Income tax revenues are allocated in two ways: a set amount is taken off the top for a number of specific programs, and the rest is divided up by a formula. The programs funded off-the-top include:

• The ROADS fund: In 2012, the Department of Transportation received $255.7 million from the individual income tax for maintenance and construction of roads and bridges, along with small amounts for passenger rail services and public transportation. In 2013 and each year thereafter, the ROADS fund will receive an additional $41.7 million until the fund reaches an annual cap of $435 million. Governor Fallin has proposed increasing the ROADS allocation by $56.7 million annually and raising the cap to $550 million in order to repair the state’s bridges;
• Quality Jobs: Companies that qualify for the Quality Jobs program, the state’s marquis economic development program, receive quarterly incentive payments from personal income tax receipts. In 2011, Quality Job payments totaled $61.8 million.
• Oklahoma’s Promise scholarships:  In 2012, $63.2 million in personal income tax revenues was allocated for Oklahoma’s Promise scholarships, which cover higher education expenses for qualified Oklahoma students. Because of carryover in the program’s trust fund, this amount will decrease to $57 million in 2013.

Remaining personal income tax revenues are apportioned according to statutory formula. Of these, 94 percent goes to the annual state budget, with 85.66 percent apportioned to the General Revenue fund and 8.34 percent to the HB 1017 Education Reform Fund.  This year (2012), income tax collections account for $1.95 billion, or 29.9 percent, of the total state appropriated budget . The agencies funded with the most income tax dollars are:

• Department of Education – $743.4 million from the personal income tax, or 32.6 percent of its appropriations. This amount represents the equivalent of salary and benefits for almost 17,000 public school teachers;
• Health Care Authority – $268.2 million, 27.3 percent of its appropriations, which is equivalent to the state match for the health care expenses of more than 430,000 low-income children enrolled in SoonerCare;
• Higher Education – $261.8 million, 27.8 percent of its appropriations, which is equivalent to the per-student cost of educating 23,400 full-time students at public colleges and universities;
• Human Services – $149.7 million, 27.9 percent of its appropriations, which is equivalent to the state share of funding for the services DHS provides to some 14,500 Oklahomans with developmental disabilities;
• Corrections – $141.2 million, 30.7 percent of appropriations, which is equivalent to the expense of incarcerating more than 9,300 inmates, or about 36 percent of the state’s entire prison population.

The remaining income tax collections provide $63.1 million to Mental Health and Substance Abuse Services, $44.9 million to Career and Technology Education, $33.0 million to the Office of Juvenile Affairs, $29.2 million to the Department of Public Safety, $20.5 million to the Department of Health, and $192.3 million to other agencies (click here for a spreadsheet showing income tax allocations for each agency).

Finally, the remaining income tax collections are apportioned as follows:

• Oklahoma Teachers Retirement System  – 5 percent. In 2011, the Teachers Retirement System received $119.8 million from the personal income tax. Despite recent measures to put it on more solid financial footing, OTRS remains one of the most underfunded public pension systems in the nation, with a funded ratio of just 56.7 percent;
• Ad Valorem Reimbursement Fund -  1 percent. The final portion of income tax revenues is allocated to school districts and counties as reimbursement for property tax revenues lost as a result of ad valorem exemptions granted by the state. This amounted to $24 million in 2011. Over the past decade, revenues to the fund have fallen chronically short of the state’s obligations, creating a shortfall in reimbursement to counties and other local entities of over $40 million.

Clearly, the income tax is a crucial cornerstone of our tax system, providing the revenue both for general operations of agencies and school districts and for important earmarked purposes, such as roads and bridges, economic development, and public pensions.  Some tax cut proposals attempt to maintain funding for these earmarks by shifting them over to other taxes. But ultimately, the huge scope of what is funded by the income tax would put an impossible burden on other taxes, unless they were drastically increased. This leaves us to wonder: is the idea that we can do without income tax merely a giant leap of faith, or is it a flight of pure fantasy?

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A couple of the notable charts are excerpted below.

