What’s up this week at Oklahoma Policy Institute? The Weekly Wonk is dedicated to this week’s events, publications, and blog posts.

This week at OK Policy, we interviewed Steven Dow about recent controversy at the Oklahoma Commission for Human Services.  We pointed out that state leaders can’t rely on growth revenue to fund infrastructure repair and other priorities if they continue to cut (or even eliminate) the income tax.

Former State Treasurer Scott Meacham explains on the OK Policy blog that Oklahoma’s Rural and Small Business Tax Credit initiatives end up costing the state hundreds of millions in tax revenues.  The blog also featured a post on asset-building as an anti-poverty strategy.  Our director David Blatt was a guest this week on Studio Tulsa, discussing the importance of the income tax in adequately funding state government and essential services for Oklahomans.  Oklahoma Policy Institute’s director was also quoted in two articles this week on federal income tax liability for low-income households and the role of unemployment benefits during a recession.

In the Know, Policy Notes

• Tthe Economix blog examines whether it is more cost-effective to direct resources to college students or to preschoolers and kindergarteners in order to increase college completions over the longer term.
• Researchers at the University of Colorado at Boulder discover that immigration is correlated with falling crime rates.
• Bloomberg reports on how municipalities and state agencies, including the Oklahoma Turnpike Authority, are taking advantage of historically low interest rates to refinance bond issues and save money.
• The National Employment Law Project warns that if Congress doesn’t renew extended unemployment insurance by the end of this year, we risk plunging millions into deeper financial crisis and putting yet another obstacle in the path of economic growth.
• The National Academy of State Health Policy released a paper detailing efforts by state agencies to identify and act on racial and ethnic health disparities.

Numbers of the Week

• 16.43 inches – Amount statewide average precipitation was below normal this water year (October 1-September 30), the 2nd driest year on record for Oklahoma.
• 1,865 – Number of foreclosures in Oklahoma in August, down 5.8 percent from the same month in 2010
• $31,600 – Minimum amount in salary and fringe benefits earned by a first-year Oklahoma public school teacher with a bachelor’s degree, 2011-2012
• 80.3 – Number of primary care physicians per 100,000 people in Oklahoma, compared to 120.5 nationally.  Oklahoma ranked 49th in availability of primary care physicians, 2010
• 29 percent – Percentage of Oklahoma’s K-12 children who are on their own after school, 2009

Scott Meacham is the former State Treasurer and former director of the Oklahoma Office of State Finance. He currently chairs the Oklahoma Chamber of Commerce’s Economic Development and Taxation Committee.

The Oklahoma legislature has struggled for decades with the best way to encourage capital investment in Oklahoma. Many ideas have been tried with varying degrees of success. The problem is that once the ideas are launched by the legislature, usually as tax benefits under Oklahoma’s tax code, they are all but forgotten. Tax benefits included credits against tax liability, deductions against income and, in some cases, direct payments from the State. No real processes exist to critically evaluate these programs and eliminate those that are not working. The result is that the least effective of these initiatives stay on the books and end up costing the state hundreds of millions in lost tax revenues.

The Rural and Small Business Tax Credit programs are one of the prime examples of bad tax policy run amok. The legislature launched these programs a decade or more ago with the stated purpose of encouraging venture capital investment in Oklahoma. The structure created was very complicated, with entities called Capco’s serving as a sort of investment pool where investors would make investments and receive hefty tax credits in return. The Capco would then invest the investor funds, perhaps along with borrowed money, in qualifying rural or small business ventures.

The problems started almost immediately as smart lawyers figured out loopholes and ways to provide tax benefits which in some cases exceeded the amount invested. With such lofty investor returns at the expense of state tax revenues, investors quit paying attention to the merits of the underlying investments, as they literally had nothing to lose. In one highly publicized case, the investors took their credits and no investment was even made. The State was left totally holding the bag. Read the rest of this entry »

Senator Tom Adelson is a state senator from Tulsa. Scott Meacham is the former State Treasurer and former director of the Oklahoma Office of State Finance. Preston Doerflinger is the current director of the Oklahoma Office of State Finance.

If the Oklahoma Legislature were to invest tens of millions of your tax dollars in start-up companies located out of state, how would that make you feel?  That’s basically the question Representative David Dank asked the Oklahoma Capital Investment Board (OCIB), a state public trust, during the August 25^th joint House/Senate hearing on state tax credits.

As co-chair of the Task Force for the Study of State Tax Credits and Economic Incentives, Representative Dank has held several hearings to review the effectiveness of state tax credits and incentives that are collectively costing Oklahoma hundreds of millions of dollars each year. One tax credit program that is drawing special scrutiny is OCIB.

