In this context, there is an urgent need for a balanced approach to the state’s budget shortfall that includes identifying possible sources of additional one-time or ongoing revenue. Governor Henry, in his FY ’11 Executive Budget,  proposed over $700 million in revenue enhancing measures, along with additional cuts across all of state government, savings from efficiencies and consolidation, and the use of remaining stimulus and reserve fund balances. Not all of the Governor’s ideas are likely to gain traction, but they provide a good starting point for an urgently-needed  discussion. In this and subsequent blog posts, OK Policy will explore some of the most promising policy ideas for generating additional revenue that would go at least part of the way to closing the budget deficit.

One straightforward revenue-generating idea involves limiting the discount that the state pays retailers for collecting the state sales tax. Currently Oklahoma is among 26 states that provides vendors some form of compensation, or discount, for collecting and remitting sales tax. As the policy organization Good Jobs First has noted:

When stores were small and records were mostly kept by hand, a plausible case could be made that retailers deserved some financial assistance from states to offset the costs associated with sales tax collection and remittance. But even then, policymakers in many states never accepted the argument.

Of the 45 states with a sales tax, 19 do not provide a vendor discount, while 26, including Oklahoma, do. Oklahoma provides retailers 2.25 percent of sales tax collections if they file electronically, or 1.25 percent otherwise, up to an monthly maximum discount of $3,300 per sales tax permit-holder.  Among the 13 states that cap the total discount, Oklahoma’s cap is the second highest. Arkansas, by comparison, allows a discount rate of 2.0 percent, with a  cap of $833 per month. The Oklahoma Tax Commission calculates the cost of the vendor discount at $25.9 million for CY 2008, more than three-quarters of which went to the 4 percent of Oklahoma businesses that collected over $100,000 in sales tax.

Even though businesses receive no payment for assisting in the collection of other taxes, such as income tax withholding, a good case can be made for not doing away with the vendor discount entirely, especially since the Streamlined Sales and Use Tax Agreement, of which Oklahoma is a part, requires states to provide “reasonable compensation” to all retailers. At the same time, the improved ease and lower cost of sales tax collection as a result of technological advances argues for lowering the amount of the vendor discount.

One proposal, advanced by UCO Economics Professor Mickey Hepner, would be to maintain the current vendor discount rate but substantially lower the annual cap. Governor Henry in his budget proposes lowering the vendor discount rate to 1 percent for all vendors, while lowering the monthly cap only slightly, to $2,250. The Governor’s budget estimates savings of $10 million from this change. An alternate approach, used in several states, is to provide a higher discount rate up to a certain threshold and a lower rate above that up to the total cap. Such an approach would provide greater benefits to small businesses, while larger retail changes, as Hepner argues, “would barely register the change.”

Reducing the vendor discount would go only a short part of the distance in bridging the budget gap, but it is sensible policy that would align our tax system with modern technological realities. It should be considered and enacted by this year’s Legislature.

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However, as we noted at the time, the announcement left a key question unanswered:

Given projected shortfalls of $809 million and cuts of $295.5 million, the question that still needs to be sorted out is where exactly the $513.5 million in additional revenue needed to bring the FY ‘10 budget into balance will come from.

Speaker Benge was quoted at the time as saying that the agreement would leave over half the $597 million in the state Rainy Day Fund unspent in FY ’10. However, when the Governor’s budget was released last week, it included $485.6 million from the Rainy Day Fund – or over 80 percent of the total balance – to make up for shortfalls in the FY ’10 budget. The remainder of the FY ’10 shortfall (which is likely closer to $545 million in total) would be filled with surplus oil revenues and transfers from agency balances.

When asked about this, Speaker Benge downplayed the discrepancy:

“I don’t think it’s an agreement breaker,” Benge said. “We can continue forward. We will use (federal) stimulus money for the balance. I think it will work out just fine.”

To my mind, what this uncertainty reveals is that this year’s budget cannot be fully resolved until there is a deal on next year’s budget.  The budget negotiators are looking at a total pool of potentially available funds – including state tax revenues, federal stimulus dollars, reserve funds, and possible new revenues from other sources – that need to be stretched to cover the remaining months of FY ’10 and all of FY ’11.  Revenue decisions will also be closely linked to decisions about how deeply to cut agency budgets in FY ’11. Until  the whole picture is drawn at least in outline, it doesn’t seem like there can be agreement on the size of each of the parts or how they fit together.

Yup, it’s for sure going to be a bumpy ride.

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We all will be asked to sacrifice. But we cannot balance the budget at the expense of the most vulnerable among us.

His speech was most eloquent, perhaps, when he spelled out what’s really at stake when it comes to cutting government:

As we proceed, I implore you to remember there are very real – and human – consequences to budget cuts. The men and women who make state government work are not numbers on a spreadsheet.

Government is the schoolteacher grading papers at night. It is the meat and poultry inspector ensuring a safe food supply. It’s the child welfare specialist investigating suspected child abuse. It’s the nursing home attendant caring for a loved one … the speech pathologist working with special-needs children … the corrections officer tasked with keeping dangerous criminals behind bars.

The challenge for the Governor, and for legislators hoping to mitigate the of budget cuts and protect core government services, is how to balance the budget when revenues are projected to come in some $800 million below initial appropriations for this year and when certified state revenues for FY ’11 are some $1.9 billion below the initial FY ’10 budget of $7.2 billion. Other than making the case for tapping the state’s Rainy Day Fund, the Governor’s speech itself offered no details on how to accomplish this task. However, the Executive Summary to his FY ’11 does lay out the Governor’s strategy for bringing the budget into balance.

