-related credits and deductions grow;

• The state sales tax, which will be affected by the propensity of retired households to spend less, and to shift spending to services that are not taxable; • The homestead property tax credit, which returned to being a means-tested program in 2014 but will still have to finance growing numbers of senior homeowners.

On the spending side, our analysis focuses on Medicaid, the largest program in the state budget, specifically: • Long-term care and the continuing push to rebalance the mix of care toward home and community-based settings; • State payments to the federal government to finance the Medicare Part D program for prescription drugs; • State payments to help low-income disabled individuals afford Medicare hospitalization and outpatient medical services.

Coming Demographic Changes

Two alternate population projections for Ohio, one running through 2050 from Scripps Gerontology Center at Miami University and another through 2040 from the Ohio Development Services Agency (ODSA), project similar trendlines. Both start with the 2010 decennial census and project forward based on estimated birth, death and migration rates. While this study primarily uses the Scripps projections, the difference between the two are worth noting. Scripps projects a larger population increase than the ODSA, both overall and specifically for seniors (Table 1). By 2035, the Scripps projections are 2 percent above those of the ODSA. The ODSA estimates that the senior population will grow at a slower pace, peaking at 2.4 million in 2035, 15 percent below the Scripps estimate for the same year. As such, the senior population, while expected to grow as a proportion of Ohio’s total population in both analyses, will make up a larger share according to Scripps. By 2035, people aged 65 and older will have grown from 14 to 24 percent of the state’s population according to Scripps. Aging Ohio: The aImpact of Demographic Fiscal Policy In the ODSA projections, seniors reach maximum of 21 percentChange (Figureon 1).State The general pattern of impact on the state’s fiscal condition is the same no matter which projection is used. Table 1.1. ODSA vs.vs. Scripps Population Projections Table ODSA Scripps Population Projections

TOTAL 65+ TOTAL 65+

2010 ODSA 11,536,494 1,622,005 Scripps 11,536,494 1,622,005

2015

2020

2025

2030

2035

11,549,120 1,794,810

11,574,870 2,011,330

11,598,670 2,243,870

11,615,100 2,381,560

11,635,110 2,385,340

11,654,759 1,852,661

11,742,437 2,135,279

11,805,235 2,453,373

11,840,251 2,691,667

11,844,212 2,798,390

Source: Miami University Scripps Gerontology Center; Ohio Development Services Agency1

Figure 1. Population Projections by Age Group

ODSA


12,000,000

Scripps

5

65+

Figure 1. Population Projections by Age Group Figure 1. Population Projections by Age Group

ODSA

Scripps

12,000,000 10,000,000 8,000,000 65+

6,000,000

20-64

4,000,000

Less than 20

2,000,000 0 2010 2015 2020 2025 2030 2035

2010 2015 2020 2025 2030 2035

1 Source: Miami University Scripps Gerontology Center; Ohio Development Services Agency Source: Miami University Scripps Gerontology Center; Ohio Development Services Agency1

One of the most salient features of an aging society is the growth in the number of very old One of the most salient features of an aging society is the growth in the number of very old individuals. individuals. This is the age group most likely to need long-term services and supports to This is the age group most likely to need long-term services and supports to provide assistance with routine provide assistance with routine activities of daily living, and to have the highest medical activities of daily living, and to have the highest medical expenses. The Scripps Center projections show the expenses. The Scripps Center projections show the number of seniors age 85 or over growing by number ofmore seniors 85 or individuals, over growing more than 200,000 individuals, or 88there percent, 2010 to 2035. thanage 200,000 orby 88of percent, from 2010 to 2035. By 2035, willfrom be nearly Aging Ohio: The seniors Impact Demographic Change on State Fiscal Policy By 2035, there will be nearly 435,000 over the age of 85 (Figure 2). 435,000 seniors over the age of 85 (Figure 2).

Figure 2. Number of Ohio Seniors over Age 85 Figure 2. Number of Ohio Seniors over Age 85 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000

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The Center for Community Solutions 0 2010 Source: Scripps Gerontology Center

2015

2020

2025

2030

2035

Source: Scripps Gerontology Center

The retirement of theboom” “baby boom” generation, born between 1946 andhas 1965, has profound The retirement of the “baby generation, born between 1946 and 1965, profound implications for implications for the number of Ohioans in their prime working ages. The Scripps population the number of Ohioans in their prime working ages. The Scripps population estimates project that the number estimates project that the number of Ohioans between 25 and 64 will fall by 452,000 between of Ohioans between 25 and 64 will fall by 452,000 between 2010 and 2035, a reduction of nearly 10 percent 2010 and 2035, a reduction of nearly 10 percent (Figure 3). (Figure 3). Figure 3. Declining Number of Working-age Ohioans (age 25 – 64) 4,700,000 4,600,000 6

4,500,000Aging Ohio: The Impact of Demographic Change on State Fiscal Policy • October, 2014 4,400,000

implications for the number of Ohioans in their prime working ages. The Scripps population estimates project that the number of Ohioans between 25 and 64 will fall by 452,000 between 2010 and 2035, a reduction of nearly 10 percent (Figure 3). Figure 3. Declining Number of Working-age Ohioans (age 25 – 64) Figure 3. Declining Number of Working-age Ohioans (age 25 – 64) 4,700,000 4,600,000 4,500,000 4,400,000 4,300,000 Aging Ohio: The Impact of Demographic Change on State Fiscal Policy 4,200,000

Figure 3. Declining Number of Working-age Ohioans (age 25 – 64)

4,100,000 4,700,000 4,000,000 4,600,000 3,900,000 4,500,000 4,400,000

2010


2015

2020

2025

2030

2035


4,300,000

Work and Retirement in a Changing Economy

4,200,000 One of the most important factors influencing the growth potential of the economy is the labor force participation rate—the rate at which individuals in a particular age cohort are working or seeking 4,100,000 employment. Workforce participation varies by age, with prime working age between 25 and 54 years and is Retirement in a in Changing Economy (FigureWork 4). There a4,000,000 steep decrease labor force participation rates at ages below and above. Nationally, in 2007, labor force participation for men in their prime working ages was 91 percent while for women it was 75 percent. The participation 3,900,000rate for men ages 55 to 64 was 70 percent, but for ages 65 and older it was 21 percent. Women aged 55-64 had a 2010 participation 58 percent but this2030 dropped 2035 to 13 percent for women 2015rate of2020 2025 2 The Center Community Solutions | P athe g eoverall aged 65 and older.for As baby boomers age into the age 55+ cohort with its lower participation8rate, labor force participation rate will decrease, as has been observed since 2000. Source: Scripps Gerontology Center

Figure Figure 4. 4. Labor Labor Force Force Participation Participation Falls Falls with with Age Age

Percentage in Labor Force

90 80 70 60 50 40 30 20 10 0 25-44 45-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 Source: The CenterSource: for Community Solutions; American Solutions; CommunityAmerican Survey Community Survey The Center for Community

Trends in the labor force participation rate during the recent recession and its aftermath have been the subject of intense scrutiny. The labor force participation rate of persons aged 55 and over increased slightly during the recession and its aftermath, while that of the prime-age workforce fell by three percentage points.3 The recession caused the national labor force participation rate to drop precipitously, from 66 www.CommunitySolutions.com

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percent in 2007 to 64.7 percent in 2010.4 This continued to drop to 62.9 percent by July 2014.5 That dramatic decline took place in the context of a longer-run decline in labor force participation stemming from an aging population and changing participation rates among age cohorts, as well as the flattening of the growth trend in the participation rate of women after decades of increases. The Congressional Budget Office (CBO) attributes approximately half of the three point drop in the labor force participation rate to long-term trends, most notably the aging population. Of the remaining 1.5 points, one was due to temporary weakness in employment prospects and wages. One half of a percentage point was due to people permanently leaving the labor market due to long-term unemployment from the lengthy recession.6 These trends will limit improvements in the labor force participation rate caused by an improving economy. It has been noted that the labor force participation rate of workers between age 65 and 69 has increased in the last several decades.7 For the 65 to 69 year-old cohort, earnings from work grew from 28 percent of total money income in 1980 to 42 percent in 2009.8 The shift to defined contribution DC plans and the Aging Ohio: The Impactin of retirement Demographic Change on Statean Fiscal Policy role in increasing accompanying fluctuations and uncertainty assets have played important the labor force participation of seniors as they try to use earnings to continue to build their nest eggs and supplement their incomes.9 The CBO predicts thetoward trend toward working past will continue, but not it will not The CBO predicts that thethat trend working past age 65 age will 65 continue, but it will counteract the counteract the overall aging of the population. In the CBO model, labor force participation inwill overall aging of the population. In the CBO model, labor force participation in the 65-69 age cohort will from 36.5 to 40 and for to 32 Still,27 a significant increasethe for65-69 men age fromcohort 36.5 to 40 increase percent, for andmen for women from 27percent, to 32 percent bywomen 2021.10 from 10 percent by 2021. Still, a significant number of workers will continue to retire early. In 2012, number of workers will continue to retire early. In 2012, 38 percent of men and 43 percent of women38 claimed percent of men and 43 percent of women claimed Social Security retirement benefits at age 62.11 Social Security retirement benefits at age 62.11 Workers who retired earlier were more likely to have been in Workers who retired earlier were more likely to have been in a physically demanding blue a physically demanding blue collar job and to have less than a college degree, and to have already worked at collar job and to have less than a college degree, and to have already worked at least 35 years least 35 years when they reached their early 12 sixties.12 Early retirees tend to have lower levels of income and when they reached their early sixties. Early retirees tend to have lower levels of income and assets. assets.

Our estimates for labor rates ofrates Ohioofadults 16 age and 16 older steady decline from Our estimates forforce laborparticipation force participation Ohio age adults andshow olderashow a steady 64.3 percent in 2010 to 57.1 percent in 2035 (Figure 5). These estimates may be a touch conservative—if decline from 64.3 percent in 2010 to 57.1 percent in 2035 (Figure 5). These estimates may be a economic conditions improve they will draw more Ohioans we expect Ohio to touch conservative—if economic conditions improve into theythe willlabor drawforce—but more Ohioans into the follow the overall national trend. labor force—but we expect Ohio to follow the overall national trend. Figure 5. Estimated Labor Force Participation Rate of Ohioans age 16 and over Figure 5. Estimated Labor Force Participation Rate of Ohioans age 16 and over 66%

Population over age 16

64% 62% 60% 58% 56% 54% 52% 2010

2015

2020

2025

2030

2035

Source: The Center for Community Solutions; American Community Survey13 Source: The Center for Community Solutions; American Community Survey13

Background on the State Tax System

Background on the State Tax System

The income tax and the state sales tax are by far the largest contributors to the state General Revenue Fund The income taxcomprised and the state sales taxofare byGRF far the largest to the state General (GRF). Together, they 86 percent the in FY 2014contributors (Figure 6). Throughout the 1990s and the st (GRF). Together, they comprised 86 percent of the GRF in FY 2014 (Figure 6). Revenue Fund have been larger than those from the sales tax. first decade of the 21 century, personal income tax receipts Throughout the in 1990s and the first decade of to thethe 21stincome century, tax This situation reversed FY 2014, however, as cuts taxpersonal and theincome addition ofreceipts the newhave small been larger than those from the sales tax. This situation reversed in FY 2014, however, as cuts to the income tax and the addition of the new small business deduction led to a decline in income 8 Aging Ohio: grew. The Impact of Demographic on lowered State Fiscal October, 2014 tax receipts even as the economy Collections from bothChange taxes are by aPolicy long • list of “tax expenditures,” e.g., credits, deductions, and exemptions. In February 2014 the Ohio

business deduction led to a decline in income tax receipts even as the economy grew. Collections from both taxes are lowered by a long list of “tax expenditures,” e.g., credits, deductions, and exemptions. In February 2014 the Ohio Department of Taxation (ODT) estimated that tax expenditures reduced sales tax receipts by Aging Theby Impact of Demographic Change on State Fiscal Policy $5.3 billion and income taxOhio: receipts $2.1 billion. Figure 6. GRF Tax Receipts, FY 2014 Figure 6. GRF Tax Receipts, FY 2014 Personal Income 40%

CAT 4%

Utility 2%

Insurance 2% Alcohol and Tobacco 5% Other 1% Sales & Use 46% Source: OBM Monthly Financial Report (July 2014) Source: OBM Monthly Financial Report (July 2014)

In real, inflation-adjusted terms, total income tax collections were 11 percent lower in FY 2013 In real, than inflation-adjusted terms, income collections were percent lower in FY 2013 thantothey were they were in FY 2000total (Figure 7). Intax nominal terms, FY 11 2013 revenues were about equal in FY 2000 (Figure 7). In nominal terms, FY 2013 revenues were about equal to those in FY 2008. This is, in those in FY 2008. This is, in part, a reflection of economic conditions but also due to a 21 percent part, a reflection of economic conditions but also due to a 21 percent reduction of tax rates between reduction of tax rates between 2005 and 2012. An additional 10 percent cut is scheduled to be 2005 and 2012. An additional is scheduled to be fully in place by the end of 2014. fully in place10 bypercent the endcut of 2014.

Figure 7. State Income Tax Revenues, FY 2000 – FY 2013 Figure 7. State Income Tax Revenues, FY 2000 – FY 2013 $11,000 Millions of Dollars

$10,000 $9,000 $8,000 $7,000 $6,000 $5,000

Nominal

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

$4,000

Real (2000 Dollars)

Source: ODT Annual Reports. The Center for Community Solutions. Total receipts less refunds. Source: ODT Annual Reports. The Center for Community Solutions. Total receipts less refunds.

Sales tax collections have not fared well either. In real terms, collections were only four percent Sales tax collections have than not fared In the realtax terms, were four percent higher in FY 2013 in FYwell 2000,either. despite rate collections being at least 0.5 only percentage pointshigher higherin FY 2013 than in FY 2000, despite the tax rate being at least 0.5 percentage points higher after FY 2003. The sales www.CommunitySolutions.com

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Aging Ohio: The Impact of Demographic Change on State Fiscal Policy

tax rate started at 5 percent from FY 2000 to FY 2003, was increased temporarily to 6 percent in FYs 2004 and after FYfell 2003. The tax rateuntil started 5 percent from FY 2000 to FY 2003, was increased 2005, and then back tosales 5.5 percent FY at 2014. temporarily to 6 percent in FYs 2004 and 2005, and then fell back to 5.5 percent until FY 2014. Figure 8. State Sales Tax Revenues, FY 2000 – FY 2013 Figure 8. State Sales Tax Revenues, FY 2000 – FY 2013

Millions of Dollars

$10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000

Nominal

Real (2000 Dollars)

Source: ODT Annual Reports; The Center for Community Solutions Source: ODT Annual Reports; The Center for Community Solutions

Despite the increased effort, the sales tax base shrank due to the recent recession and several Despitelong-term the increased effort, the sales tax base shrank due to the recession and $300 several long-term trends. Untaxed internet sales are estimated to recent cost Ohio more than million per 14 14 trends. year. Untaxed internet sales are estimated to cost Ohio more than $300 million per year. Internet Internet sellers such as Amazon, without a physical presence or other connection to sellers such as Ohio, Amazon, without a physical presence or other connectionlevel to Ohio, are not required to collect are not required to collect sales tax, and consumers’ of voluntary compliance with sales tax, andthe consumers’ level of voluntary compliance with the use tax is extremely low. There is also a longuse tax is extremely low. There is also a long-term trend away from purchases of tangible term trend away from purchases of tangible goods and toward services, most of which—medicine, goods and toward services, most of which—medicine, finance, insurance, legal, housing, andfinance, insurance, housing, and real estate—remain outside tax base. Over the several reallegal, estate—remain outside the sales tax base. Overthe the sales last several decades, thelast state has decades, the statebroadened has broadened the sales tax base to specific services such as hotel lodging, dry cleaning, the sales tax base to specific services such as hotel lodging, dry cleaning, repair repair and and installation of personal property, landscaping, certain digital products, and data processing, and the installation of personal property, landscaping, certain digital products, and data processing, tax now applies and to Medicaid payments organizations. Still,care these efforts have been to the tax now appliestotomanaged Medicaidcare payments to managed organizations. Still, inadequate these overcome the long-term erosion of the tax base. In the FY 2014-2015 budget process, the General Assembly efforts have been inadequate to overcome the long-term erosion of the tax base. In the FY 2014refused2015 to approve administration’s for broadening sales tax additional services, instead budgetthe process, the Generalplan Assembly refused tothe approve theto administration’s plan opting for to raise broadening the rate from percent 5.75 percent. the5.5 sales tax totoadditional services, opting instead to raise the rate from 5.5 percent to 5.75 percent. Trends in state tax receipts since 2000 have had a profound impact on the state operating budget. Between FY 2000 and FY 2013, real tax spending onsince primary education funding forstate operating expenses scarcely Trends in state receipts 2000 and havesecondary had a profound impact on the operating grew, even when lottery profits are included (Figure 9). GRF spending on higher education fell budget. Between FY 2000 and FY 2013, real spending on primary and secondary educationby almost 30 percent,funding leadingfor to increased costs. In human thelottery state share ofare Medicaid grew by 509).percent operating tuition expenses scarcely grew, services, even when profits included (Figure (the only major category of state GRF spending to increase significantly), while spending on other human GRF spending on higher education fell by almost 30 percent, leading to increased tuition costs. service In programs declined by 33 percent. Even the corrections budget, which grew rapidly in the 1980s human services, the state share of Medicaid grew by 50 percent (the only major category of and 1990s, declined byspending 14 percent. This created a negativewhile effectspending on staffing services. Total GRF, lottery state GRF to increase significantly), onratios other and human service programs 33 percent.fund Evenspending the corrections which in grew rapidly in in theFY 1980s profits, declined and localby government was 8 budget, percent lower FY 2013 than 2000.and 1990s, declined by 14 percent. This created a negative effect on staffing ratios and services. Total GRF, lottery profits, and local government fund spending was 8 percent lower in FY 2013 than in FY 2000. Figure 9. State-Source Spending for Major Programs


