We found that during the most recently completed budget year, FY ’10, Oklahoma collected $335.4 million from these three revenue sources. This is an increase of $12.2 million, or 3.8 percent, from FY ’09, reflecting a clear slowdown in revenue growth from these sources compared to prior years. Some key findings:

• Gaming revenues continued to grow in FY ’10, reaching $132.1 million, an increase of $13.1 million, or 11 percent from FY ’09. Of total gaming revenues, 89.5 percent ($118.2 million) came from tribal gaming and 10.5 percent (13.9 percent) from gaming terminals at racetracks that were also authorized by SQ 712.  However, the growth in tribal gaming revenues slowed noticeably in FY ’10, which likely reflected both the weak economy (nationally, total casino gaming revenues and tribal gaming revenues fell in 2009) and the state gaming market approaching saturation;
• Tobacco revenues declined slightly in FY ’10, falling by 2 percent to $133.3 million. Of total revenues from the new tobacco taxes approved in 2008, $102.6 million was collected by non-tribal retailers and $30.7 million by tribal retailers. Tobacco sales have actually fallen quite sharply the past two years, from 313.8 million packs in FY ’08 to 262.8 million in FY ’10. Revenues have managed to hold steady due to the success of various measures aimed at curtailing the purchase and resale of cigarettes taxed under a tribal “exception rate” of just 5.75 cents per pack. Instead, most tribal tobacco sales are now taxed at a rate of 85.75 cents or 57.5 cents per pack, compared to the rate of $1.03 per pack for sales by non-native retailers. (See our discussion of this issue in this blog post from last fall);
• Net proceeds from lottery sales were $70.0 million in FY ’10, an increase of less than $1 million from FY ’09. Since 2005, lottery sales have remained remarkably consistent, coming in every year between $69 million and $72 million, regardless of the ups and downs of the economy, the addition of new lottery games, and growing competition from casinos and the new state lottery in Arkansas.

Overall, the promise of these revenue streams to provide additional revenues to help fund education and health care seems to have been fulfilled. However, as we stressed in this paper in 2008, while the new revenues generated by these so-called “sin taxes” have boosted funding for education and health care, these gains have been more than offset by the revenue impact of cuts to the personal income tax approved by the Legislature in the mid- and late-2000s. This trade-off of increased “sin taxes” for cuts to the income tax has placed more of the responsibility of paying for public services on the shoulders of lower-income taxpayers. And as we reach the point where revenue growth from the new revenue streams is slowing, and may soon even begin to decline, this is yet another factor contributing to the fiscal gap between the cost of services we are committed to supporting and the revenues we generate to pay for them.

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Although one must be careful of drawing conclusions based on a single month, July’s collections confirm that revenues are continuing the upswing seen in recent months and should further dispel fears that the state will face a third consecutive year of revenue shortfalls requiring mid-year cuts.  It now seems far likelier that the economic projections made in February that formed the basis of this year’s budget underestimated the speed and strength of the economic recovery. If GR continues to come in above 100 percent of the estimate over the course of the full year, the surplus will go to replenishing the Rainy Day Fund.

At the same time, it’s important to recognize that revenues are far from having fully rebounded from the downturn. Here’s a look at July GR over the past 11 years:

This year’s collections remain 19 percent below the pre-downturn peak and slightly below collections of five years ago. This situation contrasts with the recession of 2002-03, when revenues were able to surpass pre-downturn levels within one year. We still expect that it will be FY ’13 before state revenues return to where they were prior to the recession, without adjusting for inflation or population growth. Given the heavy reliance on non-recurring revenues from the federal stimulus bill, Rainy Day Fund and other sources, the challenges the next Legislature and Governor will face in developing a budget that avoids further cuts and begins to restore services to pre-downturn levels are still likely to be substantial.

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We’ve now gone further back to see where the drop in state revenue collections leaves us. The numbers are pretty striking:

Last year’s GR collections were the lowest since FY ’04 and were lower than nine year earlier, in FY ’01, the year preceding the last recession-induced fall in tax collections.

The drop in GR collections reflects two developments in addition to the economic downturn. One is the effect of the permanent income tax cuts enacted between 2004-06, which have dampened revenue collections by several hundreds of millions of dollars annually. In addition, the Legislature has opted in recent years to apportion a growing share of tax collections to specific purposes, including roads and bridges, higher education scholarship, and the teachers’ retirement system.  We calculate that these apportionment decisions have reduced General Revenue collections by $300 million in FY ’10.  Yet even if these amounts were added to this year’s totals, FY ’10 collections would be a mere 4 percent above FY ’01. By contrast, compared to 2001, the Consumer Price Index is over 22 percent higher and the state’s population has grown by at least 6.5 percent. The state’s overall economy, as measured by state personal income over the past four quarters, is almost 50 percent greater than it was nine years ago.

This chart, along with one that looks at annual GR collections by major tax for the past five years and includes projected collections for FY ’11, is part of the revised budget outlook presentation that you can view online or download as a PDF. We also have prepared an updated 2-page fact sheet of the main budget numbers and policy points.

