[UPDATE: You can download ITEP's analysis here.]

Yesterday the Senate voted to abolish the state income tax after Sen. Tom Adelson (D-Tulsa) introduced the measure as an amendment to another bill. With public services heavily dependent on income tax and no immediate revenue prospects to replace it, the language will likely be removed before the bill is finalized. Democrats introduced the amendment (which they do not support) in an attempt to show that the tax cut rhetoric of the Republican majority is not compatible with responsible budgeting and the needs of public services.

While that is a political fight that will not have immediate repercussions on policy, it mirrors the trend of successive smaller cuts that have significantly reduced the income tax over time. From 2004 to 2006, the top income tax rate was cut from 6.65 percent to 5.5 percent. Unless the legislature acts to stop it, another state income tax cut will take effect January 1, 2012. The cut, which was triggered when the state projected that revenue will rise by more than 4 percent next year, would reduce the top rate to 5.25 percent. Read the rest of this entry »

The Oklahoman’s Michael McNutt covered the remarks I made last week at a panel on the state budget crisis at the University of Central Oklahoma’s Southwest Business Symposium. My conclusions were rather stark:

“We’ve been able to avoid the apocalypse up until now,” David Blatt, director of the Oklahoma Policy Institute, a state policy think tank, said. “If we’re going to avoid a sort of catastrophe, we need additional revenue to close that gap,” Blatt said…

The magnitude of the budget crisis that is being faced for the upcoming budget year is only beginning to be grasped. In short:  the Board of Equalization has certified just over $5.415 billion in available state dollars for FY ’11. That is $1.55 billion less than this year’s revised budget after the mid-year cuts that were made to bring the budget into balance. Assuming the state uses an additional 3/8ths of the Rainy Day Fund and the remaining available federal stimulus dollars, that still leaves a gap approaching $800 – $850 million, according to our calculations. This gap is equivalent to 12 percent deeper cuts across all agencies of state government above the cuts already enacted the past two years. The actual  gap may be somewhat lower, if the full balance of the Rainy Day Fund is used and if additional federal Medicaid matching dollars materialize as hoped, but the prospect of deep cuts next year looms large. This outlook has been confirmed in recent pronouncements by Senate Pro Tem Glenn Cofee and other legislative leaders. Read the rest of this entry »

The latest state revenue collections announced today provided mixed news:

State revenue collections in February exceeded the official estimate for the first time since December 2008, but fell short of prior year collections for the same month, State Treasurer Scott Meacham announced today.

Preliminary reports show General Revenue Fund collections in February are $220.6 million. That amount is:

• $17.3 million, or 7.3 percent below the prior year; but,
• $0.8 million, or 0.4 percent above the estimate.

February collections were buttressed by $25 million in gross production taxes on oil that were allocated to the General Revenue Fund and by stronger-than-expected income tax collections. After tax refunds, the state took in net income tax collections of $10.7 million in February, whereas the official estimate was for a net loss of $9.1 million in income tax payouts. Read the rest of this entry »

As a result of Oklahoma’s severe budget shortfalls, every state agency and program is absorbing substantial budget cuts that are having a real impact on Oklahoma families and communities. But tax expenditures – the term encompassing the array of exemptions, deductions, incentive, credits and other forms of preferential treatment in the tax code -  have been left untouched and largely unscrutinized. Tax expenditures, in one’s leading expert’s words,  “may, in effect, be viewed as spending programs channeled through the tax system”; in many cases, they are just different means of pursuing the same policy goals as direct budgetary expenditures. Why, then, should an economic development spending program to promote new technologies take cuts while a tax credit program to accomplish the same purpose is uncapped? Does it make sense that appropriations to DHS for senior assistance programs are slashed while tax preferences for elderly homeowners are untouched?

This post addressing tax expenditures is the fourth and final of a series recommending changes to our budget and tax system.  Our proposals are all intended to enhance the Legislature’s ability to manage budget downturns without having to implement deep cuts to vital state services or enact tax increases. Previous posts recommended enhanced and expanded budget forecasting, strengthening reserve funds, and putting on hold multi-year revenue commitments.