10

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Figure 9. State-Source Spending for Major Programs $,+$$ $,"$$

K-12 Education

Billions (2000 Dollars)

$,%$$ $,&$$ $,($$

Medicaid

$,*$$

Higher Education Corrections

$,!$$ $,'$$

Other Human Servs. !.'*$

!.'!$

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!.'.$

!..)$

!..+$

!.."$

!..%$

!..&$

!..($

!..*$

!..!$

!..'$

!...$

$,-$$

Fiscal Year 3

Source: The Center for Community Solutions; LSC Source: The Center for Community Solutions; LSC15

Table AverageTax Monthly Expenditures by Survey and Age Group II. Projecting Ohio2:Sales Receipts Non-taxable expenditures Partly taxable Taxable expenditures

by Bill LaFayette, Ph.D., owner, Regionomics expenditures LLC Ageassistance Interview Diary Total Interview Solutions Diary Total With the of The Center for Community

Taxable

Interview Diary Total average group 705 LT 25 1,226 176 1,402 30 81 111 499 150 649 Household Taxable 1,003 25-29 1,699 Expenditures 213 1,912 58 110 169 702 217 919 30-34of Ohio’s2,033 238 will 2,271 71 in tax 116 revenue. 187 As older 824consumers 218 1,042 The aging population lead to changes become an1,135 35-39 2,211 254 2,464 75 129 205 862 256 1,118 increasingly large share of total population, sales tax revenue will decline in constant-dollar terms 1,220 because 1,229 40-44 2,248 271less 2,519 86 123 210 Demonstrating 863 262 older households’ spending is than that of younger households. this 1,125 impact requires age1,236 45-49 2,363 280 2,642 97 122 219 867 259 1,126 specific expenditures by category of good and service so that the amount of expenditures that are taxable can 1,210 50-54 2,380 273 2,653 99 115 214 854 250 1,103 be identified. are of the99number by820 age in 248 coming years. 1,169 55-59 Also required 2,180 246 projections 2,425 105of households 204 1,067 1,129 60-64 2,106 267 2,373 102 105 207 777 249 1,025 Taxable expenditures are obtained from an analysis Microdata (PUMD) from 65-69 1,929 238 2,167 108 of the 91Public-Use 199 705 227 932 the1,031 892to 70-74Expenditure 1,855 Survey 226(CEX) 2,081 89 of Labor 83 Statistics 172 61616 This190 Consumer of the Bureau (BLS). survey806 is designed 759 75-79 1,627 214 1,841 67 75 142 by collecting 500 detailed 188 information 688 provide information on the buying habits of American consumers on all 572 80+ 1,545 178 1,723 46 62 109 392 126 518 purchases made by a sample of households along with household composition, income, and demographics. Source: Regionomics LLC; CEX Summary information is issued on fairly broad categories of goods and services, but the PUMD files give Note: Components may not add to totals because of rounding. information on each reported purchase, including the specific good or service purchased and the price paid. Because the available population projections include only age as a demographic characteristic, the impact of potential changes in other demographic characteristics cannot be modeled. The implicit assumption is that characteristics such as household formation, household size, homeownership rates, and labor force participation are constant over time within a specific age group.

The CEX includes two separate surveys: an interview survey and a diary survey. The total of each month’s purchases within each survey was averaged across households and the individual averages were summed to yield an average expenditure for each age group and each month. Each month’s average was inflated to December 2012 dollars via the Consumer Expenditure Survey for All Urban Consumers (CPI-U). Table 2 shows average non-taxable, partly taxable, and taxable expenditures for each survey and each age group, and the resulting effective taxable average for the age group assuming that half of the partly taxable expenditures are taxed. Note that average expenditures begin to decline for households with a head older than 49 (Figure 10). As these households become an increasingly large share of Ohio’s total household makeup, this will pose challenges for the state’s sales tax revenue—and for the revenues and profitability of the businesses serving The Center for Community Solutions 6|Page these households. This will be explored in the next section. www.CommunitySolutions.com

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Non-taxable expenditures Interview Diary Total 1,226 176 1,402 1,699 213 1,912 2,033 238 2,271 2,211 254 2,464 2,248 271 2,519 2,363 280 2,642 2,380 273 2,653 2,180 246 2,425 2,106 267 2,373 1,929 238 2,167 1,855 226 2,081 1,627 214 1,841 1,545 178 1,723

Partly taxable expenditures Interview Diary Total 30 81 111 58 110 169 71 116 187 75 129 205 86 123 210 97 122 219 99 115 214 99 105 204 102 105 207 108 91 199 89 83 172 67 75 142 46 62 109


Taxable expenditures Interview Diary Total 499 150 649 702 217 919 824 218 1,042 862 256 1,118 863 262 1,125 867 259 1,126 854 250 1,103 820 248 1,067 777 249 1,025 705 227 932 616 190 806 500 188 688 392 126 518

15 | P a g e

Source: Regionomics LLC; CEX Note: Components may not add to totals because of rounding.

Source: Regionomics LLC; CEX Note: Components may not add to totals because of rounding.

Age group LT 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+

Table 2: Average Monthly Expenditures by Survey and Age Group Table 2: Average Monthly Expenditures by Survey and Age Group


Taxable average 705 1,003 1,135 1,220 1,229 1,236 1,210 1,169 1,129 1,031 892 759 572

Aging Ohio: The Impact of Demographic Change on State Fiscal Policy Figure10. 10.Monthly MonthlyTotal Totaland and Taxable Taxable purchases, purchases, by Figure by Age Age of ofHead Headof ofHousehold Household $4,500 $4,000 $3,500 $3,000 $2,500 Aging Ohio: The Impact of Demographic Change on State Fiscal Policy $2,000 $1,500

Figure 10. Monthly Total and Taxable purchases, by Age of Head of Household $1,000 $4,500 $500 $4,000 $$3,500 $3,000

LT 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ Total Purchases

$2,500 $2,000 Source: Regionomics LLC; CEX

Effective taxable purchases

Source: Regionomics LLC; CEX

$1,500

Figure 11. Percent of Purchases Taxable, to bypeak Age at of$1,235 Head per of Household There are two reinforcing factors that cause taxable purchases month for the 45-49 year $1,000 old age group. The first factor is that total average purchases—both taxable and non-taxable—are less for 40% $500 older households. Total average expenditures peak at $4,000 per month in that age range and decline with age afterwards, with total purchases reaching an average of $2,350 per month for households aged 80 years $- 35% and older. The other factor is that taxable purchases make up a lower percentage of total purchases for seniors LT 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ (Figure 11). For working-age households, taxable purchases maintain a fairly constant share of about a third 30% of total purchases. This falls for retirement-age households, reaching a low of 24 percent of total purchases TotalWith Purchases Effective taxable purchases for households aged25% 80 years and older. fewer total purchases and fewer still of those purchases being taxable, potential tax revenue decreases as seniors increase as a proportion of the total population. Source: Regionomics LLC; CEX 20%

Figure 11. Percent of Purchases Taxable, by Age of Head of Household Figure 15% 11. Percent of Purchases Taxable, by Age of Head of Household 40% 10% 35% 5% 30% 0% 25%

LT 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+

Source: The Center 20% for Center Community Solutions; CEX

15% 10% 5% 0% LT 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+ Source: The Center for CenterSource: Community Solutions; The Center for CEX Center Community Solutions; CEX

Projecting Households and Sales Tax Revenues over Time

In order to translate the findings discussed in the preceding section to sales tax receipts, it is necessary to have a projection of the number of households in Ohio categorized by the age of the head of household. The population Center for Community Solutions 7 | P aprojections ge Although projections by age are available at five-year intervals for the state, household www.CommunitySolutions.com

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are not. This report uses the proportion of individuals in a given age group derived from the U.S. Census Bureau’s American Community Survey 2011 three-year estimates.17 to infer the number of households from the number of individuals by age in the adult population. This involves calculating the headship rate (the number of household heads as a fraction of total population) by age in Ohio in 2011 and applying that rate to the projections discussed below. This approach requires the assumption that these age-specific headship rates will remain constant over the coming decades, when in fact they probably will not. In a recent study, Andrew Paciorek noted that in the wake of the housing bust and recession, the household formation rate plunged.18 Between 2006 and 2011, only about 550,000 households formed per year nationally, compared to an average of 1.35 million per year during the five preceding years. According to Paciorek, this formation rate was the lowest in the 40 years for which these rates are available. The impact of the recession on household formation may have been even greater in Ohio because the impact of foreclosures and recession on the state’s economy were both greater than average (although Ohio’s economy seriously lagged the averages during the preceding expansion as well). The implication is that headship rates for all age cohorts—but the younger ones in particular—are lower than their long-run levels because people adversely affected by the recession doubled up or continued living with parents rather than forming separate households. Assuming that these individuals regard these arrangements as suboptimal, the continuing recovery in the economy, housing markets, and credit availability will lead to above-average formation rates in coming years that will return headship rates to their long-run levels. This implies in turn that the consumption of these younger cohorts especially is understated in the long-run projections, and hence the overall projections are understated as well. (The sales tax generated in 2010 by households headed by 16-to 24-year-olds are only 2.7 percent of total modeled collections, and that generated by both this group and households headed by 25-to 34-year-olds are 16.6 percent of the total. Both ratios decline in the later years of the projections.)19 Changes in both the sales tax rates and the scope of goods and services subject to tax are both possible in coming years. However, no changes in either scale or scope of sales taxes—other than the expansion to online purchases—are assumed in deriving sales tax collections from projected taxable expenditures. Total taxable expenditures are projected by multiplying the average taxable expenditures per household in the right-hand column of Table 2 by the number of households implied by the application of household head percentages from the ACS to the Scripps and ODSA population projections. This result times the current 5.75 percent state sales tax rate yields sales tax revenue from households. These sales tax revenue projections are by default in constant (December 2012) dollars. It is straightforward to express these revenues in current dollars by multiplying the calculated revenue by an inflation factor based on current long-run projected inflation rates. The Congressional Budget Office projects inflation measured by the CPI-U to average 1.9 percent in 2014, rise to 2.4 percent by 2018 and remain at this level through 2023.20 Tax revenues are not inflated in this analysis, however. Although revenues are affected by inflation, outlays are affected as well. The projections in constant dollars—i.e., constant purchasing power—are an indication of changes in the degree to which government expenditures are covered by this revenue stream.

The Impact of Health Care Spending

Analyzing expenditures in constant-dollar terms to some extent neglects the impact of health care costs in the budgets of older Ohioans especially and the impact of above-average growth of these costs on spending on taxable goods. Health care expenditures will increase in real terms because the older population will consume a larger quantity of medical products and services. These expenditures will also increase in real terms to the extent that medical cost inflation exceeds that of all items. The first reason is reflected in the age-specific expenditure projections, but the second reason is not reflected and may have significant impacts on both taxable expenditures and government obligations. Figure 12 graphs the comparison between inflation rates of medical and non-medical costs since 1990 as measured by the CPI-U, while Figure 13 shows average CPI-U inflation rates by decade beginning in the 1940s. Both general and medical care inflation rates have declined significantly over the past 23 years, but medical care costs continue to rise at a faster rate than costs of other goods and services. Figure 13 shows that this is nothing new: since the 1950s, the only decade in which medical care inflation was not far greater than non-medical inflation was during the stagflation of the 1970s. 14



Figure 12: Annual Inflation Rates: Medical Care and Other Items, 1990-2013 Figure 12: Annual Inflation Rates: Medical Care and Other Items, 1990-2013

10% 9% 8%

Inflation rate

7% 6% 5% 4% 3% 2% 1% 0% 2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

-1%

Year All items less medical care

Medical care

Aging Impact of Demographic Change on State Source: Consumer Price Ohio: Index, The All Urban Consumers, U.S. Bureau of Labor Statistics

Fiscal Policy

Source: Consumer Price Index, All Urban Consumers, U.S. Bureau of Labor Statistics

Figure 13: 10-Year Average Inflation Rates: Medical Care and Other1940s Items, Through 2000s Figure 13: 10-Year Average Inflation Rates: Medical Care and Other Items, 1940s Through 2000s

9% 8% 7%

Inflation rate

6% 5% 4% 3% 2% 1%

8|Page

The Center 0% for Community Solutions 1940s

1950s

1960s

1970s

1980s

1990s

2000s

Year All items less medical care

Medical care




15

An important question is whether this above-average rate of medical cost inflation will continue. If it does, the higher costs coupled with the higher demand by older individuals will lead medical spending to crowd out other spending. This is relevant to projecting sales tax collections because medical services, specified medical equipment, and prescription drugs are not taxable (but over-the-counter drugs are taxable). Part of the price growth is a function of technological change, and not merely because of the cost of technological innovations themselves. In much the same way that a 2014 high-definition, Internet-enabled television is a qualitatively different good from a 1990 color television with a picture tube (or broadband consumer Internet access in 2014 is different from no Internet access in 1990), medical care in 2014 is in many ways a significantly different set of goods and services from those available in 1990. In both cases, there is no clear comparison between the basket of goods and services in 1990 and those in 2014. This is a standard problem in measuring price changes over long time periods. BLS tries to reflect these quality changes by making “hedonic adjustments” but this is a difficult, error-prone exercise that makes the measured long-run price changes in Figures 12 and 13 highly suspect—especially for a technologically intensive item such as health care.21 However, if we accept the measured inflation rates as correct, the implication is that the real cost of health care is significantly higher than it was 20 years ago. It is certainly the case that health care spending is an increasing share of total expenditures. The trend is unsustainable: according to John Friedman of Harvard University, if no changes are made, Medicare spending alone would be 99 percent of gross domestic product by 2080.22 But a break in the trend has been predicted for years. If real health care spending continues to rise, this spending will substitute for other purchases, initially reducing the taxable base and tax collections. However, this substitution impact will reduce demand for other goods and services, causing their price to fall and stimulating demand. The impact of this secondary effect on total expenditures and tax collections is ambiguous, depending on the price elasticity of demand for taxable goods and services. Spending growth has slowed in recent years, though—from real annual increases averaging 3.6 percent between 1999 and 2007 to 2.6 percent between 2011 and 2013, according to data from the National Income and Product Accounts of the US Bureau of Economic Analysis.23 The lingering effects of the recession, including job and health coverage loss, and less generous health insurance coverage are commonly cited as the cause of this deceleration but Ryu and his colleagues find that these impacts account for only about one-fifth of the slowdown in growth. They argue that other factors, such as slower introduction of new technology, may be behind the trend change, possibly suggesting the long-awaited shift toward slower long-term growth of health care costs.24

Projected Constant-Dollar Sales Tax Receipts

Figure 14 presents the projected constant-dollar Ohio sales tax receipts based on the ODSA projections through 2040 and the Scripps projections through 2050. Again, these projections assume socioeconomic stability within age brackets and do not include the possible negative impacts from growing real health care expenditures. Both series show continued increases in collections over the current decade, followed by a trend break as the increasing share of older households leads to declining constant-dollar expenditures on taxable goods. The higher rate of population growth assumed in the Scripps projections cause revenues to peak higher and later than revenues from the ODSA projections. The Scripps projection revenues at their 2025 peak are just under $3.5 billion, up 4.3 percent from 2010 and a miniscule 1.5 percent from 2015. The ODSA projections lead to a 2020 peak of $3.41 billion, a gain of 1.8 percent from 2010. Following the Scripps peak, that series projects collections slightly more than 3 percent greater than the ODSA-based series. The ODSA projection revenues in 2040 are 0.3 percent less in real terms than their 2010 level, while the Scripps projection revenues in 2050 are still 2 percent higher than they were in 2010. Note that the modeled collections of $3.352 billion in 2010 are far less than the $7.286 billion actually collected by the state in that year.25 One reason for this disparity is that these estimates include only sales taxes paid by households and omit payments by businesses. Business-to-business purchases probably account for about a third of total sales tax liability, and perhaps more.26 A second reason is the possibility raised earlier that at least some respondents of the CEX underreport their spending.27 That problem is addressed in this analysis merely by excluding responses that fail to report non-taxable expenditures. This approach eliminates the most egregious examples of underreporting, but undoubtedly leaves some underreported cases in the sample. These revenues must cover a higher level of public expenditures on services for the aging population – unless those services are curtailed. 16