The broad outlines of the Governor’s approach are as follows. First off, as announced last week in an agreement between the Governor, House Speaker, and President Pro Tem, the FY ’10 revenue shortfall will be filled in part by across-the-board annual budget cuts averaging 7.5 percent of funding from General Revenue. These cuts, which amount to some $465 million, are to be offset by some $180 million in supplemental funding divided between common education, higher education, Medicaid and corrections. That still leaves an FY ’10 gap of over $500 million, which the Governor proposes to fill with $485 million from the Rainy Day Fund and transfers from agency revolving funds.

For FY ’11, the budget would be balanced as follows under the Governor’s plan:

• FY ’10 cuts would be annualized and increased by an additional 0.5 percent to 3 percent for all agencies.  In addition, pass-through funds to several agencies would be suspended. In total, this represents some $380 million in budget reductions for FY ’11 compared to initial FY ’10 appropriations;
• $696 million in remaining stimulus funds;
• $67 million in Rainy Day Funds.  (This would leave the RDF with some $44 million);
• $53 million in anticipated savings from agency consolidations and consolidation of information technology services;
• $233 million from new bond issues that would free up General Revenue;
• $85 million in transfers of cash balances from revolving funds;
• $239 million from a variety enhanced tax collection proposals, particularly increased sales tax collections on Internet sales and automated enforcement of vehicle insurance.
• $103 million from eliminating or suspending various tax credits;
• $58 million from increases in fees and permits.

Two points need to be made about these budget balancing proposals. First, many of those I spoke with at the Capitol who had learned of the Governor’s ideas for generating additional revenues and savings through efficiencies were skeptical that the proposals would gain legislative support or would have the fiscal impact promised in the budget. Without these measures, however, cuts would have to be even deeper than those the Governor recommends. (On the other hand, if the revised certification to be presented later this month to the Board of Equalization projects stronger revenue collections over the next 17 months than December’s initial estimates, the budget gap will not be as sizable.)

Secondly, even with these optimistic assumptions about savings and new revenues, the impact of the proposed funding levels in the Governor’s budget remain extremely worrisome.   With a few exceptions, most agencies are facing FY ’11 funding that is 10 to 17 percent below their budgets for FY ’09. Even those core agencies in education, health and human services, and public safety that are partially protected will take cuts in FY ’10 and FY ’11 and are not funded in FY ’11 to deal with rising operating costs and caseloads.

The bottom line is, for all of us who count on government – on those school teachers, safety inspectors, child welfare specialists, nursing home attendants, and corrections officers – to protect our safety and well-being and make us a stronger state, this fiscal storm still looks to have a devastating effect.

To see OK Policy’s updated spreadsheet of agency-level and overall appropriations for FY ’09 through FY ’11, and related budget information, click here.

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Governor Henry stated that the goal of the council is to make sure Oklahoma doesn’t fall into any traps and that we get the full benefit of the stimulus funds. He stressed that, although openness and accountability is a key goal of this process, it goes beyond that. The other stated goal is to identify all opportunities where Oklahoma can benefit from the stimulus package.

The governor stressed that, “If there is money available that will be beneficial for the state, I want to take advantage of it. So far, I have not seen any of the stimulus money that is available that would not be beneficial to Oklahoma, for whatever reason.” He expressed that he wants Oklahoma to be the role model for how the ARRA will be implemented by having full disclosure in the process, with every dime of the stimulus money being listed on the website to show where it went and how it was spent.

Susan Savage and Steve Burrage just returned today from a meeting at the White House yesterday. Vice President Biden was quoted from the meeting as saying “All that is legal is not acceptable in this process.” All but one of the states were represented at the meeting. Secretary Savage reported that many of the states expressed a desire to see a change in the compliance structure of the bill, which is loaded at the back end with money to determine if there was compliance. She felt that the administration heard the concerns of the states and will be making money available up front to ensure compliance.

To that end, Steve Burrage expressed his intent to consider all funds as high risk funds under auditing standards, which puts in place heightened control requirements. The federal government wants the money spent quickly, productively, and in a manner free from fraud and waste. These are hard things to ensure all at once. In fact, 16 states have federal auditors arriving soon to facilitate the process. Oklahoma is not one of those states. Steve Burrage, Oklahoma’s State Auditor, urged all agencies to go in and do an assessment of their control procedures and requirements – basically an operational audit. He stressed “document, document, document.” There will be “real time audit procedures” that will allow Oklahoma to find waste on the front end instead of on the back. Lisa Hodges and Josh Richards will be coordinating parts of the process for the Oklahoma Auditor’s Office.

Governor Henry enthusiastically declared that this coordinating council will set Oklahoma apart and make us the best in the nation at this process. He gave all the members of the council a charge before they convene again a week from Tuesday (March 24^th). At that meeting, each member will present a written report that outlines the concerns and opportunities that they and their work groups have identified regarding this process.

For more information, click on the following links.
Coordinating Council
Oklahoma Recovery & Reinvestment

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The coordinating council is set to hold its first meeting on Friday, March 13th at 3:00 p.m. in the Governor’s large conference room at the Capitol.

UPDATE: Here’s the Governor’s Executive Order creating the Coordinating Council

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