The most recent Tax Expenditure Report prepared by the Oklahoma Tax Commission (OTC) identifies over 450 separate provisions of state law that provide for some reduction in the amount of state taxes that would have been collected but for the preferential tax treatment benefiting some favored activity or category of taxpayer. The total cost of tax expenditures – $5.4 billion in FY ’08 for provisions that could be estimated by the OTC – equal more than 75 percent of total state appropriations ($7.1 billion in FY ’08).

The fact is, there is no way to know how much tax expenditures will affect state revenues during this fiscal year or the next. Unlike budgetary expenditures, which are subject to annual appropriations and to the availability of revenues, tax expenditures tend to be fiscally open-ended. In most cases, any person or business meeting the eligibility criteria can claim a credit, exemption, or deduction, without there being any cap on the total amount made available.

In order to provide more budget predictability and ensure that the impact of budget shortfalls is more broadly and equitably distributed, policymakers should consider subjecting at least some tax expenditures to caps and triggers. A cap would set a total dollar amount that can be claimed under the credit or exemption, while a trigger would make the tax preference subject to the availability of revenues.

There are already some precedents for the state implementing funding caps on tax preferences:

• Incentive payments under the Quality Investment Program created by SQ 725 are limited to $10 million in total, with no single company eligible for more than $5 million in subsidies.
• The total amount of tax rebates claimed on gross production taxes for deep well drilling below 15,000 is capped at $25 million. In situations where eligible rebate claims for deep well drill exemptions exceed the available cap, the statutes and OTC rules specify a process for allocating the rebates among eligible participants.
• Income tax credits for investments in agricultural processing cooperatives are limited to $2 million annually.

In terms of triggers, the Quality Investment Program, which is tied to the balance in the Rainy Day Fund, is the only credit that can be suspended or limited under current law based on the availability of revenues. Between 1998 and 2005, eligibility thresholds for the Sales Tax Relief credit were tied to a revenue trigger, so that in year when revenues were projected to fall, eligibility for the credit was restricted.

Increasing our scrutiny and evaluation of tax expenditures, and subjecting at least some to  fiscal caps, would constitute sound policy regardless of fiscal circumstances. But during this time of crisis, to claim that the priorities we’ve chosen to fund through the appropriations process can be slashed while the priorities we’ve embedded in the tax code are untouchable simply doesn’t make sense.

The continued weakness of natural gas prices and production is the most important factor accounting for Oklahoma’s disappointing revenue collections.  July collections from natural gas production to the General Revenue Fund (GRF) totaled just $22.2 million in July -  a 75 percent decline from revenues for the same month a year ago, and $42.1 million less than the estimate certified in February by the State Board of Equalization. More than half of the total revenue shortfall in the GRF can be attributed directly to falling revenues from the gross production tax on gas. Read the rest of this entry »

As a follow-up to our earlier post about the announced cuts to state agencies resulting from the shortfall in July revenue collections, we have prepared a spreadsheet that shows how much of a cut each agency will receive in dollar amounts and as a percentage of the initial FY ’10 appropriation. The spreadsheet also includes total FY ’09 and FY ’10 appropriations amounts for each agency. The August cuts, totaling $21.9 million, represent 5 percent of one month’s appropriation from the FY ’10 General Revenue Fund (GRF). This latest development continues to tighten the squeeze on agency budgets.  In June, the state implemented 5 percent across-the-board cuts to agency  allocations as a result of shortfalls in last year’s revenues collections. Most agencies also saw their initial FY ’10 funding reduced by up to 7 percent, at the same time as they are struggling to meet rising employee health care and retirement costs, and in some cases, dealing with growing demands for services as a result of the downturn.

Overall, the August cut represents 0.30 percent of total state appropriations for FY ’10. However, as not all agencies are funded entirely through the GRF, “across-the-board cuts” do not affect all agencies in exactly the same way. This is shown in the graph below, which depicts the cut that the ten largest state agencies must absorb as a share of their total annual appropriation. The Department of Transportation, which is appropriated entirely out of the State Transportation Fund, has not had its funding cut at all. The Department of Education, which receives funding in part through the 1017 Education Reform Fund, the Lottery Fund, and others, was cut by just under 0.3 percent. In addition, this year’s budget included over $600 million in federal stimulus funds from the American Recovery and Reinvestment Act, which is unaffected by the state revenue shortfall. This explains why the cut to the Oklahoma Health Care Authority, which benefits from an enhanced federal Medicaid match under the stimulus bill, was just 0.25 percent of total appropriations. In total, about 30 percent of total state appropriations in FY ’10 – some $2.1 billion – came from funds other than current year GR.