Figure 14: 14: Projected Projected Ohio Ohio Consumer Consumer Sales Sales Tax Tax Revenues Figure Revenues in in Constant Constant Dollars Dollars

Millions of constatnt (December 2012) dollars

$3,550

$3,500

$3,450

$3,400

$3,350

$3,300

$3,250 2010

2015

2020

2025

2030

2035

2040

2045

2050

Year Scripps

ODSA

Source: Regionomics and The Center for Community Solutions; Consumer Survey Source: Regionomics and The Center for Community Solutions;Expenditure Consumer Expenditure Survey

III. Income Tax Tax Estimates III. Income Estimates

Jon Honeck and Matt Bird Jon Honeck and Matt Bird The Center for Community Solutions The Center for Community Solutions Ohio, like many federal Adjusted Gross Income (AGI) as(AGI) the starting point, or tax base, Ohio, likeother manystates, otheruses states, uses federal Adjusted Gross Income as the starting point, or for the statetax income tax return. If Congress changes how federal AGI is determined, those changes affect base, for the state income tax return. If Congress changes how federal AGI is determined, the Ohio incomethose tax unless the affect state passes a law to decouple with to specific After starting with federal changes the Ohio income tax unless therespect state passes a lawitems. to decouple with respect AGI, Ohio taxpayers then apply certain additions or deductions that modify the amount of income subject to to specific items. After starting with federal AGI, Ohio taxpayers then apply certain additions or taxation. After taxpayers have determined an initial amount of liability, they can apply credits to reduce what deductions that modify the amount of income subject to taxation. After taxpayers have they owe. determined an initial amount of liability, they can apply credits to reduce what they owe. In order to understand the impact of aging on the state income tax we developed a model that estimates In order to understand the impact of aging on the state income tax we developed a model that changes in the tax base and the future costs of deductions and credits that are designed mainly for seniors and estimates changes in the tax base and the future costs of deductions and credits that are designed retirees. Recipients of Social Security income are permitted on their state return to deduct the full amount of mainly for seniors and retirees. Recipients of Social Security income are permitted on their state benefits that is included in federal AGI. Recipients of a military pension can also deduct 100 percent of their return to deduct the full amount of benefits that is included in federal AGI. Recipients of a pension amount. Other important deductions that are related to aging are for excess medical expenses and military pension can also deduct 100 percent of their pension amount. Other important disability income. deductions that are related to aging are for excess medical expenses and disability income. Ohio also permits seniors and retirees to use tax credits (Table 3). Every tax return from a senior-headed Ohio also65permits and retirees to useThe taxcredit credits 3). Every on taxretirement return from a household (age or over)seniors is allowed a $50 credit. is (Table not conditional status. Ohio senior-headed household (age 65 or over) is allowed a $50 credit. The credit is not conditional taxpayers are not asked to give their age on income tax returns, but in our analysis the senior citizen credit can be used as a proxy for age because the family must include at least one person age 65 or over. Pension and retirement income, such as 401(k) and IRA distributions, are treated differently than Social Security benefits and areThe eligible for for theCommunity retirement income tax credit. Distributions less than $500 are fully taxable, Center Solutions 21 | P but a g higher e amounts are eligible for a credit based on a sliding scale, with a maximum of $200 credit for distributions more than $8,000. The retirement credit, as it is called, is not dependent on age. www.CommunitySolutions.com

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Scripps

ODSA

Source: Regionomics and The Center for Community Solutions; Consumer Expenditure Survey

Table MajorTax TaxCredits Credits Designed Designed for andand Retirees Table 3: 3: Major forSeniors Seniors Retirees Credit

Eligibility

Credit Amount

Senior Citizen Tax Credit

All Ohioans 65 years or older. Not dependent on retirement.

$50 per return

Retirement Income Credit

Ohioans who receive retirement income. Not dependent on age.

$25-$200

Lump Sum Retirement Credit

Ohioans who receive a lump sum distribution from a retirement account which was included in their federal return.

$25-$200 multiplied by expected remaining life years

Lump Sum Distribution Credit

Ohioans 65 years or older who received a qualifying lump sum distribution. Claimed in lieu of the senior citizen credit and disqualifies the filer from taking senior citizen credit in the future.

$50 multiplied by expected remaining life years

Source: Ohio Department of Taxation

Recent Trends in for Aging and Solutions Retirement-related Tax Expenditures10 | P a g e The Center Community

The senior citizen share of all state income tax returns (resident and non-resident) increased steadily from 11.2 Aging TheinImpact of Demographic onshare Stateof Fiscal percent in 2000 to almost 16Ohio: percent 2012 (Figure 15). SeniorChange citizens’ totalPolicy tax liability has been lower than their share of returns, in large part because of the use of specialized deductions and credits. Seniors’ average AGI is higher than that of non-seniors.28 Source: Ohio Department of Taxation

!"#$"%&'()'*(&+,'-"&.#%/'(#'01+21,1&3'

Figure 15. Senior Share of the Number of Total Returns and Ohio Income Tax Liability Figure 15. Senior Share of the Number of Total Returns and Ohio Income Tax Liability 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Number of Returns

Tax Liability

Source: The Center for Community Solutions; ODT (includes non-residents) Source: The Center for Community Solutions; ODT (includes non-residents)

Table 4. Simplified Provisional Income Test for Federal Taxation The Social Security Deduction of Social Security Benefits The federally taxable portion of Social Security benefits is determined by applying Provisional Income Level a “provisional income test” that addsProportion federal AGI plus interest from federal Married bonds and one-half of SocialIndividual Security income. The threshold of Benefits Taxable Filers Filers for taxation for a married couple tax return is a provisional income level of $32,000 ($25,000 for a single 29 Exempt Under $25,000 taxpayer). The taxable portion of Social Security is the$32,000 amount of the benefitUnder in excess of the threshold, but to 50% of benefits - $44,000 - $34,000 not moreUp than 50 percent of taxable total benefits in the$32,000 first “tier” of taxability, and $25,000 not more than 85 percent of total benefits (Tier in theOne) second tier (Table 4). The threshold amounts for exemption that determine the two “tiers” are Up 85% of benefits $44,000 Over $34,000 not adjustedtofor inflation, sotaxable the amount of SocialOver Security benefits subject to federal taxation, and the Ohio (Tier Two) deduction, grows over time as average benefit levels increase. 4 Source: Social Security Administration 18


Table 4. Simplified Provisional Income Test for Federal Taxation of Social Security Benefits Table 4. Simplified Provisional Income Test for Federal Taxation of Social Security Benefits Provisional Income Level Proportion of Benefits Taxable

Married Filers

Individual Filers

Exempt

Under $32,000

Under $25,000

$32,000 - $44,000

$25,000 - $34,000

Over $44,000

Over $34,000

Up to 50% of benefits taxable (Tier One) Up to 85% of benefits taxable (Tier Two)

Source: Social Security Administration30 Source: Social Security Administration 4

For tax year 2012, Ohio income tax returns reported $18.98 billion in deductions, of which $7.7 billion (41 percent) were from the Social Security deduction alone. The Social Security income deduction was the largest single deduction taken by all taxpayers. Returns from senior households accounted for 84 percent of the value and 81 percent of the number of returns claiming this deduction in 2012. Persons under age 65 can use the credit for Social Security Disability Insurance (SSDI) or survivors’ benefits. From 2005 to 2012, the number of returns claiming the Social Security deduction grew by 39 percent and the Aging Ohio: The Impact total amount grew by 67 percent (Figure 16). of Demographic Change on State Fiscal Policy Figure 16. Social Security Deduction: Number of Returns and Amount (nominal $) Figure 16. Social Security Deduction: Number of Returns and Amount (nominal $) $9.0 B $8.0 B $7.0 B $6.0 B $5.0 B 11 | P a g e $4.0 B $3.0 B $2.0 B $1.0 B $.0 B

800,000 700,000 600,000 500,000 400,000 The Center for Community Solutions 300,000 200,000 100,000 0 2005

2006

2007

2008

2009

2010

2011

Number - Seniors

Number - All

Amount - Seniors

Amount - All

2012

Source: The Center for Community Solutions analysis of Ohio Department of Taxation data Center forreturns. Community Solutions analysis of Ohio Department of Taxation data Note: figureSource: includesThe non-resident Note: figure includes non-resident returns.

Figure 17. Reduction of Senior Households’ Federal AGI Despite the large dollar amount, thedue Social deduction federal AGI of all Ohio income tax to Security the Social Securityreduced Deduction returns by less than two percent in 2012. Among seniors, however, it had a more significant impact, reducing 12% percent in 2012 (Figure 17). The decline in the share shielded from taxation after 2009 their federal AGI by 7.8 probably reflects greater amounts of income from other sources as the economy recovered. The amount of tax liability removed10% by the Social Security deduction is harder to estimate because it depends on which tax brackets would apply. The tax department estimates the total value of revenue foregone from all taxpayers of all ages at nearly $3008% million in FY 2013. 31 6% 4% 2% www.CommunitySolutions.com 0%

19

2005

2006

2007

2008

2009

2010

2011

2012

Source: The Center for Community Solutions analysis of Ohio Department of Taxation data Note: figure includes non-resident returns.

Figure 17. Reduction of Senior Households’ AGISecurity Deduction Figure 17. Reduction of Senior Households’ Federal AGI due to Federal the Social due to the Social Security Deduction 12% 10% 8% 6% 4% 2% 0% 2005

2006

2007

2008

2009

2010

2011

2012

Source: The Center for Community Solutions’ analysis of Ohio Department of Taxation data The Center for Community Solutions’ analysis of Ohio Department of Taxation data Note: FigureSource: includes non-residents. Note: Figure includes non-residents.

Military Retirement Deduction The military retirement deduction is available to individuals who receive a pension from the U.S. Department of Defense for service in the armed forces. The pension is fully deductible. This is a relatively new deduction that began in 2008. Senior returns were 46 percent of claimants and 45 percent of the total $793 million value Ohio: Thededuction Impact ofisDemographic Change on State Fiscal Policy in 2012. The averageAging amount of the high, at $23,651. Figure 18. Military Retirement Deduction Figure 18. Military Retirement Deduction 40,000

$900 M

35,000

$800 M

$700 M 12 | P a g e

The Center for Community Solutions 30,000

$600 M

25,000

$500 M

20,000

$400 M

15,000

$300 M

10,000

$200 M

5,000

$100 M $M

0 %,,+!

%,,-!

%,$,!

%,$$!

Number - Seniors

Number - All

Amount - Seniors

Amount - All

%,$%!

Source: The Center for Community Solutions’ analysis of Ohio Department of Taxation data The Center for Community Solutions’ analysis of Ohio Department of Taxation data Note: FigureSource: includes non-residents. Note: Figure includes non-residents.

mount of Credit Millions of Dollars)

20

of Returns Claiming it (in Thousands)

Figure 19. Number of Ohio Tax Returns Using the Retirement Income Credit and Amount, Excess Medical Expense Deduction 2000-2012 Ohio allows deductions for excess medical expenses, unsubsidized long-term care expenses, and health $180 1,000 insurance premiums. All of these deductions are combined and reported on the same line on the state form. 900 $160 The ODT only began to publish information about this deduction in 2010, even though it is the second largest 800 $140 deduction after the social security deduction. In 2012, it was claimed on 670,827 returns, and reduced Ohio 700 $120seniors. AGI by $3.6 billion. It is not directly age-related, but 57 percent of claimants were

600 $100 500 $80 400 Ohio: The Impact of Demographic Change on State Fiscal Policy • October, 2014 Aging $60 300

In 2012, 46 percent of senior returns claimed the deduction, compared to 6 percent of non-senior returns. The average deduction for seniors was $5,850, versus $4,579 for non-seniors.

Credits

Aging Ohio: The Impact of Demographic Change on State Fiscal Policy There are three credits that are targeted to seniors and retirees—the Senior Citizen Credit, the Retirement Income Credit and the Lump Sum Retirement Credit. Figure 18. Military Retirement Deduction Senior Citizen Credit

40,000which we are also using as a proxy to determine whether$900 The Senior Citizen Credit, the M age of the filer is 65 or older, is the second largest credit targeted at seniors. This is a flat credit of $50 per return claiming it, $800 M 35,000 regardless of whether the return is filed jointly or separately. In 2012, 839,061, or about 16 $700 M percent, of all tax 30,000Citizen Credit out of 5.32 million total returns filed.32 In 2012, this accounted for returns claimed the Senior $600 M nearly $42 million in 25,000 forgone revenue. $500 M

20,000

Some seniors have the option to deduct this as a lump sum equal to $50 multiplied $400 by their M expected 15,000 remaining years. Filers taking this option are prohibited from taking the Senior Citizen Credit on that return $300 M and in future years. In 2012, 979 filers took this Lump Sum Distribution Credit for a total of $595,000. Between 10,000 $200 M 900 and 1,200 returns claim the Lump Sum Distribution Credit every year, with about 10-13 years as the 5,000 $100 M actuarially predicted remaining years of life. We can use this to roughly estimate that 10,000–15,000 returns filed by seniors every year0are not captured in our estimate based on the senior credit, $ M or about 2 percent of the total senior returns. %,,+! %,,-! %,$,! %,$$! %,$%!

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

Amount of Credit (in Millions of Dollars)

$180 $160 $140 $120 $100 $80 $60 $40 $20 $-

1,000 900 800 700 600 500 400 300 200 100 0 2000

Number of Returns Claiming Credit (in Thousands)

Retirement Income Credit Number - Seniors Number - All While this credit is largely taken by filers who also claimed the Senior Citizen Credit, it is not done so Amount the - Seniors exclusively. In 2012, 922,296 taxpayers claimed RetirementAmount Income- All Credit for a total credit of $162.5 million Source: (FigureThe 19). Of these, 669,209 (72.5 percent) were seniors, who claimed credits worth $119 million. The Center for Community Solutions’ analysis of Ohio Department of Taxation data averageNote: amount claimed is $176, indicating that most returns are using the maximum amount of $200. The Figure includes non-residents. Retirement Income Credit is used by 17 percent of all Ohio taxpayers. Figure 19. Number of Ohio Tax Returns Using the Retirement Income Credit and Amount, Figure 19. Number of Ohio Tax Returns Using2000-2012 the Retirement Income Credit and Amount, 2000-2012

Total Returns - R.I.C.

Senior Returns - R.I.C.

Total Amount R.I.C.

Senior Amount - R.I.C.