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As can be seen in this chart, state personal income remains slightly below pre-downturn levels. Oklahoma’s  state personal income of $131.2 billion in the 1st quarter was 99.2 percent of the amount in the 3rd quarter of 2008 (amounts are seasonally adjusted at annual rates).  While state personal income for the nation as a whole declined more sharply than in Oklahoma during the worst of the recession, it, too, has recovered to just over 99 percent of pre-downturn levels.

While personal income remains slightly below pre-downturn levels, state revenue collections continue to fare far worse. A new report from the Rockefeller Institute of Government shows that for the nation as a whole, state tax revenues grew by 2.5 percent in the first quarter of 2010, marking the first growth in year-over-year quarterly revenue collections since the third quarter of 2008. However, in Oklahoma, data we compiled based on the monthly revenue reports from the State Treasurer’s Office showed revenues for January-March 2010 (Q3 of FY ’10) remaining 6.8 percent below one year ago. More strikingly, quarterly revenue collections for January – March were a full 22.3 percent below collections for the same quarter in 2008. (Data now in for the April – June quarter shows revenue collections up 2 percent from one year ago but down 23 percent from two years ago).

The Rockefeller Institute report noted that, “Tax revenue is highly related to economic growth, but there is significant volatility in tax revenue that is not explained solely by one broad measure of the economy.” With unemployment rates still high, natural gas prices still low, and retail sales still weak, it looks like it’s going to take quite awhile longer for the state’s revenue recovery to catch up to the recovery in state personal income.

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However, comparing collections to last April, when the worsening economy had sent revenues plummeting, only tells part of the story. The graph above compares April’s GR to the average April GR over the past five years; we find that this month’s collections are only 83 percent of their historical average. Collections would have had to hit $618 million – or $106 million more than actual – to be back to their five-year average. Although last month’s collections suggested that the rebound to pre-downturn levels might happen quickly, it now seems more likely that March’s strong revenue performance was somewhat anomalous and that the recovery will take longer.

So what does this mean for the budget for next year that is still being negotiated as the legislative session approaches its scheduled adjournment in under three weeks? Almost nothing. We’ll repeat the reminder we provided last month, that these monthly revenue collections have no direct impact on the amount of revenue available for appropriation for FY ’11:

… 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.

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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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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.

Still, the revenue numbers provide far from unambiguous signs that the state’s fiscal situation has turned a corner. Not only were February’s collections 7.3 percent below those of a year ago, they were only 76.1 percent of the average collections for the same month over the five prior years. By this measure, February actually stands as the worst month of the entire downturn, as shown in the table above. On the other hand, a good part of this month’s poor performance compared to prior years was in the “other sources” revenue category, which includes investment earnings and miscellaneous taxes, fees, and charges. General Revenue from “other sources” was a full $23.8 million below the month’s estimate for February and $17.9 million below last year. It’s unclear at this point what accounts for the weakness in this revenue category, but it may relate more to a quirk in the timing of collections and transfers  than actual economic conditions.  Had “other sources” come in at the estimate, February 2010 revenues would have reached 84 percent of the five-year average and provided much clearer evidence of a genuine upswing.

As an indicator of how severe this revenue downturn has been and how long and difficult the recovery is likely to be, this year’s February collections are 30 percent below their peak of four years ago — and lower than any year since at least FY 2001.

Finally, while it is not fully clear whether revenue collections are now recovering, the fact that February’s collections hit the estimate does mean that this year’s General Revenue shortfall may not end up quite as enormous as previously assumed.  The shortfall, which was projected by the Board of Equalization last month to reach $940 million by year’s end, now stands at $863 million, basically unchanged from a month ago. Should the final four months of the fiscal year look like this month, it might actually allow the state to enter the next fiscal year with a small amount of cash left in the bank.

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Meacham said January’s numbers are somewhat encouraging, even though they remain below prior year collections and the official estimate.

“We’re not out of the woods yet, but we are seeing some positive movement,” he said.

Unfortunately, we can’t share the Treasurer’s optimism. It is true that compared to the last 12 months, January’s collections came up considerably less short compared to prior year numbers and to the certified estimate. But the improved performance compared to the same month last year (January 2009) reflects that we are now a full year into the revenue downturn, which means that comparisons are to a deflated base.  Meanwhile, the improved performance compared to the estimate is largely due to gross production tax estimates for January being only $12.8 million, compared to an average estimate for the first six months of the year of $54 million. If January’s gross production tax revenues had been estimated at the same amount as December’s estimate ($45.4 million), January’s collections would have been 27 percent below the estimate, along the lines of previous months.

In order to control for some of these factors, we pulled together the data comparing monthly revenue collections for each of the past 19 months to the average collections for the same month over the five previous years.

January’s collections of $410.4 million were just 77.0 percent of the average of $531.2 million over the five years between FY ’04 – FY ’09. By this measure, January actually stands as the second worst month of the downturn behind only September 2009 (76.5 percent), faring slightly worse than the three prior months.

There is no single definitive way to interpret these numbers. But all who were holding their breath in hopes that January’s collections would provide a clear signal that the long-awaited revenue recovery is now clearly underway must keep waiting to exhale.

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