This so-called across-the-board distribution of budget cuts is the only one that can be implemented under the state Constitution and statutes without the involvement of the Legislature. But it does not necessarily reflect the ability of agencies to avoid making cuts that threaten essential public services.  If we are going to be able to navigate these revenue shortfalls in ways that cause the least harm to the health, well-being, and security of Oklahomans, we need to make sure we understand the ways these unequal cuts impact the various agencies’ ability to provide services to the people of Oklahoma. Only then can we determine if across the board cuts will be able to be endured by all agencies or if a different approach is needed.

As we’ve discussed in various blog posts and issue briefs, most state agencies received basically flat funding or were dealt budget cuts of 5 to 7 percent for the new fiscal year beginning July 1st, even as inflation leads to increased operating expenditures and the cost of employee health care and retirement contributions continue to mount. The result is that most agencies are being underfunded for the basic functions and missions that they are expected to accomplish, whether that is operating schools or parks, regulating environmental quality or nursing homes, protecting at-risk children, or preserving  public safety.

But what does this situation mean for the agencies, departments, and school districts that operate public services? We usually don’t hear stories about the impact of underfunding unless and until there is a crisis. Yet the reality is that many public agencies at all levels of government, especially regulatory and administrative agencies, are perpetually underfunded.  Resources are always scarce, and even in good budgetary times, most legislators prefer to fund programs that provide direct benefits to their constituents than those that do the unglamorous work of  licensing, inspecting, investigating, and adjudicating. This is especially true here in Oklahoma, where we are among the bottom five states in the amount we spend per person on state and local government

Recently, the journal Health Affairs published an interview with Kerry Weems, who served as Interim Director of one of those unheralded but vital regulatory agencies, the Centers for Medicare and Medicaid Services (CMS), during the last 18 months of the Bush Administration. CMS is charged with overseeing expenditures of almost $700 billion annually in the two major public health care programs. In particular, it has the responsibility for preventing and investigating waste, fraud and abuse in these programs. But in Weems’ view, one that is shared by many others, CMS is not staffed at levels necessary for it to fulfill its mission. Here’s how he describes the impact that a shortage of resources has on his former agency: Read the rest of this entry »

A new report by our friends at the Center on Budget and Policy Priorities shows that the approach Oklahoma policymakers are taking to the current fiscal crisis – implementing budget cuts without drawing down reserves or looking at raising revenues – is increasingly out of step with the nation as a whole:

The current recession has taken a heavy toll on states’ ability to meet public needs. The combination of declining revenues and increasing demand for services has created budget shortfalls in 47 states.

To begin closing the gaps between the cost of programs and the amount of money available to pay for them, so far at least 34 states have cut services to families and individuals, including services that benefit vulnerable families. But these cuts have not solved state budget problems, because the sheer size of state budget shortfalls is so great – estimated to exceed $350 billion over the next two and a half years. Were states to rely on spending cuts alone to close their gaps, it would require unprecedented reductions in such essential public services as health care, education, and assistance for the elderly and disabled.

Instead of a cuts-only approach, states increasingly are employing a combination of budget solutions that also involves drawing down reserve funds, maximizing the use of federal dollars, and raising taxes. A number of prominent economists have pointed out that budget cuts are more harmful to state economies during a recession than properly structured tax increases, so it is good policy to use tax increases to fill a substantial portion of deficits that exceed the amount that can be closed with reserves or federal funds.

So far, in 2009, 16 states have raised new revenue through tax measures. Another 17 are giving serious consideration to doing so. These actions are in addition to revenue actions taken by 10 states in late 2007 and 2008 as the recession’s effects began to be felt. Although some of these measures are relatively small in terms of the amount of revenue raised, others — such as packages enacted in California and New York and under consideration in Illinois — are very significant.