Source: TheSource: Center for analysis of Ohio Department Taxation data TheCommunity Center for Solutions Community Solutions analysis of Ohio of Department of Taxation data

Lump Sum Retirement Credit Households’ Use of Major Credits and Deductions, Tax Year 2012 Table 5. Senior Item Number of Returns Share ofallows Seniorthe Returns The Lump Sum Retirement Credit is the final credit targeted at seniors, which filer to offset taxes on Senior Citizen Credit 839,061 100% income they received as a single lump sum distribution from a pension, retirement, or profit-sharing plan. It is Retirement Credit 669,209 not as large as the Income previous two, with only 2,113 Ohioans claiming it in 2011 for a total80% of $4.2 million. In sum, Social Security Deduction 543,559 65% credits in 2012: senior households claimed the following major age- or retirement-related deductions and Medical Expense Deduction

383,926

46%

Disability Income Deduction

25,238

3%


21

Aging Ohio: The Impact of Demographic Change on State Fiscal Policy Table 5. Senior Households’ Use of Major Credits and Deductions, Tax Year 2012 Aging Ohio: The Impact of Demographic Change on State Fiscal Policy Table 5. Senior Households’ Use of Major Credits and Deductions, Tax Year 2012 Item Social Security Deduction Senior Citizen Credit Medical Expense Deduction Retirement Income Credit

Number of Returns 543,559 839,061 383,926 669,209

Share of Senior Returns 65% 100% 46% 80%

Social Security Deduction Disability Income Deduction Medical Expense Deduction Military Retirement Deduction Disability Income Deduction

543,559 25,238 383,926 15,463 25,238

65% 3% 46% 2% 3%

Military Retirement Deduction

15,463

2%

Source: Ohio Department of Taxation; includes non-residents

It should also be notedSource: that 179,394 seniors, or percent of thenon-residents total, used the Low Income Ohio Department Department of 21 Taxation; includes Source: Ohio of Taxation; includes non-residents Credit in 2012, for a value of $15.8 million. The Low Income Credit removes all tax liability for Ohio taxable incomes of $10,000 or less. The utilization of the other credits described above It should also be noted 179,394 seniors, or 21 of the total, Low Income Credit in 2012, for Figure 20. that Federal Reported bypercent Ohio Residents on used Statethe Income Tax Returns, would probably be higherAGI if the Low Income Credit did not exist. a value of $15.8 million. The Low Income Credit removes all tax liability for Ohio taxable incomes of $10,000 Tax Years 2000-2012 or less. The utilization of the other credits described above would probably be higher if the Low Income Credit did not exist. $350

How an Aging Society Affects the Income Tax Base

TheAging reduction of$300 the number of households at prime How an Society Affects the Income Tax working Base ages will have profound Billions of Dollars

implications the income tax just as it did for the sales tax. Ohio’s income tax base is already The reduction of the for number $250 of households at prime working ages will have profound implications for the constrained by slow economic andOhio’s population growth. The amountconstrained of AGI reported by Ohio income tax just as it did for the sales tax. income tax base is already by slow economic and residents (residents typically provide 97 percent of total income tax liability) was still two population growth. The$200 amount of AGI reported by Ohio residents (residents typically provide 97 percent of percent in 2012 in 2000, afterlower adjusting forthan inflation (Figure As noted tax(Figure total income taxlower liability) wasthan still two percent in 2012 in 2000, after20). adjusting forabove, inflation revenues fell even more precipitously under the impact of repeated tax cuts. 20). As noted above, tax$150 revenues fell even more precipitously under the impact of repeated tax cuts. $100 20. AGIby Reported by Ohioon Residents on State Tax Returns, Figure 20. Figure Federal AGIFederal Reported Ohio Residents State Income TaxIncome Returns, Tax Years 2000-2012 Tax Years 2000-2012

Billions of Dollars

$50 $350 $0 $300 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 $250

Nominal

Real (2012 dollars)

$200

Source: The Center for Community Solutions; Ohio Department of Taxation

$150

Table 6. Types of Income included in the Model and their Contribution to Federal AGI $100 (IRS Returns) Share of Total Federal AGI $50 Income Type (2011)

Wage$0 and Salary Earnings 71.5% Pensions 2000 2001 2002 2003 2004 2005 2006 2007 2008 8.3% 2009 2010 2011 2012 Partnerships & S-corporations 4.2% Self-employment 3.1% Nominal Real (2012 dollars) IRA/Retirement Accounts 2.8% Capital Gains 2.5% Source: The Center for Community Solutions; Ohio Department of Ohio Taxation Source: The Center for Community Solutions; Department Social Security 2.3% of Taxation Ordinary Dividends 1.9% to estimate theDividends impact of demographic thetax state taxwe base, weACS usedestimates ACS In orderIntoorder estimate the impact of demographic changechange on the on state base, used of filers Qualified 1.4% estimates of filers and non-filers to produce a universe of potential taxpaying units. We thenof income Interest 1.0%developed an estimate and non-filers to produce a universe of potential taxpaying units. We then

5 developed estimate of income tax to filers at various ages, and estimates applied them toon thethe Scripps Source: IRS, applied Statistics of Income, Ohio 2011. tax filers at variousan ages, and them the Scripps population based assumption that population estimates based on the assumption that the proportion of non-filers in the the proportion of non-filers in the population at various age cohorts will stay the same in the future. The population at various age cohorts will stay the same in the future. The estimate is meant to estimate is meant to simulate an average economic year that will be representative of the number of filers simulate an average economic year that will be representative of the number of filers over the over the course of the economic cycle. This method will underestimate the number of returns in an economic course of the economic cycle. This method will underestimate the number of returns in an expansion and overestimate returns in a recession. The from therecovery recent recession to be economic expansion and overestimate returns inrecovery a recession. The from the continues recent slow and the state has not recovered all of the jobs it lost. We also report below on an “optimistic employment recession to be slow and the state has not recovered all of the jobs it lost. We The Centercontinues for Community Solutions 14 also |Page scenario” that increases the number of filers with wage and salary income, but this scenario does not change the overall result in which slow population growth and aging eventually overwhelm other trends.

The Center for Community Solutions 22

27 | P a g e


Billi

$100 $50

The model develops estimates for the prevalence of ten types of income by age cohort that comprise 99 percent $0 Ohio residents.33 The model started with IRS returns because Ohio tax data of the AGI on IRS returns from does not have detailed information on specific types income. Wage and salary 2000 2001 2002 2003 2004of2005 2006 2007 2008 2009 2010earnings 2011 2012are by far the largest component of federal AGI (Table 6). The model converts federal estimates to state returns by estimating the number of federal filers who receive the earned income tax credit are not required to file at the state level. Nominal Real (2012but dollars) Non-residents who file Ohio state returns were not included in this portion of the modeling. Source: The Center for Community Solutions; Ohio Department of Taxation

Table 6. Types of Income included in the Model and their Contribution to Federal AGI (IRS Returns) Income Type

Share of Total Federal AGI (2011)

Wage and Salary Earnings

71.5%

Pensions

8.3%

Partnerships & S-corporations

4.2%

Self-employment

3.1%

IRA/Retirement Accounts

2.8%

Capital Gains

2.5%

Social Security

2.3%

Ordinary Dividends

1.9%

Qualified Dividends

1.4%

Interest

1.0%

Source: IRS, Statistics of Income, Ohio 2011.34

For each type of income, the model produces an estimate of the number of tax returns and the average amountsThe reported 10-year age cohorts and for seniors 65 and older. For wage and salary earnings, Centerwithin for Community Solutions 14 | P age pension, and retirement accounts, we developed more detailed estimates for five-year age ranges for the senior population. Figure shows estimated average earningsChange per taxon return age cohort Aging21Ohio: The Impact of Demographic Stateby Fiscal Policy in 2011. Readers interested in the details of our methods should consult the Appendix. Figure 21. Estimated Average Wage and Salary Income for ODT Returns by Age, 2011 Figure 21. Estimated Average Wage and Salary Income for ODT Returns by Age, 2011 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $16-24 25-34 35-44 45-54 55-64 65-69 70-74 75-79 80 plus Age Source: The Center for Community Solutions analysis of Solutions IRS and ODT data of IRS and ODT data Source: The Center for Community analysis

Estimating the Number StateIncome Income Tax Returns Estimating the Number of of State Returns

The number of estimated Ohio resident state income filers follows population trend estimates The number of estimated Ohio resident state income filers follows population trend estimates and does andgreatly, does notpeaking change at greatly, at nearly 5.2The million in 2025. The age composition of the not change nearlypeaking 5.2 million in 2025. age composition of the tax filers changes tax filers changes significantly, however. The number ofabout senior767,000 filers grows from aboutthan 767,000 significantly, however. The number of senior filers grows from in 2010 to more 1.3 million 2010 to more than 1.3 million 2035, accounting for one-fourth of all taxpayers. in 2035, in accounting for one-fourth of all in taxpayers. Figure 22. Estimated Number of ODT Returns from Ohio Residents


6,000,000

23

and does not change greatly, peaking at nearly 5.2 million in 2025. The age composition of the tax filers changes significantly, however. The number of senior filers grows from about 767,000 in 2010 to more than 1.3 million in 2035, accounting for one-fourth of all taxpayers.

Figure 22. Estimated Number of ODT Returns from Ohio Residents Figure 22. Estimated Number of ODT Returns from Ohio Residents 6,000,000 5,000,000 4,000,000 3,000,000

Senior Non-senior

2,000,000 1,000,000 0 2010

2015

2020

2025

2030

2035

Source: The Center Source: for Community Solutions analysis of Solutions IRS and ODT data of IRS and ODT data The Center for Community analysis

The number ODT returns withand wage andincome salary income fall by 273,000 (7 percent) The number of ODT of returns with wage salary will fallwill by 273,000 (7 percent) between 2015 and Aging Ohio: The Impact of Demographic Change on State Fiscal Policy between 2015 and 2035 (Figure 23). 2035 (Figure 23).

Figure 23. Estimated Number of ODT Filers with Wage Earnings Figure 23. Estimated Number of ODT Filers with Wage Earnings 4,500,000

29 | P a g e

The Center for Community Solutions 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2015

2020

2025

2030

2035

Source: The Center Source: for Community Solutions analysis of Solutions IRS and ODT data of IRS and ODT data The Center for Community analysis

Income Tax Scenarios Income Tax Scenarios

In our modeling of the income we developed three scenarios. The first scenario maintains In our modeling of the income tax we tax developed three scenarios. The first scenario maintains the prevalence the prevalence of each type of income and the average amounts of income for each cohort of each type of income and the average amounts of income for each age cohort at constantage 2011 levels.atThe constant 2011 levels. The purpose of this scenario is to isolate the effects of demographic change purpose of this scenario is to isolate the effects of demographic change without regard to any other trends. without regard to any other trends. This scenario is a close analogy of the sales tax model This scenario is a above. close analogy of the sales tax model described above. In thisonconstant income described In this constant income scenario, total AGI reported state income taxscenario, total AGI reported on state income tax returns scarcely changes over the 2015 – 2035 period, declining by just 1 returns scarcely changes over the 2015 – 2035 period, declining by just 1 percent. As one would percent.expect, As onethe would expect, the composition of AGI changes to the aging population. Social Security, composition of AGI changes due to the agingdue population. Social Security, retirement retirement account, and pension income all increase by double digits, and employment-related income account, and pension income all increase by double digits, and employment-related income declines. Because it ignores known trends, such as the decline of defined benefit pensions, this scenario declines. Because it ignores known trends, such as the decline of defined benefit pensions, this is also unrealistic. We provide some additional detail some in an appendix. scenario doesWhat suggest, scenario is also unrealistic. We provide additional What detail the in an appendix. the however, is that better retirement income security could offset much of the decline in employment-related income. scenario does suggest, however, is that better retirement income security could offset much of the decline in employment-related income. 24


Taking into Account Trends in Work and Retirement Income

Taking into Account Trends in Work and Retirement Income A more realistic model takes into account increases in income, inflation, and changing prevalence of various kinds of income on tax returns. Not only will average incomes rise, at least in nominal terms, but the relative importance of various types of income will change in response to economic and regulatory trends. Several trends are of major importance. First, there has been a marked decline in defined benefit (DB) pension coverage and an increase in the use of retirement accounts such as Individual Retirement Accounts (IRAs) and 401(k)s. Second, looking more narrowly at the tax system, the prevalence of taxable social security in federal returns will increase if the provisional income test is not revised for inflation. This will increase the share of AGI from Social Security but will lower the state tax base because of the Social Security deduction. Pension coverage and retirement account ownership are not universal, recent trends Aging Ohio: The Impact of Demographic Change onand State Fiscal Policymay negatively affect seniors’ financial stability. The shift from traditional employer-sponsored DB plans to defined contribution (DC) plans, such as 401(k) accounts, has been well-documented. DC plans shift investment risk from the employer employee. In a typicallevels DB plan, employees a steady income in retirement market ratesto ofthe return and contribution are the primary receive determinants of income. The based on yearsofofwithdrawals service withcan an employer. DB plans are now rare in theinvestments private sector. In a 401(k) or other timing play a key role in determining whether provide definedsufficient contribution plan,Workers market are rates of return andtocontribution are the primary determinants of income. also expected save on theirlevels own outside of employerincome.sponsored The timing of withdrawals can play a key role in determining whether investments provide sufficient plans through IRAs. income. Workers are also expected to save on their own outside of employer-sponsored plans through IRAs. In 1988, nearly 57 percent of employees covered by pension plans listed a DB plan as their 35 In 1988,primary nearly 57 percent of employees covered by pensionfell plans listed a DBinplan asOver their this primary retirement plan coverage. This proportion to 21 percent 2012. sameretirement 35 plan coverage. This proportion fell to 21 percent in 2012. Over this same DC of plans became dominant, period, DC plans became dominant, becoming the primary plan forperiod, 78 percent covered becoming the primary workers (Figureplan 24). for 78 percent of covered workers (Figure 24). Figure 24. 24. Type Type of of Primary Primary Pension Pension Plan Plan for for Covered Covered Workers Workers Figure 90 Percentage of Workforce

80 70 60 50

Defined Benefit

40

Defined Contribution

30 20 10 0 1988

2012

Source:Source: Employment BenefitBenefit Research Institute. Chart refers non-agricultural workers. Employment Research Institute. Chart to refers to non-agricultural workers.

The structure of benefit packages oftenthe limits the ability of low-income workers to accumulate The structure of benefit packages often limits ability of low-income workers to accumulate a largeanest large nest egg for retirement. Low-income workers are much less likely to be offered a egg for retirement. Low-income workers are much less likely to be offered a retirement plan, are less likely retirement plan,isare less likely participate if a plan is offered, and tend to contribute a lower to participate if a plan offered, and to tend to contribute a lower percentage of their salary when they do percentage of their salary when they do participate. For example, employers offer tax-qualified participate. For example, employers offer tax-qualified DC plans to just 41 percent of workers in the lowest plans to just percent workers lowest quartileof ofindividuals earnings, but offer such quartileDC of earnings, but41 they offer of such plans in to the nearly 87 percent in they the highest earnings 36 plans to nearly 87 percent of individuals in the highest earnings quartile. Not all are 36 quartile. Not all workers are able to take advantage of these plans when offered, so onlyworkers about one-fourth of able to take advantage of these plans when offered, so only about one-fourth of workers in the workers in the lowest quartile actually participate in a DC plan (Figure 25). lowest quartile actually participate in a DC plan (Figure 25).


25

Figure 25. Participation Rates in Defined Contribution Retirement Plans Decrease Figure 25. Participation Rates in Defined at Contribution Retirement Lower Earnings Levels Plans Decrease at Lower Earnings Levels

Percentage of Workers

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Highest quartile Second quartile Third quartile Lowest quartile Individual Earnings Level (2008) 37 Source: Anguelov, Iams, and Purcell (2012). 2009Purcell Participation Rates. Source: Anguelov, Iams, and (2012).37 2009 Participation Rates.

The uses model uses 2000 trend – 2011data trend dataOhio fromIRS Ohio IRS returns and makes the following The model 2000 – 2011 from returns and makes the following assumptions with assumptions with each type of income: each type of income: • Wage and Salary Earnings. The average amount per return is increased using the historical trend • returns Wage and The average in IRS tax fromSalary Ohio Earnings. residents from 2000 to amount 2011. per return is increased using the historical trend in IRS tax returns from Ohio residents from 2000 to 2011. • Self-Employment Business Income. TheIncome. incidence has been rising slowly in Ohio butinthe • Self-Employment Business Therate incidence rate has been rising slowly Ohio average amount per return is extremely volatile. The scenario adjusts prevalence upward to but the average amount per return is extremely volatile. The scenario adjusts prevalence achieve national levels of 16 percent of total by 2015. upward to achieve national levelstax of returns 16 percent of total tax returns by 2015. • accounts. Retirement accounts. Over time, retirement accounts more are becoming prevalent. We • Retirement Over time, retirement accounts are becoming prevalent.more We used national national estimates of of theretirement increasedaccounts ownership of retirement accounts in 67, future estimates ofused the increased ownership in future generations at age which generations at age 67,38which createthese the basis for our scenario. We applied thesein create the basis for our scenario. We applied national estimates to38Ohio age cohorts national estimates to Ohio age cohorts in future years. In order to derive tax future years. In order to derive tax prevalence, we used national estimates of retirement prevalence, account 39 we39used estimates of retirement account distributions. These Thesenational estimates show that many account holders do not access theirestimates accountsshow until distributions. thatminimum many account holders do not their accounts until they reach the minimum they reach the IRA distribution ageaccess of 70 ½. IRA distribution of 70 ½. estimates of national DB pension ownership by age • Defined Benefit Pensions. Weage again used • Defined Benefit Pensions. We usedthem estimates of national DB pension ownership cohort, and derived tax incidence by first again applying to actual information from recent Ohio by age cohort, and derived tax incidence by first applying them to actual information from IRS returns. recent Ohio IRS returns. • Partnership & S-Corporation. Tax information is only available foravailable Ohio returns for several • Partnership & S-Corporation. Tax information is only for Ohio returns years. for National trends show that the proportion of returns reporting this type of income did not change several years. National trends show that the proportion of returns reporting this type of significantlyincome from 2005 from 2011, so it was not changed the scenario. The average amount did not change significantly from 2005infrom 2011, so it was not changed inper the return was scenario. estimatedThe national trends, lowered by 10 was percent to reflect the Ohio average. average amount per return estimated national trends, lowered by 10 • Social Security. Over the provisional social security income test is drawing more social percent totime, reflect the Ohio average. security•income federally taxable and thussocial increasing the income Ohio deduction. In the more Socialinto Security. Over time, status, the provisional security test is drawing scenario, the prevalence federally taxable social security across ages is gradually social securityofincome into federally taxable status, andall thus increasing the increased Ohio deduction. In the scenario, according to recent historical trends. the prevalence of federally taxable social security across all agesThe is gradually increased according to recent across historical trends. • Capital Gains. scenario returns overall tax prevalence all filers to non-recession levels • Capital Gains. The scenario returns overall tax prevalence of 16 percent. The average amount is increased by the inflation rate. across all filers to nonrecession levels of 16 percent. The average amount is increased by the inflation rate. • Ordinary Qualified There is no There adjustment to prevalence rates in the rates model, • and Ordinary andDividends. Qualified Dividends. is no adjustment to prevalence in but the the overall incidence across all filers increases slowly because older cohorts are more likely to model, but the overall incidence across all filers increases slowly because older cohorts report this kind of income. The average amount for qualified dividends is linked directly to the ordinary dividend level but reduced based on 2011 data. • Interest. The incidence and amount of interest income are suppressed currently by the U.S. Federal The Center for Community Solutions 32 | of P a43g e Reserve’s low interest rate policy. The scenario raises the prevalence to historical state levels percent across all filers (up from 33 percent in 2011) and raises the average amount to the recent historical average of just over $2,000 per return (with interest) in 2015 and then increases it by inflation thereafter. 26


(with interest) in 2015 and then increases it by inflation thereafter. The overall result of the scenario is that total AGI falls in real terms by 13.5 percent from 2015 to The overall result of theinscenario is that falls in real terms 13.5 percent toearnings. 2035, driven 2035, driven large part by a total fall ofAGI 21 percent in the totalby amount of wagefrom and2015 salary in large part by a fallshifts of 21 also percent the total of wage and salary income. earnings.The Important shifts Important takeinplace in theamount composition of retirement prevalence of also take place taxable in the composition of among retirement income. The increases prevalence of taxable social among resident social security resident returns from 63 percent in security 2015 to 77 percent. returns increases from 63 percent in 2015 to 77 percent. prevalence offrom pension The prevalence of pension distributions amongThe seniors declines overdistributions three-fourthsamong in 2015 seniors declines from over three-fourths 2015 toofabout half, with causing the total number taxpayers with to about half, causing the total in number taxpayers pensions at all ages toofdecline from 1.2 pensions at all ages decline from in 1.22035. million in 2015 to 966,000 in 2035. increases in the total million in to 2015 to 966,000 Consequently, increases in theConsequently, total amount of Social Security amount ofpayments Social Security paymentsaccount and retirement account arebypartially offsetdecline by a 24inpercent and retirement distributions aredistributions partially offset a 24 percent decline in pension pension distributions distributions (Figure (Figure 26). 26).

