January 26th, 2016
Oklahoma is facing a full-fledged budget emergency. This year’s budget is nearly $900 million, or 11.4 percent, below that of fiscal year 2009 when adjusted for inflation. A mid-year revenue failure was declared in December due to revenue collections coming in below projections, forcing most agencies to implement deeper cuts, and a second round of mid-year cuts could be necessary. Legislators are currently expected to have $901 million less for next year’s budget than this year – and the shortfall could grow even greater when new revenue estimates are released in February.
In recent years, policymakers have relied on budget cuts and one-time revenue fixes to cobble together the annual budget. Critical state services have already been cut deeply and repeatedly, leading to severe teacher shortages, larger class sizes, higher tuition charges and user fees, understaffed facilities, reduced payments for health care and social service providers, long waiting lists for services, and other harmful effects. The dependence on one-time revenues has created a chronic budget hole that we can’t fill even when tax collections improve.
If we try to solve our budget crisis only by doubling down on budget cuts and one-time revenues, we will only inflict greater damage to our economy and to the well-being of Oklahomans. Instead, we can and must solve this crisis through a more balanced approach that includes new recurring revenues.
There are many revenue options that are worth considering. Here are five reasonable solutions that OK Policy will be promoting as priorities over the coming months. Together, these solutions could generate hundreds of millions of additional recurring revenue, lessening the need for deeper cuts and helping put Oklahoma’s economy and budget on a more sustainable path:
Repeal the most recent income tax cut
Oklahoma has cut the income tax by over $1 billion since 2004. This includes the most recent 0.25 percent cut that took effect in January, which is projected to reduce state revenues by $147 million this fiscal year. The tax cut passed by the Legislature in 2014 was never intended to take effect while revenues were falling and the state was experiencing a revenue failure. Another income tax cut is scheduled for 2018 that would reduce revenues by an additional $120 million if not repealed or suspended this session. We simply should not be moving ahead with tax cuts while we are facing huge budget deficits and slashing the budgets of core services.
Adopt combined corporate reporting
Some multi-state corporations shift income to out-of-state subsidiaries to escape state tax liability. Most states with a corporate income tax have adopted a reform known as combined corporate reporting that effectively halts this tax avoidance strategy and ensures that multi-state corporations pay their fair share of taxes, just like local businesses.
End the double deduction of state income taxes
Oklahoma is one of only six states that allows taxpayers who claim itemized deductions on their federal tax return to also claim the deduction for state income taxes on their state return. This nonsensical tax break is an unintentional fluke of the law that serves no policy purpose. By eliminating this “double deduction” of state income taxes, the state would gain an estimated $97 million in additional revenue. Only taxpayers who itemize their deductions, which tend to be higher-income households, would be affected.
Improve collection of taxes owed on online purchases
States are hampered in their ability to require some retailers to collect and remit taxes owed on online sales. With the growth of e-Commerce, Main Street retailers are placed at a competitive disadvantage and state and local governments are lostng substantial action. While waiting on Congress to adopt a comprehensive fix to the problem, Oklahoma could follow the lead of ten states that have adopted so-called “Amazon laws” to help boost tax collections from more online businesses based outside of Oklahoma that partner with in-state retailers.
Accept federal funds for health care
Accepting federal funds to expand coverage to low-income adults would create savings for the state budget through additional tax dollars and by shifting costs that are currently paid for with state funds to the federal government. It would also provide a major economic boost to the state, help businesses by creating a healthier workforce, and avoid leaving the lowest-income Oklahomans in a “coverage crater” without insurance options.
These five options are far from an exhaustive list of solutions for generating additional revenues. Expanding the sales tax base to include additional services, raising the tobacco tax or motor fuel tax, eliminating tax incentives, and curbing off-the-top allocations are among ideas that have long been discussed and that may get more serious consideration this year in light of the budget emergency. In addition, the Legislature will have to look at a range of one-time revenue options to help fill the gap, including tapping the Rainy Day Fund and agency revolving funds, issuing new bonds, and putting a moratorium on tax credits and deductions.
There’s no doubt that any action to generate new recurring revenues will face strong political obstacles and, in some cases, constitutional hurdles. Still, given the severity of the crisis and the potential damage that cutting much deeper into budgets will inflict, this is the time when all options must truly be on the table.