The state’s annual appropriated budget for FY ’12 is $6.511 billion. This is the third straight year of decreased funding for state agencies; total appropriations for next year will be $250 million less than in FY ’07.Of total appropriations, 89.2 percent, or $5.811 billion, will go to the ten largest agencies in the core areas of education, health care, human services, public safety and corrections, with all the remaining appropriated agencies – 68 of them -  dividing up the remaining 10.8 percent ($699 million). This pattern of roughly 9 out of 10 appropriated dollars going to the ten largest agencies is long-standing and consistent; last year, as we showed here, the ten largest agencies received 89.5 percent of state funding.Click here for a table comparing the share of the total budget for each of the top agencies the past two years.

Our message on this year’s budget has been laid out in this blog post and this op-ed.  In short:

The agreement shows that legislative leaders and the Governor worked to minimize the damage, especially where cuts in state funding would have entailed a corresponding loss of federal matching funds…  However, this agreement is not cause for celebration. State agencies are now facing a third consecutive year of funding reductions and budget cuts, which will continue to corrode their ability to perform their core missions…. This outcome was not inevitable. Those who negotiated the budget will say they played the best hand possible given the cards they were dealt. However, we must recognize that a choice was made not to play with all the cards in the deck. Their decisions not to put serious revenue options on the table and to allow a cut in the top income tax rate to take effect seriously constrained what could be done to limit the magnitude of funding cuts.

We hope you will take a look at the FY ’12 Budget Highlights and share copies with others who may find it of interest. You can also click here for all our latest budget fact sheets and issue briefs, here for our budget blog posts, and here for our comprehensive Online Budget Guide.

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State revenue collections in March topped prior year collections for the first time since December 2008 and the official estimate for a second consecutive month, State Treasurer Scott Meacham announced today.

Collections beat the official estimate by an impressive $81.4 million, or 25.5 percent. For the third quarter of FY ’10, collections fell short of the estimate by just 2.4 percent; by comparison, for the second quarter, revenues were more than 27 percent below the estimate.

Compared to the same month in 2009, collections in March were $6.4 million, or 1.6 percent, higher. The chart below, which we have been using in recent months to put this year’s collections in a longer-term perspective,  reveals the extent to which March marks a sharp and decisive upturn in revenues. The month’s collections were back to just over 90 percent of the average collection for the same month over the past five years.  In each of the previous nine months, collections remained mired below 85 percent of their five-year average.

The upturn is important in several respects. Improving gross production and personal income tax collections indicate the economic recovery is taking hold in the state, as the Treasurer noted in his press release and a media availability I attended. The rebound will help the state repay funds that were borrowed in prior months to keep the budget balanced and ensure that deeper cuts to this year’s budget, beyond those already agreed to and implemented, will be unnecessary.  It also gives policymakers some confidence that the worst is truly over and that they have less need to safeguard against a recurrence of this year, when revenue estimates proved overly optimistic and agencies were forced to absorb repeated cuts once the new fiscal year began. This could factor into decisions about whether to use the full amount left in the Rainy Day Fund ($374 million) to shore up next year’s budget, rather than leaving a portion in reserve for FY’11 and FY ’12.

However, it must be emphasized that regardless of how strongly revenues recover during these latter months of FY ’10, it has no bearing on the amount of revenue that is available to the Legislature for appropriation in FY ’11. The final, binding revenue estimate was certified by the Board of Equalization in February.  There is no authority and no opportunity to recast the die and alter that certification based on economic conditions or economic projections.

However, changes to revenue-related laws approved by the Legislature during session can lead to a revised certification. This means that the various revenue enhancements that Governor Henry proposed in his FY ’11 budget, or those that OK Policy has recommended as worthy of consideration in our just-released issue brief, could still be used to mitigate the extent of next year’s budget cuts.  The Treasurer noted again today that without these additional revenues, no agency will be spared double-digit cuts and these will affect Oklahomans in profound ways.  Even if the improving fiscal landscape is encouraging, the progress is too little and too late to spare the Legislature the really hard decisions in the weeks ahead.

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