Figure 26. Scenario 2: Inflation-adjusted Federal AGI from Ohio Residents (2012 Dollars) Figure 26. Scenario 2: Inflation-adjusted Federal AGI from Ohio Residents (2012 Dollars) $350

Billions of Dollars

$300 $250 $200 $150 $100 $50 $0 2015

2020

2025

2030

Source: TheAging Center Ohio: for Community Solutions The Source: Impact of Demographic Change on State The Center for Community Solutions

2035

Fiscal Policy

Figure 27. Income Tax Scenario: Inflation-Adjusted Change in Total Amount of AGI Components, Figure 27. Income Tax Scenario: Inflation-Adjusted Change in Total Amount of AGI 2015 – 2015 2035 – 2035 Components, Earnings Self-employment Retirement Account Pension Social Security

33 | P a g e

Partner,for S-corp The Center Community Solutions Capital Gains @ 2.4% Ordinary Dividends Qualified Dividends Interest @2.4% -30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Source: The Center for Community Solutions


In this scenario, the composition of AGI undergoes some significant changes from 2015 to 2035. Employment (including self-employment) earnings decline from more than 72 percent of the total to just under 66 percent (Figure 28). Retirement-related income types (pensions, IRAs, www.CommunitySolutions.com Social Security) increase their share from 15.4 percent to 18.6 percent. Social Security payments increase their share of total AGI from less than 3 percent to nearly 5 percent, which would be

27

Ordinary Dividends Qualified Dividends

In this scenario, Interest the composition @2.4% of AGI undergoes some significant changes from 2015 to 2035. Employment (including self-employment) earnings decline from more than 72 percent of the total to just under 66 percent (Figure 28). Retirement-related-30% income types-10% (pensions, their 15.4 -20% 0% IRAs, 10%Social 20%Security) 30% increase 40% 50% share 60% from 70% percent to 18.6 percent. Social Security payments increase their share of total AGI from less than 3 percent to nearly 5 Source: percent, which be removed from the state tax base because of the deduction. Capital income The Centerwould for Community Solutions increases its share by more than three percentage points, from 12.4 percent to 15.6 percent. Figure AGI from Ohio Residents (All(All ages) Figure28. 28. Changing ChangingComposition CompositionofofFederal Federal AGI from Ohio Residents ages) Retirem ent Income, 15.4% Capital Income; 12.4%

2015

Employ ment income, 72.2%

Retirem ent Income, 18.6%

2035

Capital Income; 15.6% Employ ment income, 65.8%

Source: The Center for Community Solutions Source: The Center for Community Solutions

Aging Ohio: The Impact of Demographic Change on State Fiscal Policy Assuming an average effective tax rate of 3 percent, the estimated amount of revenue collected by the state would be nearly $1.18 billion lower in 2035 than 2015.

Scenario 3: Improved Employment at Younger Ages

Scenario 3: Improved Employment at Younger Ages One of the most salient features of the recession and ensuing partial recovery is the reduction of One of the most salient features ages. of theAccording recession and ensuing recovery the reduction employment at younger to ACS data, partial every age cohortisyounger than 60of employment at younger ages. According to ACS data, every age cohort younger than 60 experienced decline in its labor experienced a decline in its labor force participation rate. Older ages showed veryaslight force participation rate. Older ages showed very slight increases. The decline was most severe among young increases. The decline was most severe among young adults (Figure 29). adults (Figure 29). Figure 29. Decline in the Employment-to-Population Ratio among Younger Age Cohorts, Figure 29. Decline in the Labor Force Participation Rate among Younger Age Cohorts, 2007 to 2011 2007 to 2011 90% 88% 86%

18 | P a g e

The Center for Community Solutions 84% 82% 80%

2007

78%

2011

76% 74% 72% 70% 16 - 24

25 - 34

35 - 44

45 - 54

55 - 59

Source: The Center forSource: Community The Solutions; Center forACS Community Solutions; ACS

As of 2014, Ohio not recovered alljobs of the jobsduring it lost during the recession. fact As of 2014, Ohio still hadstill nothad recovered all of the it lost the recession. In fact In employment was employment was less than its level in 2000, before the beginning of the previous recession. less than its level in 2000, before the beginning of the previous recession. But this recovery may beBut completed this recovery may be completed eventually. The optimistic employment scenario returns the incidence of employment among the younger age cohorts to pre-recession (2007) levels by 2020 28 AgingofOhio: Impact Demographic Change on State Fiscal The Policy • October, 2014 and increases the number filersThe with wageof and salary earnings proportionately. heightened level of employment is maintained after 2020. By 2035, this scenario would increase

eventually. The optimistic employment scenario returns the incidence of employment among the younger age cohorts to pre-recession (2007) levels by 2020 and increases the number of filers with wage and salary earnings proportionately. The heightened level of employment is maintained after 2020. By 2035, this scenario would increase the number of filers with wage and salary earnings by 158,000 (4 percent) above the baseline estimate explained above. The financial effect is to add $5.4 billion (3.4 percent) in real terms to wage and salary earnings in 2035.40 This creates a more gradual decline in inflation-adjusted AGI but does not change Aging Ohio: The Impact of Demographic Change on State Fiscal Policy the overall trend (Figure 30).

Billions of dollars

Figure 30. Federal AGI in the Improved Employment Scenario vs. Baseline (2012 dollars) Figure 30. Federal AGI in the Improved Employment Scenario vs. Baseline (2012 dollars) $300 $290 $280 $270 $260 $250 $240 $230 $220 $210 $200 2015

2020

2025

Increased Employment

2030

2035

Baseline

Source: The Center for Community Source: SolutionsThe Center for Community Solutions

A number of caveats are in order. First, this scenario does not take into account the dynamic A number of caveats are in order. First, this scenario does not take into account the dynamic economic effects economic effects that would result from strong labor demand, especially the faster growth in that would result from strong labor demand, especially the faster growth in real wages that would likely real wages that would likely result. Improved employment also might change migration result. Improved employment also might change migration patterns and lead to more young adults staying patterns and lead to more young adults staying in the state, and more people migrating in from in the state, more people migrating in from Other formspace of income might economic also increase at a otherand states. Other forms of income mightother also states. increase at a faster with strong faster pace with such strong growth,and suchpartnership as self-employment growth, as economic self-employment income. and partnership income.

Impacts on Aging and Retirement-related Deductions and Credits Impacts on Aging and Retirement-related Deductions and Credits

As noted above, the estimated amount of taxable Social Security included in federal AGI, and fully deductible noted above, thewill estimated of taxable Social Security included in federal AGI, and from theAs Ohio income tax, increaseamount by 56 percent in real terms between 2015 and 2035. By 2035, the fully deductible from the Ohio income tax, will increase by 56 percent in real terms between amount of the deduction would grow to $12.4 billion (Figure 31). In the space of 20 years, the number of andclaiming 2035. By the 2035, the amount of the deduction would grow to $12.4(Figure billion 32). (Figure 31). resident2015 returns deduction grows from 771,000 to nearly 1.2 million In the space of 20 years, the number of resident returns claiming the deduction grows from 771,000 to nearly 1.2 million (Figure 32).


29


Figure Figure 31. 31. Amount Amount of of Social Social Security Security Deduction Deduction from from Ohio Ohio Residents, Residents, 2015 2015 –– 2035 2035 $14

Billions of 2012 Dollars

Aging Ohio: The Impact of Demographic Change on State Fiscal Policy $12

$10 Figure 31. Amount of Social Security Deduction from Ohio Residents, 2015 – 2035 $14

$8

$12 $10

$4

$8

Billions of 2012 Dollars

$6

$2 $-

$6 $4 $2

2015

2020

2025

2030

2035

$-

Source: The Center for Community Source: Solutions Solutions 2015 The Center 2020 for Community 2025 2030

2035

Source: The Center Community Solutions Figure 32. Number offorResident Returns Using the Social Security Deduction, 2015 - 2035 Figure 32. Number of Resident Returns Using the Social Security Deduction, 2015 - 2035

Figure 32. Number of Resident Returns Using the Social Security Deduction, 2015 - 2035 1,400,000 1,400,000

1,200,000

1,200,000

1,000,000 1,000,000 800,000800,000

Seniors

600,000

600,000

Seniors

Under 65

Under 65

400,000

400,000

200,000

200,000 0

0 2015

2020

2025

2030

2035


2015 2030 Solutions 2035 Source: 2020 The Center2025 for Community

Assuming an average effective tax rate of 3 percent, the total value of the deduction grows from

million to tax $370.1 million. Source: The $237.5 Center for Community Solutions Assuming an average effective rate of 3 percent, the total value of the deduction grows from $237.5 million to $370.1 million. Excess Medical Expense Deduction AssumingEstimates an average rate ofMedical 3 percent, thededuction total value deduction grows from were effective created for tax the Excess Expense usingof thethe assumption that the Excess Medical Expense $237.5 million to Deduction $370.1 prevalence of the million. deduction among seniors and non-seniors will remain constant at 2012 levels. The number of taxpayers the deduction grow from 694,000 2015 to 872,000that in the prevalence Estimates were created for the Excess using Medical Expensewould deduction using theinassumption 2035 (Figure 33). Given that the deduction is really a combination of three distinct tax breaks, Excess Medical of the deduction amongExpense seniors Deduction and non-seniors will remain constant at 2012 levels. The number of taxpayers using the deduction would grow 694,000Medical in 2015Expense to 872,000 in 2035 (Figure 33). Given thatthat the the deduction Estimates were created forfrom the Excess deduction using the assumption is reallyprevalence a combination ofdeduction three distinct tax breaks, and non-seniors with very little information available, of the among seniors and willhistorical remain constant at 2012 levels. we 41 appliedThe the number annualThe growth rate ofusing 2.8 percent from a similar federal tax 694,000 deduction. of taxpayers the deduction would grow from in 2015 in Center for Community Solutions 37 |to P a872,000 ge 2035 (Figure 33). Given that the deduction is really a combination of three distinct tax breaks,


30

37 | P a g e


Aging Ohio: The Impact of Demographic Change on State Fiscal Policy and with very little historical information available, we applied the annual growth rate of 2.8 percent from a similar federal tax deduction.41 Figure 33. 33. Number Number of of Returns Returns Using Figure Using the the Medical Medical Expense Expense Deduction Deduction Figure 33. Number of Returns Using the Medical Expense Deduction 1,000,000 1,000,000 900,000 900,000 800,000 800,000 700,000 700,000 600,000 600,000 500,000 500,000 400,000 400,000 300,000 300,000 200,000 200,000 100,000 100,000 -

Senior Senior Non-Senior Non-Senior

2015 2015

2020 2020

2025 2025

2030 2030

2035 2035

Source: The Center for Community Solutions Source: The Center for Community Solutions Source: The Center for Community Solutions

The 2012 level oflevel the deduction was $3.5 billion. It will grow $5.4to billion by 2035 34). This The 2012 of the deduction was $3.5 billion. It willto grow $5.4 billion by(Figure 2035 (Figure 34).estimate Figure 34. Estimated Total Amount of the Medical Expense Deduction, 2015-2035 includes both residents and non-residents. This estimate includes both residents and non-residents. $6

Billions of 2012 Dollars Billions'()'4564'7(,,+#/'

Figure 34. Estimated Total Amount of the Medical Expense Deduction, 2015-2035 Figure 34. Estimated Total Amount of the Medical Expense Deduction, 2015-2035 $5 $6 $4 $5 $3 $4 $2 $3 $1 $2 $0 $1 2015

2020

2025

2030

2035

2020

2025

2030

2035

$0


2015


Total tax revenue lost the deduction willfrom grow from $113 million to $162 million. Total tax revenue lost from thefrom deduction will grow $113 million to $162 million. Military Retirement Deduction Military Retirement Deduction The estimates for this deduction the number users willslowly grow slowly from in 35,700 The estimates for this deduction assumeassume that thethat number of usersofwill grow from 35,700 2015 to in 2015 to approximately 42,400 in 2035. At that point, 60 percent of the claimants will be approximately 42,400 in 2035. At that point, 60 percent of the claimants will be seniors, up from 48 percent in 2015. With little historical experience with this pension, we have assumed that average amounts will keep pace with inflation. With these parameters, the total amount deducted will grow by $145 million over 20 years Community Solutions the large number of individuals who have served 38 | Pduring a g e the (FigureThe 35). Center This is for probably an underestimate Iraq and Afghanistan conflicts. Total tax revenue lost from the deduction will grow from $25.7 million to $30.1 million.The Center for Community Solutions 21 | P a g e


31


Figure35. 35.Military MilitaryRetirement RetirementPensions, Pensions,Total Total Amount Amount Deducted Deducted Figure

Millions of 2012 Dollars

$1,200 $1,000 $800 $600 $400 $200 $2015

2020 Non-Senior

2025

2030

2035

Senior



Figure 36. Total Amount of Retirement Income Credits, Ohio Residents, 2015 - 2035 Retirement Income Credit$180 By 2035 the average retirement account distribution would grow to nearly $22,000 and the average pension payment to over $34,000 $160 in nominal terms. Our model assumes the continuation of current law that limits the total amount of the retirement credit to $200 per return. Historically, the number of taxpayers claiming $140 the state retirement income credit is just over half of the combined total number of returns with retirement account distributions and$120 pension payments. This means there are many taxpayers who are accessing both a pension and a retirement account in the same tax year and the retirement income credit is applied to both. $100 We estimate that there will be 966,000 taxpayers with pensions and 1.03 million with retirement accounts in 2035 (2012 dollars) and that $80the average credit (now at $176) will continue to grow at the current trend rate.