The paper also shows that states that enacted significant tax increases over the course of the last state fiscal crisis (2002-04) saw growth rates in personal income, employment and the median wage from 2004-07 that were virtually indistinguishable from the national average.

In Oklahoma, the constitutional constraints of SQ 640 and political realities have effectively kept tax increases off the table as revenues have collapsed in recent months. However, the unwillingness even to tap into our Rainy Day Fund has left Oklahoma with few tools other than budget cuts at our disposal to manage the fiscal crisis.

You can find full coverage of the state fiscal crisis from the Center’s state budget and tax website.

This being the second Tuesday of the month, the Office of State Finance released the monthly revenue figures today. Unless you were the one who picked “down 21 percent” in the office betting pool, there was little to be happy about in the new set of numbers. For the fourth straight month, April’s General Revenue (GR) collections came in well below the certified estimate and the totals for the same month last year. As the economic downturn deepened, every major tax fell short in April, with gross production taxes off a whopping 64.9 percent from last year and 54.1 percent from the estimate.  Individual income taxes (21.8 percent below prior year and 17.7 percent below the estimate) and corporate income taxes (20.7 percent below prior year and 47.4 percent below estimate) also fared poorly. Sales tax collections were a relative bright spot, coming in 5.3 percent below the estimate but up 13.2 percent compared to a year ago.

As can be seen from the chart, Oklahoma’s tax collections held up through the first half of the current fiscal year before tumbling down the hill beginning in January. For the year, GR is now down 2.2 percent compared to FY ’08.

Read the rest of this entry »

As the Oklahoma Legislature winds down the 2009 session, there is still talk of tax relief–a lower top income tax rate, exemptions for oil and gas drilling, and limits on property tax growth–in spite of a budget shortfall of $600 million or more. With all the reductions of  the last few years and with some of our leaders calling for further tax cuts yet, it is easy to forget that Oklahoma already is a very low tax state.

OK Policy will soon release the Online Guide to Oklahoma Budget and Taxes. It offers a comprehensive look at government spending, revenues, budget processes, and important policy issues Oklahoma faces in  the years ahead. The Guide uses plain English, clear graphs, and an easy navigating system so readers can find out what they need in a hurry, or examine a subject in greater depth.

Read the rest of this entry »

As the economic downturn worsens, Oklahoma’s budget has begun to resemble a boxer up against the ropes. The news from the March revenue report released today by the Office of State Finance just dealt another blow. General Revenue (GR) collections for the month were down $93 million, or 19.1 percent, compared to the year prior. Every major tax came in below a year ago, with gross production taxes (down 40.7 percent from March 2008), motor vehicle taxes (down 25.4 percent), and personal income tax collections (down 22.3 percent) taking the worst hits.

As can be seen from the chart, this is the third consecutive month of steep revenue declines. For the year, FY ’09 revenues are a slim $33 million, or 0.8 percent above last year.

Compared to the certified estimate, March’s collections fell $81.8 million, or 17.2 percent, short. That is a slight improvement from February, when collections missed the mark by a whopping 30.3 percent. For the year, revenue collections have now dipped slightly below the certified estimate. Since the Legislature only appropriates at 95 percent of the estimate, it leaves a 5 percent cushion to avert or minimize budget shortfalls when the economy declines. Treasurer Meacham today declared that, “we expect collections for the next three months to also fall below original estimates, but they are not forecasted to fall enough to require cuts between now and the end of June.”

Read the rest of this entry »

The AP reported Thursday that Oklahoma’s budget shortfall could potentially take another $65  million hit as a result of tax provisions that were included as part of the federal stimulus bill passed by Congress in February. The stimulus bill, or ARRA (American Recovery and Reinvestment Act), included several provisions that reduce businesses’ taxable income in 2009 and 2010. Since Oklahoma ties its income tax to federal definitions of taxable income, these federal tax cuts can wind up affecting state revenue collections as well. The most substantial provision – accounting for $46 million in lost revenue for the upcoming budget year – comes from the bonus depreciation allowance, which allows companies to write-off assets more rapidly than under normal law. Read the rest of this entry »