Because the amount Aging of the$60 credit is capped, total inflation Change inflation-adjusted valuePolicy will fall by 29 percent Ohio: The Impactthe of Demographic on State Fiscal between 2015 and 2035, from $40 $170.1 million to $120.2 million (Figure 36). $20 Figure Figure 36. 36. Total Total Amount Amount of of Retirement Retirement Income Income Credits, Credits, Ohio Ohio Residents, Residents, 2015 2015 -- 2035 2035 $$180 $160

2015

2020

2025

2030

2035



$140 $120 $100 $80 $60 $40 $20

$2015


2020

2025

2030


32

2035

22 | P a g e

Senior Citizen Credit As discussed above, the number of senior citizen filers will grow from 880,000 in 2015 to 1.3 Aging Ohio: The Impact of Demographic Change on State Fiscal Policy • October, 2014 million. With the value of the credit limited to $50 per return, however, inflation erodes its value over time. In real terms, the total amount of the credit changes little over 20 years, ending

2015

2020

2025

2030

2035


Senior Citizen Credit As discussed the number of senior citizen filers will grow from 880,000 in 2015 to 1.3 million. With Seniorabove, Citizen Credit the value the creditabove, limitedthe to number $50 per return, however, inflation its value overintime. Asofdiscussed of senior citizen filers will erodes grow from 880,000 2015In to real 1.3 terms, the totalmillion. amountWith of the credit changes little over 20 years, the time period 5 percent less than the value of the credit limited to $50ending per return, however, inflation erodes its in 2015 (Figure 37). value over time. In real terms, the total amount of the credit changes little over 20 years, ending the time period 5 percent less than in 2015 (Figure 37). Figure Figure 37. 37. Total TotalAmount Amountof ofSenior SeniorCitizen CitizenCredits, Credits,Ohio OhioResidents, Residents,2015 2015--2035 2035 $50


$45 $40 $35 $30 $25 $20 $15 $10 $5 $2015

2020

2025

2030

2035

Source: The Center for Community Source: Solutions The Center for Community Solutions

IV. The Property Tax Tax Credit IV.Homestead The Homestead Property Credit Jon Honeck, Matt Bird, and Tara Britton Jon Honeck, Matt Bird, and Tara Britton The Center for Community Solutions The Center for Community Solutions

History

The Center for Community Solutions | Ptotally age The homestead property tax exemption reduces property taxes for seniors and permanently40 and disabled homeowners by shielding a portion of their home’s value from taxation. The state reimburses local property tax levies for the costs of the program. Eligibility for the exemption has changed dramatically over the last several years. Prior to 2007, the homestead exemption was an income-based program with three tiers of benefits. Taxpayers with the lowest incomes received the greatest benefit. Since 2007, the program has been changed twice with drastic impacts on the numbers of individuals eligible for the exemption and for costs to the state.

In 2007, the Homestead Exemption became available to all Ohio homeowners, regardless of income, who were either: • age 65 or older or will reach age 65 during the tax year,

• permanently and totally disabled as of January 1 of the tax year, or

• at least 59 years old and the surviving spouse of an individual who previously received the exemption.42 Rather than a tiered reduction in taxes, all households who qualified for the homestead exemption received an exemption of property tax levied on $25,000 of the market value of their home. This flat exemption was more valuable for most homeowners than the former tiered benefits. Because of these changes, the number of households eligible for the homestead exemption was projected to grow from around 220,000 to around 750,000.43 Statewide, the majority of those eligible for an exemption were age 65 and older (90 percent), while nearly 9 percent were eligible based on disability and a little more than one percent qualified due to survivorship.44 www.CommunitySolutions.com

33

Mi

$10 $5

Figure 38 shows that the actual amount of eligible households in the first year of the change (tax year 2007) $was 776,154, exceeding the estimate. This number grew to 854,251 by tax year 2010. The total amount in tax 2015 2020 2025 2030 2035 reduction in the last year of the old program (2006) was $70 million. In 2007, this grew to $318 million and by tax yearSource: 2011 this amount million. The Center for reached Community$400 Solutions

1,000 900 800 700 600 500 400 300 200 100 0

$450 $400 $350 $300 $250 $200 $150 $100 $50 $0

Total Reduction of Taxes (in Millions of Dollars)

Number of Exemptions (in Thousands)

Figure38. 38.Homestead HomesteadCredit: Credit:Number Numberof ofExemptions Exemptionsand andTotal TotalReduction Reductionof ofTaxes Taxes Figure

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Number of Exemptions

Total reduction in taxes (tax year)

7

Source: Ohio Department of Taxation Source: Ohio Department of Taxation45

Current Law – Big Changes Start in 2014

The growth in the program’s costs became a major cause for concern to state policymakers. The 2014-2015 state budget, signed into law in June 2013, created a new income eligibility threshold for new applicants. Seniors who are currently eligible for the program will continue to receive the homestead exemption (the “grandfathered” group); this is defined as anyone who was eligible under the 2007 law or who had applied in tax year 2013 or earlier. Seniors who apply for the exemption for tax year 2014 and subsequent years will only be eligible if their household income is less than $30,000. This amount is indexed to inflation (GDP deflator). Eligibility for the homestead exemption includes homeowners who are 65 years of age or older, permanently and totally disabled, or at least 59 years old and the surviving spouse of an individual who previously received the exemption; except that now these applicants must have total income that is $30,000 or less. For the purposes of the homestead exemption, total income refers to Ohio Adjusted Gross Income (OAGI), a concept defined in Ohio tax law. While aThe portion of for Social Security income is taxable at the federal level, as noted above, Ohio Center Community Solutions 23 |allows P a g eSocial Security recipients to deduct the total amount of their benefits. This is an important distinction between federal adjusted gross income and OAGI, especially as it relates to the homestead exemption. Social Security benefits make up a large portion of the income of many seniors. Benefits are indexed to inflation. By deducting these benefits from income many more seniors will fall below the $30,000 income limit and become eligible for the homestead exemption.

Estimating the Number of Eligible Households

In our projection, we used ACS data to estimate that the proportion of newly-eligible households below the income threshold. Since senior income and the GDP deflator are projected to increase approximately together, the competing effects should leave the proportion below the threshold unchanged. The appendix provides greater detail on our methodology. We also estimated how the number of grandfathered households would change. In 2010, 261,000, or 30 percent, of senior-owned homes had an OAGI above $30,000. However, those that qualified for the homestead exemption before the eligibility threshold will take effect will be grandfathered in and still be able to claim it. While this grandfathered group will shrink in time, it will be a significant proportion of those claiming the exemption in the immediate future. An accurate estimate of this population is vital for a reliable forecast of the number of households that qualify for the homestead exemption. 34


The simplifying assumptions of this calculation of the grandfathered households are that (1) everyone in that age range will be grandfathered in (no new seniors moving into the state); (2) the annual age distributions within the five-year age groups in the Scripps projections are even (3) there will be near-universal claiming of the credit among eligible homeowners (90 percent) and homeownership rates will not change; and (4) the effects of survivorship will be ignored. The total number of senior-owned homes is projected to rise from 866,000 in 2010 to 1,496,000 in 2035 (Figure 39). Of these, 605,000 were owned by taxpaying units with an OAGI less than $30,000 in 2010 and 1,070,000 are projected to be below the projected income limit in 2035. In 2015, senior-owned homes above the income limit are nearly universally grandfathered in, adding 278,000 homes which otherwise would not have qualified for the exemption. This group will shrink considerably in the coming years, down to only 31,000 in 2035, accounting for just 2.9 percent of the total homes using the exemption. This dynamic will partially offset Ohio: The Impact of Demographic Change on State Fiscal Policy the rising number Aging of newly eligible households. Figure 39. Estimated Universe of Senior-Owned Homes

Figure 39. Estimated Universe of Senior-Owned Homes

1,600

./0123!45!64027!! 89:!;7?!

1,400 Total # Seniors Owned Homes

1,200 1,000 800

Total Less than Income Limit

600 400

Total Eligible Senior Homes

200 2010

2015

2020

2025

2030

2035



Figure 40. Number of Households Eligible for the Homestead Exemption

Further adjustments1,200,000 were made to account for the number of disabled recipients younger than 65 and for eligible households that fail to claim the credit. The model estimates that the proportion of disabled claimants under age 65 within1,000,000 the total number of claimants will fall from 9 percent of the total to about 7 percent as the younger population declines. We also assumed that non-claimants will comprise 10 percent of the total universe of eligible households. With these assumptions, the number of total recipients will increase from 800,000 941,000 in 2015 to 1.06 million in 2035 (Figure 40). 600,000 400,000 200,000 2015

2020

2025

2030

2035



35

households. With these assumptions, the number of total recipients will increase from 941,000 in 2015 to 1.06 million in 2035 (Figure 40).

Figure 40. 40. Number Number of of Households Households Eligible Eligible for for the the Homestead Homestead Exemption Exemption Figure 1,200,000 1,000,000 800,000 600,000 400,000 200,000 2015

2020

2025

2030

2035


Value of Homestead Exemption

Historically, the average reduction in taxes realized by the homestead exemption was fairly stable under the The Center for Community Solutionsdramatically from $323 per home to $410 when43 |Page pre-2007 benefit structure, but then Aging Ohio: The jumped Impact of Demographic Change on State Fiscal Policy the exemption was changed to a remove all taxes on the first $25,000 of property value (Figure 41). Figure41. 41.Average AverageReduction Reductionin inTaxes Taxes from from Homestead Homestead Exemption, Exemption, 2000-2011 2000-2011 Figure $500 $400 $300 $200 $100 $-

Before 2007

After 2007

Source: Ohio Department of Taxation8 Source: Ohio Department of Taxation46

Millage Rate

Figure Statewide Average Net is Millage Rate, Property Some of the increase in the42. average reduction in taxes also due to aResidential steady increase in property tax rates on residential property (Figure 42). Property taxes are often described in terms of millage; one mill yields $1 of 70 tax on $1,000 of taxable value. In 2011, the average net millage rate for residential and agricultural property was 61.1 mills. A60linear projection of historical trends predicts that the average net millage rate in Ohio will rise to 78.5 mills in 2035. This likely overstates the actual eventual millage rate—as the millage rate increases, the probability of50voters approving an increase should be reduced. Also, House Bill 59 (2013) changed the property tax law to make new or replacement levies ineligible for the 10 and 2.5 percent residential property tax rollbacks. This 40 will create a disincentive to increase millage rates. 30 20

36

10


Aging AgingOhio: Ohio:The TheImpact ImpactofofDemographic DemographicChange Changeon onState StateFiscal FiscalPolicy Policy

Figure 42. Statewide Figure Figure42. 42.Statewide StatewideAverage AverageNet NetMillage MillageRate, Rate,Residential ResidentialProperty Property 7070

Millage Rate Millage Rate

6060 5050 4040 3030 2020 1010 --

2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011

Source: Ohio Department of Taxation4747 Source: Ohio Department of TaxationSource: Ohio Department of Taxation47

On basis, we that total value ofofthe exemption (the Onan aninflation-adjusted inflation-adjusted weestimate estimate that total thehomestead homestead exemption (the of the On an inflation-adjusted basis, webasis, estimate that total value ofvalue the homestead exemption (the amount amount of the state appropriation) will be largely unchanged from 2015 to 2035 (Figure 43). In amount of the state appropriation) will be largely unchanged from 2015 to 2035 (Figure 43). state appropriation) will bethe largely unchanged from 2015 toeligibility 2035 (Figure 43). will In this turns out to be In the case, this turns out to be case, then the recent income changes have limited the this turns out toeligibility be the case, then the recent income the eligibility changes will have limited the then thestate’s recent income changes will have limited state’s fiscal exposure. state’sfiscal fiscalexposure. exposure.

Figure 43. 43. Estimated Statewide Statewide Total Reduction Reduction of Taxes from the Homestead Exemption Figure Figure 43.Estimated Estimated StatewideTotal Total ReductionofofTaxes Taxesfrom fromthe theHomestead HomesteadExemption Exemption

Millions of 2012 Dollars Millions of 2012 Dollars

$450 $450 $400 $400 $350 $350 $300 $300 $250 $250 $200 $200 $150 $150 $100 $100 $50 $50 $-$-

2015 2015

2020 2020

2025 2025

2030 2030

2035 2035

Source: The Center for Community Solutions The Center for Community Solutions Source: The Center for CommunitySource: Solutions

V. Medicaid Expenses

Jon Honeck and Matt Bird The Center for Community Solutions

Long-term Care

V. Expenses The Medicaid program supports long-term care for disabled individuals who need a nursing home level of V. Medicaid Medicaid Expenses care and meet income and asset tests. Medicaid is the single largest payment source for formal long-term care. Historically, the Medicaid program funded institutional care in skilled nursing facilities as an entitlement. The Center for Solutions 4545|for Medicare, the federally-funded health insurance program for those 65 and over, will only pay The Center forCommunity Community Solutions |PPashort-term agge e stays for the purpose of rehabilitation. Over time, federal Medicaid policy shifted to encourage states to care for consumers in home-and community-based settings (HCBS) because it is both more cost-effective and www.CommunitySolutions.com

37

preferred by consumers and their families. Ohio, like other states, has requested waivers from the Centers for Medicare and Medicaid Services (CMS) to manage a number of programs for consumers of all ages to provide home-and community-based care. The most significant program for the elderly is PASSPORT (Pre-Admission Screening System Providing Options and Resources Today), which enrolled more than 34,000 individuals in March 2014 on the eve of enrollment for the MyCare pilot program. PASSPORT is available starting at age 60. Under the waiver agreement, PASSPORT costs are capped at 60 percent of nursing home average costs. The assisted living waiver, which provides care in a facility that does not provide around-the-clock skilled nursing, enrolled more than 4,300 individuals in March, 2014. PACE (Program for All-Inclusive Care of the Elderly) is a much smaller program in which providers bear full risk for all of the enrollees’ health and long-term care needs. PACE is now limited to one site in Cleveland that enrolls less than 300 individuals.48 The need for long-term care rises significantly as a person ages. The majority of individuals age 50 and older will have a nursing home stay at some point, even if it is just a short-term stay at the end of life.49 On average, consumers who have a nursing home stay will spend a year there.50 The growing need for long-term care is one of the most significant costs associated with an aging society. It is important to note, however, that most long-term care is provided informally, generally through family members. The market for private longterm care insurance is under-developed, with just 12 percent of the elderly having coverage.51 Individuals who need Medicaid-financed nursing home care generally have higher levels of disability, lower incomes, and fewer assets at younger ages.52 Medicaid-financed long-term care has historically been overweighted toward nursing facilities. Over time, however, the state has rebalanced. The shift has been analyzed in a series of reports from the Scripps Gerontology Center at Miami University. The latest report shows that as of 2011, the proportion of elderly receiving institutional long-term care was 55 percent (down from 90 percent in 1993), and the number of nursing home residents has fallen despite an increase in the elderly population.53 Predicting utilization and costs at this juncture is fraught with uncertainty because Ohio’s long-term care system is undergoing profound policy changes. The state is participating in the Balancing Incentive Payment program, which provides an enhanced federal medical assistance percentage (FMAP) for a limited time to create a “no wrong door” system for people of all ages seeking long-term care, conflict-free case management that ensures that consumers get the help they really need, and a standardized assessment instrument. The other major initiative, MyCare, is a three-year demonstration project that started in the spring of 2014 and uses managed care organizations to coordinate care for consumers who receive both Medicaid and Medicare benefits (Parts A, B, and D: hospitalization, medical services and mental health, and a prescription drug benefit). This initiative is part of a national project to test whether improved care will create cost savings for both Medicaid and Medicare. The full “dual-eligibles” in the project include adults of all ages, regardless of their residential setting, but not including the developmentally disabled population. The MyCare service area is 29 counties in all of the major urban areas of the state. Consumers can opt-out of the Medicare portion of the project but enrollment in a managed care plan for Medicaid is mandatory. PASSPORT and Assisted Living programs will formally cease to exist, but the services will remain in place through the Areas Agencies on Aging. MyCare is changing some of the basic rules affecting long-term care and will likely increase the utilization of community-based long-term care. The financial payment structure of per capita payments will incentivize managed care organizations (MCOs) to keep MyCare participants in the community. (The Nursing Facility Level of Care rate cell, which will apply to both waiver and institutional members, is $3,716 per month, well below the comparable $5,100 average for nursing homes.) It also will make a wide range of services available to waiver program recipients and remove the cost cap for PASSPORT participants. Scripps Gerontology Center data shows that long-term care utilization rates for all settings (community and institutional) for people aged 60 and older have varied between 3.2 and 3.4 percent since 1997. 54 From 1997 to 2011, nursing home usage fell from 2.5 percent to 1.9 percent of the older population. During this same period, the proportion in community-based care rose from 0.7 to 1.5 percent. Despite the increase in the elderly population, the state spending on long-term care was only 7 percent higher in 2011 than it was in 1997. The FY 2014-2015 budget set a policy goal to continue rebalancing toward community long-term care options. By the end of FY 2015, at least 50 percent of Medicaid recipients aged 60-and-above who need long-term care must be in community settings.55 38


We used two scenarios for projecting future utilization trends among the age 60 and over population. Both scenarios use the same cost projections, increasing nursing facility costs at the rate of inflation and waiver costs at 1.6 percent per year before adjusting for inflation. The variance in the scenarios is strictly due to utilization. A low utilization scenario holds the nursing facility census constant at 42,000 individuals and maintains the waiver incidence constant rate of 1.6 percent of the older population, starting with ODM projections of 2015 caseload. In this scenario, total Medicaid long-term care utilization starts at 3.2 percent of the older population in 2015 and then declines slowly to 2.8 percent by 2035. In a high utilization scenario, the nursing home census starts at 42,000 in 2015 and then is maintained at 1.6 percent of the older population, leading to over 55,000 Medicaid patients in nursing homes by 2035. Waiver or community LTSS enrollment starts at 1.6 percent of population and is increased by one-tenth of one percentage point every five years. Total Medicaid long-term care utilization rises to 3.6 percent of the age 60 and older population by 2035. Figure 44 shows the number ofChange consumers resulting each scenario. By Aging Ohio: The Impact of Demographic on State Fiscalfrom Policy 2035, the high utilization scenario has 26,600 more consumers receiving long-term care. Figure 44. 44. Number Number of of Persons Persons Over Over Age 60 using Medicaid Long-term Care Figure 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2015

2020

High Utilization - Total LTC

2025

2030

2035

Low Utilization - Total LTC


Both scenarios use constant FMAP rates. The low utilization scenario will create increased estimated state-share costs over time, but it will be a gradual rise from $1.1 billion to $1.3 billion Both scenarios use The constant rates. The low utilization scenario will create increased estimated (Figure 45). high FMAP utilization scenario will see estimated state share costs rise to $1.7 billion stateshare costs over time, but it will be a gradual rise from $1.1 billion to $1.3 billion (Figure 45). The by 2035. The cost differences between the two scenarios become more significant over time.high The utilization willscenario see estimated share costsinrise to and $1.7 nearly billion$400 by 2035. Theincost differences highscenario utilization is $243state million higher 2025 million 2035. between the two scenarios become more significant over time. The high utilization scenario is $243 million higher in 2025 and 45. nearly $400 million 2035. Costs of Long-term Care Scenarios (2012 dollars) Figure Estimated StateinShare $2,000


$1,800 $1,600 $1,400 $1,200

State share, low utilization

$1,000 $800

State Share, High Utilization

$600 $400 $200 $2015

2020

2025

Source: The Center for Community Solutions www.CommunitySolutions.com

2030

2035 39

by 2035. The cost differences between the two scenarios become more significant over time. The high utilization scenario is $243 million higher in 2025 and nearly $400 million in 2035.

Figure 45. 45. Estimated Estimated State State Share Share Costs Costs of of Long-term Long-term Care Care Scenarios Scenarios (2012 (2012 dollars) dollars) Figure $2,000


$1,800 $1,600 $1,400 $1,200

State share, low utilization

$1,000 $800

State Share, High Utilization

$600 $400 $200 $2015

2020

2025

2030

2035

Source: The Center for Community Source: TheSolutions Center for Community Solutions

Of course, there are many that could these scenarios. An aggressive state policy Of course, there areunknowns many unknowns thatinfluence could influence these scenarios. An aggressive state of rebalancing could succeed incould further decreasing the total numberthe of total seniors in nursing homes, even in the face policy of rebalancing succeed in further decreasing number of seniors in nursing of babyhomes, boomereven retirements. This would greatlyretirements. help to mitigate costs. greatly On the other hand, the relative in the face of baby boomer This would help to mitigate costs. costs of different long-term care the programs over time. If ODM true, theover PASSPORT On the other hand, relativemay costschange of different long-term careprojections programs hold may change time. If member ODM projections the PASSPORT member will have program’s per cost will hold have true, increased by just 1.6 program’s percent perper year before cost inflation between FY 2005 per year before inflation 2005 FYhealth 2015. This not and FY increased 2015. Thisby is just not 1.6 outpercent of line with national trends. Thebetween average FY wage of and home aidesisadvanced by only 1.6 percent per year between 2002 and 2012 nationally.56 In Ohio, the rate of increase was an even more paltry 1.3 percent.57 The state also has been relatively successful in moderating nursing home prices on a per person basis. for Scripps Gerontology Center data show that in real terms the Medicaid daily nursing The Center Community Solutions 48 | P a g e home reimbursement rate has gone down since the late 1990s.58 The private pay rate has held steady, while the Medicare rate has increased. Whether these cost trends will continue is an open question. They contribute to high employee turnover rates among health care workers and maintain a pay scale that qualifies them and their families for Medicaid and other public benefit programs. Thus, the low costs of long-term care services leads to higher enrollment for the younger Medicaid population and higher costs for other public benefit programs. Another concern is that lasting quality improvements may be difficult to achieve in an environment of low employee pay and morale. The state is looking for the MyCare program to continue these favorable pricing trends, but there may be a tradeoff between costs and quality.

Medicare Part D – State Contribution

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added a prescription drug benefit to the national Medicare program. The law’s provisions became fully effective in 2006. Under the law, the federal government assumed responsibility for prescription drug coverage for full benefit dual eligibles. As part of the bargain, states were made responsible for making continued monthly payments to CMS for a share of the costs of their state’s dual eligible population. The cost sharing arrangement is known officially as the “phased-down state contribution,” but is often referred to as the “clawback.” The cost-sharing formula is a complicated arrangement based on 2003 spending levels, adjusted for changes in the number of full benefit dual eligibles, program per capita drug spending, the state’s current FMAP rate, and a predetermined cost sharing percentage. Federal law set the basic cost sharing percentage at 90 percent in 2006, and phased the rate down annually to a permanent level of 75 percent starting in 2015. During the recession, the Obama administration applied the enhanced Medicaid FMAP rate to the clawback percentage, resulting in a temporary, but substantial budget savings to states for several years. As part of FY 2014-2015 state budget planning, the state Medicaid department forecasted Ohio Part D payments of $308.9 million in FY 2014 and $314.5 million in FY 2015, with monthly average beneficiaries of 40


just over 215,000 and 222,000, respectively. Actual payments may be slightly lower based on initial federal guidance released after the budget.59 Our estimates for future payments are based on the ODM 2015 caseload estimate with (1) growth in per capita expenditures and (2) changes in the number of full benefit dual eligibles. We increased the state monthly per capita expenditure forecast after 2015 by 5 percent per year using the Medicare Trustees’ 2014 forecast for growth in Part D expenditures per beneficiary. The implications of such growth over decades are extraordinary, and reflect both drug prices and utilization; drug prices are one of the major drivers of health care costs. To estimate the number of full benefit dual eligibles we used Kaiser Commission information that showed that 50 percent of Ohio dual eligibles were non-elderly in FY 2010.60 We then applied this proportion to the state estimates of monthly average beneficiaries to derive an estimation of population incidence of full benefit duals for both elderly (6 percent) and non-elderly (1.6 percent). Aging Ohio: The Impact of Demographic Change on State Fiscal Policy The baseline scenario shown below holds population incidence and the FMAP rate constant, which is unlikely but would only worsen the fiscal impact.61 The number of full-benefit duals changes due to population changes due to population demographics. Overall, the number of beneficiaries will grow by 21 demographics. Overall, the number of beneficiaries will grow by 21 percent between 2015 and 2035, peaking percent between 2015 and 2035, peaking at about 267,000 (Figure 46). The number of nonat aboutelderly 267,000beneficiaries (Figure 46).declines The number of non-elderly beneficiaries declines in both relative and absolute in both relative and absolute terms. Elderly individuals will be 63 terms. Elderly individuals will be 63 percent percent of total beneficiaries in 2035. of total beneficiaries in 2035. Figure 46. Estimated Number of Full Benefit Medicaid-Medicare Dual Eligibles in Part D Figure 46. Estimated Number of Full Benefit Medicaid-Medicare Dual Eligibles in Part D 300,000 250,000 200,000 150,000

65+ popl Non-elderly popl

100,000 50,000 0 2015

2020

2025

2030

2035


The total coststate of the state contribution willthan more than double in inflation-adjusted terms 2015 and The total cost of the contribution will more double in inflation-adjusted terms between between 2015 and 2035 even though caseload only increases by 21 percent (Figure 47). In this 2035 even though caseload only increases by 21 percent (Figure 47). In this scenario, prescription drug prices scenario, prescription drug prices are the primary driver of program costs. are the primary driver of program costs. Figure 47. Estimated State Contribution for Medicare Part D Payments $700


$600 $500 $400 $300

www.CommunitySolutions.com $200

41

between 2015 and 2035 even though caseload only increases by 21 percent (Figure 47). In this scenario, prescription drug prices are the primary driver of program costs.

Figure 47. 47. Estimated Estimated State State Contribution Contribution for for Medicare Medicare Part Part D Figure D Payments Payments $700


$600 $500 $400 $300 $200 $100 Aging Ohio: The Impact of Demographic Change on State Fiscal Policy $0 2015Solutions Source: The Center for Community

2020

2025

2030

2035


Programs Medicare Medicare Savings Savings Programs

The Center for Community 50 |before P a g ethey The Medicare available to individuals with a qualifying work history months The Medicare program is program availableisSolutions to individuals with a qualifying work history threethree months before they turn 65, and to younger disabled individuals receiving SSDI 24 months after cash turn 65, and to younger disabled individuals receiving SSDI 24 months after cash benefits begin. The program benefits consists of four parts:begin. The program consists of four parts: • Part A: Hospitalization, physicalhospice, therapy, and short-term nursing home care; home care; • Part A:hospice, Hospitalization, physical therapy, and short-term nursing • Part B: Outpatient diagnostic and treatment services, preventive services, health, medical • Part B: Outpatient diagnostic and treatment services, preventive services, mental health,mental and durable and durable medical equipment equipment • Part C: Medicare Advantage Plans are private insurance companies contracted to cover both Part A Plans and Part Services;insurance they also companies may offer Part D services. • Part C: Medicare Advantage areBprivate contracted to cover both Part A and Part • Part D: Prescription Drug Coverage B Services; they also may offer Part D services. • Part D: Prescription Drugplans Coverage Most Medicare require the participant to pay a premium and cover a share of costs through Medicaidtoprogram will assist and withcover these costs for of certain Most Medicare planscopayments. require the The participant pay a premium a share costslow-income through recipients. Some of these individuals are not eligible for full Medicaid benefits. These “partial Some of copayments. The Medicaid program will assist with these costs for certain low-income recipients. duals” receive assistance through the state’s Medicaid program with Medicare premiums, these individuals are not eligible for full Medicaid benefits. These “partial duals” receive assistance through deductibles, and copayments depending on theirdeductibles, level of income. younger ages, many of on their the state’s Medicaid program with Medicare premiums, andAt copayments depending them are SSDI recipients. level of income. At younger ages, many of them are SSDI recipients.

Qualified Medicare Beneficiaries (QMBs) have an level income level 100 below 100 percent the federal Qualified Medicare Beneficiaries (QMBs) have an income below percent of theoffederal poverty line. poverty line. Specified Low-Income Beneficiaries (SLMBs) have an income level between 100 Specified Low-Income Beneficiaries (SLMBs) have an income level between 100 percent and 120 percent of the percent and 120 percent of the FPL. Qualifying Individuals between 120 and 135 percent of the FPL. Qualifying Individuals between 120 and 135 percent of the FPL also receive a limited Medicaid FPL also receive a limited Medicaid benefit but it is paid for entirely by the federal government benefit but it is paid and for entirely government is notmeet partasset of this analysis. Participants is not partbyofthe thisfederal analysis. Participants and also must requirements of $7,160 for aalso must meet asset requirements $7,160 forfor a single person andexcluding $10,750 their for a home, married excluding their home, single personof and $10,750 a married couple, car,couple, furniture, and car, furniture,personal and personal Table 7 the displays income levels and benefits these three groups: items.62 items. Table 762 displays incomethe levels and benefits for these threefor groups: Table 7. Benefits for Medicare Savings Programs Table 7. Benefits for Medicare Savings Programs

Medicare Savings Program Qualified Medicaid Beneficiary (QMB)

Income Limit as a percentage of the FPL At or below 100%

Cost Sharing Benefits Part A premium, deductible, copayments and coinsurance, including for skilled nursing facility stays Part B premium, deductible, copayments, and coinsurance

Specified Low-Income Medicare Beneficiary (SLMB) Qualifying Individuals Source: GAO (2012)63

42

Above 100% but less than 120%

Part B premium

At 120% but less than 135% Source: GAO (2012)63

Part B premium

Through April 2014, the combined number of monthly QMB/SLMB Ohio Medicaid consumers for FY 2014 averaged about 117,000, up from in FY 2003. Recent Aging Ohio: The Impact of43,000 Demographic Change onfederal State policy Fiscal attempted Policy • October, 2014 to address historical underutilization of these programs by requiring the Social Security

Through April 2014, the combined number of monthly QMB/SLMB Ohio Medicaid consumers for FY 2014 averaged about 117,000, up from 43,000 in FY 2003. Recent federal policy attempted to address historical underutilization of these programs by requiring the Social Security Administration to transfer information from applications for the Medicare Part D low-income subsidy to state Medicaid agencies.64 This automatic transfer procedure began 2010The andImpact helpedof toDemographic increase the number by nearly 10 AginginOhio: Changeof onOhio StateSLMB Fiscalconsumers Policy percent in FY 2010 and 14 percent in FY 2011. It is important to note that some of these consumers are under age 65. In order to project the number of QMB/SLMB consumers, we started by estimating incidence In orderrates to project number QMB/SLMB consumers, we started by estimating incidence amongthe seniors andofnon-seniors using ACS estimates of poverty and assuming as arates among 65 seniors placeholder and non-seniors using ACS estimates of poverty and assuming as a placeholder based on imperfect based on imperfect information that 50 percent of current consumers were seniors. 65 Estimated incidence rates for 2012 among information that 50 percent of current consumers were seniors. Estimated incidence rates for 2012 among the eligible population were nearly 27 percent for the eligible population 27 for percent for seniors and justfor over 4 percent for non-seniors. Estimates seniors and just were over 4nearly percent non-seniors. Estimates future years applied ACS poverty for future years applied ACS poverty rates to Scripps population estimates and started with a projection rates to Scripps population estimates and started with a projection of 124,000 consumers in of 124,000 consumers in 2015. Prevalence rates were heldalmost constant, whichproduces almost certainly produces an 2015. Prevalence rates were held constant, which certainly an underestimate of underestimate of caseload but isolates the effects of demographic change. Under these conditions, total caseload but isolates the effects of demographic change. Under these conditions, total caseload caseloadgrows growstoto 154,000 (24.5 percent) with elderly consumers comprising percent total 154,000 (24.5 percent) with elderly consumers comprising 6363 percent of of thethe total byby 2035 (Figure 2035 48). (Figure 48).

Figure Figure 48. 48. Estimated Estimated Number Number of of QMB/SLMB QMB/SLMB Consumers Consumers 180,000 160,000 140,000 120,000 100,000

Seniors

80,000

Non-seniors

60,000 40,000 20,000 0 2015

2020

2025

2030

2035

Source: The Center for Communtiy Source: SolutionsThe Center for Communtiy Solutions

An analysis of historical spending that expenditures Partmore B arethan more90than 90 percent An analysis of historical spending showedshowed that expenditures for Partfor B are percent of the total.66 66 of the total. Estimating a future trend is difficult because expenditures per person have Estimating a future trend is difficult because expenditures per person have trended lower in recent years. trended level, lowerthe in recent years. At Trustees’ the national level, the 2013 Trustees’ predicts At the national 2013 Medicare report predicts anMedicare average 5.5 percentreport annual growth rate an average 5.5 percent annual growth rate for Part B premiums and a 3.3 percent growth rate in for Part B premiums and a 3.3 percent growth rate in Part A premiums. The estimate uses a blended annual Part A premiums. The estimate uses a blended annual growth rate of 5.3 percent based on thewas held growth rate of 5.3 percent based on the Trustees’ projections, adjusted for inflation. The FMAP rate Trustees’ forto inflation. The FMAP rate was constant. 2035, constant. By 2035,projections, state shareadjusted costs grow $325.7 million, a growth rateheld of 123 percentBy over 20 state years (Figure share costs grow to $325.7 million, a growth rate of 123 percent over 20 years (Figure 49). in 49). As in the Part D clawback estimates, demographic change plays a secondary role compared toAshealth care the Part D clawback estimates, demographic change plays a secondary role compared to health costs themselves. care costs themselves.


43


Figure 49. 49. Estimated Estimated Annual Figure Annual State-Share State-Share Expenditure Expenditure for for Medicare Medicare Savings Savings Programs Programs $350


$300 $250 $200 $150 $100 $50 $0 2015

2020

2025

2030

2035

Source: The Center for CommunitySource: Solutions The Center for Community Solutions

Summary: Fiscal Impact of Scenarios Summary: Fiscal Impact of Scenarios

In termsInofterms the order magnitude, the greatest single impact of Ohio’s aging demographics is the declining of theoforder of magnitude, the greatest single impact of Ohio’s aging demographics is income the tax declining base, which will remove $1.7 billion in potential tax revenue by 2035. The sales tax, which is income tax base, which will remove $1.7 billion in potential tax revenue by 2035. now theThe largest to now GRFthe revenues, scarcelytoincrease, even with assumptions salescontributor tax, which is largest will contributor GRF revenues, willfavorable scarcely increase, evenabout household formation. On the spending side, assuming a favorable low utilization scenario for long-term care, with favorable assumptions about household formation. On the spending side, assuming a the Medicaid budget will expand by $655 million per year (state share). It is critical to note that the largest favorable low utilization scenario for long-term care, the Medicaid budget will expand by $655 driver of this result is health costsIt themselves. care (adding million per year (statecare share). is critical to The notehigh that utilization the largest scenario driver offor thislong-term result is health 26,000 people) would raise costs by an additional $400 million per year. Recent reforms to the homestead care costs themselves. The high utilization scenario for long-term care (adding 26,000 people) wouldarrest raise costs by an additional $400 million percosts year.virtually Recent reforms to the credit credit should the growth in the program and leave unchanged inhomestead the long-run. should arrest the growth in the program and leave costs virtually unchanged in the long-run. Aging Ohio: The Impact of Demographic Change on State Fiscal Policy

The combined bottom line impact is an estimated net revenue loss of $1.26 billion and a $667 million increase combined bottom linea impact is an netinrevenue loss of $1.26 billion and a $667 in state The appropriations, creating potential $1.9estimated billion gap the state budget. million increase in state appropriations, creating a potential $1.9 billion gap in the state budget.

Table 8. Fiscal Impacts of Aging Ohio, 2015 – 2035 (millions of 2012 dollars)

Change in Annual Table 8. Fiscal Impacts ofTax Aging Ohio, 2015 – 2035 (millions of 2012 dollars) State Impacts Revenue Change in Annual State Tax Impacts Sales Tax Collections Revenue $52.3 Income Tax Base ($1,175.2) Sales Tax Collections $52.3 Income Tax Base Social Security Deduction Social Security Deduction Medical Expense Deduction Medical Retirement Expense Deduction Military Deduction

($1,175.2) ($133.4) ($133.4) ($48.4) ($48.4) ($4.3) ($4.3) $2.1

Military Retirement Deduction Senior Credit Senior Credit Retirement Income Credit Retirement Income Credit Total Total State Spending

Homestead Credit State Spending Medicaid Long-term Care (State share - low utilization) Medicare Part D Clawback The Center for Community MedicaidSolutions – Medicare Savings Programs (QMBY/SLMBY) (State share) Total

$2.1 $49.9 $49.9 ($1,257.0)

Change in($1,257.0) Annual Appropriations ($11.9) Change in Annual Appropriations $192.1 $307.2 $179.4

53 | P a g e

$666.8


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Ohio:for The Impact of Demographic Change on State Fiscal Policy • October, 2014 Source: Aging The Center Community Solutions

Conclusion

Ohio’s aging demographic profile poses a challenge for the state budget, but it is a gradual one. Change will occur slowly, over the course of a generation. This report outlines a realistic scenario in which a nearly $2 billion gap would open in state finances by 2035. Inflation-adjusted revenues will fall, absent any policy interventions to bolster them. Any additional investments the state would like to make in education, economic development, transportation, or any other programs will occur against this backdrop. There is always a possibility that more favorable trends will prevail and make the transition easier. Health care costs show signs of moderating, for example, or the economy could switch to a stronger growth trajectory. Still, the demographic trends will eventually prevail. The number of Ohioans in their prime working years will diminish, and the oldest segment of the population, which is most in the poorest health and most in need of long-term care, will grow. A different, but still plausible, scenario for higher utilization of long-term care services will increase spending by an additional $400 million in constant dollars. It is clear from the trends discussed in this report that the state must take steps to align its revenue base with its long-term needs. The future is not bright for either the sales tax or the income tax. A thorough review of all tax expenditures, i.e., credits, deductions, and exemptions, is long overdue, including the Social Security deduction and retirement-related credits. Base-broadening efforts must be on the table, even though they are extremely difficult politically. The governor’s FY 2014-2015 budget proposal included an abortive attempt to broaden the sales tax base to include more services. The proposal gained no traction, and instead the legislature raised the sales tax rate by 0.25 percentage points to compensate for cuts to the income tax. This continues the trend toward a more regressive tax system, as income tax rates are far lower now than 10 years ago and counties have being raising their local “add-on” sales tax rates, in part to offset the substantial declines in the state’s Local Government Fund instituted in an effort to balance the budget. If the state continues this exchange of revenue sources without a broadened tax base, the sales tax rate will have to skyrocket, perhaps even doubling or more to make up the difference. One of the more salient features of Ohio’s evolving tax landscape has been a shift in tax burden away from business and toward households. This started decades ago, but became even more aggressive in the last 10 years. The corporate income tax and tangible personal property tax were replaced by a commercial activity tax that does not come close to collecting what the two former taxes collected. The latest budget included a 50 percent small business income deduction, which increased temporarily to 75 percent for 2014. The demographic trends outlined in this report indicate that it is simply unrealistic to expect private households relying on wage-earner or retirement income to be able to make up lost revenue from businesses. The overriding trend for the state and local public sector in the 21st century has been belt-tightening. With the exception of Medicaid, most major categories of state spending have been flat or declining. The trends outlined in this report portend more of the same in the absence of major policy changes. The implications for local government may be even more profound, however. A stagnant sales tax base puts even more pressure on counties to raise their rates. Municipal income taxes apply to wage income and retirement income or various forms of unearned income, so they will also feel a pinch. As Ohio reassesses the relationship between the state and local governments, the long-term revenue crunch has to be taken into account. A number of steps could be taken to help ease the transition to an older society. Many of them have been discussed nationally. The state should appoint an advisory commission to explore some of the following concepts: • Focus on prevention activities to improve the health of individuals at younger ages in order to delay or mitigate their need for long-term care.

• Design more systematic policies to support the needs of those who are caring for elderly family members. • Encourage employers to offer more flexible work schedules and better ergonomics to keep seniors in the workforce longer. These policies may also improve the health of younger workers.

• Boost retirement income security for those who have little or no access to, or means to invest in, retirement accounts. This could involve working with employers to match 401k contributions or direct subsidies to individuals to encourage savings, such as a specialized refundable state EITC for retirement. www.CommunitySolutions.com

45

• Enlarge the take-up rate for long-term care insurance, although the failure of the federal CLASS Act is not encouraging in this regard. Are there certain insurance subsidies that would make sense for the state to undertake now to save costs in the long run?

• Explore the establishment of a state trust fund with long-term investments to pay some of the Medicaid longterm care services or other health costs related to an aging population. Should some portion of a year-end state budget surplus be saved for the long-run? • Take a more systematic approach to developing seniors as a volunteer resource so that their expertise and wisdom continue to benefit society.

Most of all, there will be a need for creativity in both the public and private sectors to deal with the unprecedented challenges of an aging society. The state has time to prepare, but a long-term perspective is necessary. Waiting to make changes will only make the choices more difficult.

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APPENDIX I. SALES TAX ESTIMATE METHODOLOGY Regionomics LLC

The CEX includes two separate surveys: an interview survey and a diary survey. The interview survey collects information on major purchases made over a three-month period; the diary survey tracks routine purchases by asking the household to record each purchase made during a two-week period. A total of 693 consumption goods and services are identified; each of these was classified as taxable or non-taxable under current Ohio law. A relatively small category of purchases are taxable in some cases and not in others. These include restaurant meals, which are taxable if they are eaten on the premises but not if they are taken out, and purchases made on trips, which are taxable if the trip is within Ohio but not if it is out of state. In the absence of more specific information regarding the proportion of such purchases that is taxable, it was assumed that 50 percent of the total amount of these partly-taxable purchases was taxable. There is some overlap between the purchases reported on the two surveys, but BLS indicates which survey is the information source for each purchase in the summary statistics; information for 437 goods and services is taken from the interview survey and 256 come from the diary survey. The analysis of each survey is limited to the designated set of goods and services. Thus, because these lists of goods and services tracked in each survey are mutually exclusive and collectively exhaustive, the averages from each survey can be summed to obtain the total average purchase for households in the specific age group. Eight quarterly interview and diary surveys spanning 2011 and 2012 were analyzed; prior years’ purchases were likely impacted by the recession. The use of entire years of data addresses the seasonality of consumer purchases. The interview survey file includes responses for all three-month periods beginning during that quarter; thus, the first-quarter survey includes purchases made as late as May. The result is that all months except for the last month of each quarter are included in two interview surveys. Information from both surveys was used in the analysis for these months. The diary survey file for a given month reports information on all households whose survey period began during the month; thus, many households report purchases made in each of two months. All purchases for these households were allocated to the month that had the highest dollar value of purchases. These two-week purchase totals were converted to a monthly basis by multiplying them by the ratio of the number of days in the month to 14. The recurring nature of the purchases in the diary survey make this a valid adjustment. The monthly averages were multiplied by 12 to annualize them. A problem that came to light in inspecting diary results for individual households is that a significant number of households may have underreported their purchases. Even a cursory scan of the results reveals highincome households reporting only a few purchases or no purchases at all for the two-week period. It may be that these households found the detailed recordkeeping required by this survey too burdensome. Sabelhaus and his colleagues in a 2012 conference paper raised the possibility that high-income households may be underrepresented in the CES and that these households may underreport their spending.67 Underreporting was readily apparent in the data, and not solely by high-income households. Failing to address this problem would cause the average value of the routine purchases tracked in this survey to be underestimated, possibly misstating the taxable share of purchases. Rather than imposing some ad-hoc rule regarding the level of expenditures that a household at a given income level “should” make, it was decided to exclude all households reporting no non-taxable purchases – customarily a large fraction of household purchases of goods and services – during the two-week period. Underreporting seemed to be less of a problem in the interview survey, so virtually all of those observations were useable. Another problem in estimating sales taxes from purchases is that taxes are generally not paid on goods bought online despite the legal requirement to do so. An earlier analysis by Regionomics revealed that this requirement is almost universally ignored.68 Various efforts are currently underway to close this loophole, and it is assumed that mechanisms will be put in place to ensure that these use taxes are paid in the future. Table A-1 reports the number of total observations (households) and useable observations by age group in the interview survey, while Table A-2 provides the same information for the diary survey. www.CommunitySolutions.com

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age group in the interview survey, while Table A-2 provides the same information for the diary survey. Table A-1: A-1: Valid Valid Cases Cases by by Age Age Group Group in in the the Interview Interview Survey Survey Total Valid LT 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+

2011 Q2 6,729 6,727 416 541 553 551 639 670 684 660 555 468 337 255 398

2011 Q3 6,611 6,604 366 530 573 556 612 644 659 659 549 470 317 265 404

2011 Q4 6,781 6,774 471 534 584 578 570 659 711 644 503 499 322 277 422

2012 Q1 6,838 6,835 433 520 611 614 581 631 702 691 520 510 319 284 419

2012 Q2 6,715 6,712 400 493 582 618 559 624 717 690 493 505 338 271 422

2012 Q3 6,689 6,687 384 518 545 626 579 635 705 690 517 496 347 242 403

2012 Q4 6,751 6,746 463 513 559 601 578 644 679 667 542 497 342 260 401

2013 Q1 6,769 6,764 466 531 604 553 572 642 636 657 564 501 369 245 424

Total 53,883 53,831 3,394 4,175 4,610 4,696 4,689 5,148 5,493 5,358 4,242 3,945 2,690 2,099 3,292

2013 Q1 3,416 2,815 165 194 244 235 294 253 307 303 217 211 154 90 148

Total 27,684 22,891 1,133 1,558 2,189 2,015 2,333 2,237 2,446 2,124 1,983 1,643 1,115 871 1,244

Table A-2: Table A-2: Valid Valid Cases Cases by by Age Age Group Group in in the the Diary Diary Survey Survey Total Valid LT 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+

2011 Q2 3,494 2,947 159 206 287 256 322 290 308 252 267 179 155 126 140

2011 Q3 3,508 2,918 115 199 309 218 332 263 308 267 284 201 153 122 147

2011 Q4 3,468 2,837 145 175 244 248 276 306 351 248 237 172 134 125 176

2012 Q1 3,455 2,864 117 210 273 278 247 294 325 287 248 211 125 107 142

2012 Q2 3,512 2,956 141 225 319 284 283 332 258 249 258 215 132 83 177

2012 Q3 3,463 2,820 144 176 232 249 324 249 278 271 234 248 135 122 158

2012 Q4 3,368 2,734 147 173 281 247 255 250 311 247 238 206 127 96 156

Source: Regionomics analysis of the BLS Consumer Expenditure Survey Source: Regionomics analysis of the BLS Consumer Expenditure Survey

II. INCOME TAX ESTIMATE METHODOLOGY Background on State and FederalSolutions Tax Data The Center for Community

57 | P a g e Population estimates do not translate directly into the number of income tax filers. Individuals in the population must be aggregated into taxpayer units that file an income tax return.

A tax return may represent more than one individual. Married couples generally file a joint return and tax policy takes into account the presence of dependents in the household. Ohio, like many states, uses the federal income tax return as the starting point for the state income tax return. This is done to simplify administration for the taxpayer and the tax department. It means that taxpayers report an aggregate income amount called Federal Adjusted Gross Income (AGI) as the starting point on the state return. This is the foundation of the Ohio income tax base and for our analysis of how changing demographics will affect the state income tax system. Since Federal AGI is aggregated when it is reported on the state income tax form, published state data contains little information about specific sources of income, except for what can be gleaned indirectly through the use of certain deductions and credits.69 Ohio Department of Taxation data does provide detailed information about taxpayers who use the senior tax credit, available to households paying the state income tax with at least one senior age 65 and over. Using this method, we were able to analyze historical trends in the use of other deductions and credits by senior households, including the retirement income credit and Social Security deduction. 48


IRS data, on the other hand, presents basic information about major components of income reported on the federal 1040 form by Ohio residents, such as wages, pensions, capital gains, and business partnership income, but without any information about age or other demographics. Limited data are available at the national level about the characteristics of federal tax returns by age, although the senior population is aggregated into a single group aged 65 and over. A more extensive IRS micro-data set with a sampling of individual records is available but at the national level only and with a significant time lag. Non-filers in the Population Estimating the number of returns that will be filed in the future is not simple. It depends on a complex mix of tax policy, demographic change, and economic conditions. The IRS forecasts that Ohio residents will file about 5.85 million federal returns by 2018.70 This would represent an average increase of about one percent per year from the 2010 level, which seems reasonable for a medium-term forecast if economic growth can reverse the recent decline in labor market participation and provide greater capital income that pulls more seniors into mandatory filing status. It is doubtful that a one percent annual increase can continue in the longrun, however. The Scripps Institute population projections show a cumulative increase in the state’s population of 2.7 percent between 2010 and 2035, and a decline thereafter. It is also important to recognize that hundreds of thousands of Ohio residents with little or no earned income do not file at the state and federal levels because their incomes are too low. For tax year 2013, IRS rules exempted senior couples filing jointly with incomes under $20,900 from filing; the threshold was $10,750 for single seniors. Slightly lower thresholds applied to the under-65 population. The thresholds are adjusted each year. Seniors generally do not have to count Social Security towards these filing thresholds unless they meet the Social Security provisional income test. For the 2013 state return, the Ohio Department of Taxation identified the following four scenarios that exempted taxpayers from filing: • single taxpayers with federal AGI less than or equal to $11,700 with no Schedule A • adjustments (deductions);

• married, filing jointly taxpayers with federal AGI less than or equal to $13,400 with no Schedule A adjustments; • taxpayers with personal exemption amounts the same as or more than Ohio Adjusted • Gross Income (line 3) with no Schedule A adjustments;

• taxpayers whose only source of income is retirement income that is eligible for the retirement income credit, and the credit is the same or larger than their tax before • credits.

The 2007 tax year provided an interesting experiment in determining how many non-filers there are at the federal level with very low incomes. Federal tax law allowed individuals who had $3,000 or more in qualifying income including Social Security and railroad retirement, veterans’ payments, and wages to file for economic stimulus payments.71 Individuals received $300 and joint filers $600. The result was that the number of federal returns increased 10.8 percent from the previous year. The number of state returns went up by 2.6 percent. Even allowing for some increase due to economic trends, we estimate that the stimulus payments resulted in an additional 450,000 returns from Ohio residents who would not otherwise have filed. It is likely that most of them were from seniors and retirees, although some at younger ages may have been SSDI recipients. SSI was not considered qualifying income. In practice, the federal EITC provides a powerful motivation for individuals with earned income to file even they do not meet the mandatory filing threshold. The number of federal returns exceeds the number of state returns each year. The relationship between total state returns and federal returns is relatively stable, with the state level being about 96 percent of the federal (Figure A-1). This is somewhat misleading, however, because about 5 percent of state returns are from non-residents. The ratio between federal and state resident returns declined slightly from 95 percent to 91 percent since 2000. The model assumes this will recover to 93 percent. Interesting, in 2011, the number of state resident returns was still 5 percent below the level of tax year 2000, but the number of federal returns had almost recovered to tax year 2000 levels. www.CommunitySolutions.com

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Source: Regionomics analysis of the BLS Consumer Expenditure Survey

6.5 6.3 6.1 5.9 5.7 5.5 5.3 5.1 4.9 4.7 4.5

Federal Returns State Returns - total State Returns -Residents 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Millions of Returns

Figure A-1. Number of Tax Returns, IRS and Ohio Department of Taxation Figure A-1. Number of Tax Returns, IRS and Ohio Department of Taxation

Source: IRS and ODT

Source: IRS and ODT

Federal AGI reported on Ohio returns generally is slightly below the amount reported on IRS returns (within Table A-3. Total Number of Federal Filers, ACS Estimate vs. IRS one percent). 2010 Income ACS IRS Prct difference ACS Estimates of Filing Status by Age Cohort In order to create a more detailed picture of Ohio households, their income distribution, and the types of