The Oklahoma Legislature created OCIB in 1985 to attract private sector investment in Oklahoma start-up companies.  As conceived, the idea was to have the state invest in venture capital funds, whether located in Oklahoma or other states, and rely on the investment expertise of these venture capital funds to invest these dollars in Oklahoma companies.

The business model is a little more complicated.  OCIB borrows money from banks and invests these loan proceeds in the venture firms.  Banks are willing to make the loans because OCIB pledges tax credits issued by the state of Oklahoma to the bank as security for the loan.  So long as OCIB pays the loan back, the tax credits would not be sold.

OCIB thought these venture firms would earn a positive return on OCIB investments and use the profits from the investments to pay down the loan.  But things did not work out that way.  By 2005, OCIB had borrowed $31 million while the investments were worth $13.6 million.  So, OCIB had to sell the tax credits off to pay down the debt.

Who buys the tax credits? Businesses and wealthy investors who owe Oklahoma taxes.  Instead of paying state income taxes, they buy the credits from OCIB and reduce their tax bill dollar for dollar.  Since inception, OCIB has sold $27.5 million in tax credits.  That has a direct effect on the state budget.  Oklahoma has $27.5 million less to spend on core services – like roads and bridges, health, education, and public safety.

It’s an open debate on whether Oklahoma should directly invest in fledgling Oklahoma businesses.  Many states support new ideas generated within the state thru direct investment – in places like universities and institutions of higher research.  And there certainly would not be adequate capital for basic research and development without public sector involvement. Others point out that states directly favoring some types of business activity over others interferes with the allocation of capital in the private sector and raises borrowing costs for everyone else.

In fact, the authors of this article have friendly disagreement on the subject.  But we do agree on one thing – it’s simply wrong for states to gamble away tax dollars on out of state companies or to directly subsidize economic growth and job creation elsewhere.  That’s not what the people of Oklahoma elected their State Legislature to do. Read the rest of this entry »

The 2011 legislative session was marked by passage of legislation to limit lawsuit damages, restrict the collective bargaining rights of public employees and the legal rights of teachers, revamp the workers compensation system, and consolidate state agencies. Yet when asked to name the session’s biggest accomplishment, Senate President Pro Tem Brian Bingman identified an issue that largely flew under the public radar:

The biggest thing is going to have to be pension reform. The Legislature stepped up and made some tough decisions and took our pension liability from $16 billion down to $10 billion. And at the same time we’re protecting the commitments we made to the people in the system. I think that was huge.

Read the rest of this entry »

The State Board of Equalization met yesterday to certify preliminary revenue estimates for the upcoming budget year, FY ’12. These estimates will form the basis for the Governor’s Executive Budget that will be delivered in early February; the Board will meet again in mid-February to provide revised estimates that will be binding on the 2010 Legislature.

The preliminary FY ’12 estimates, developed by the Oklahoma Tax Commission and Office of State Finance, suggest that state revenue collections will continue to recover from their precipitous drop during the economic downturn, but that the recovery will remain slow and incomplete. As we see in the chart below, FY ’12 collections to the General Revenue (GR) Fund are expected to be $5.103 billion. That is an increase of  $500 million, or 10.9 percent, from FY ’10 but some $850 million, or 14 percent, below the pre-downturn peak of FY ’08. Next year’s collections will remain considerably below levels of six years ago, even as the cost of providing services rises due to inflation, population growth, and increased caseloads.

Read the rest of this entry »

Yesterday’s announcement of state General Revenue (GR) collections for the month of November showed that the state continues to recover only slowly and partially from the depths of the downturn. Outgoing State Treasurer Scott Meacham chose to highlight that November collections this year were 9.3 percent above last year’s; for the first five months of the fiscal year, FY ’11, GR is up 6.3 percent from FY ’10. But as we see from the chart, FY ’11 collections remain substantially below pre-downturn levels. Year-to-date GR is 24.0 percent below the same period of two years ago (FY ’11) and remains below levels of six years ago.

As we discussed in our recent forecasting brief, it is going to take a long time, likely several more years, before revenues recover to nominal pre-downturn levels under current policies.  Facing this extended period of sluggish revenue collections, the need for a revenue structure that is capable of supporting the cost of core public services will be increasingly vital and urgent.

Note: As the economy continues to struggle and revenue collections remain well below pre-downturn levels, we thought this a good time to repost a blog we first ran in January of this year challenging an argument we continue to hear about the need to just keep cutting public budgets.

Last week I attended the Stand Up for Seniors advocacy forum which focused on the impact the state’s worsening economic and fiscal situation is having on programs serving seniors. State Treasurer Scott Meacham was among the elected officials who addressed the gathering. In laying out the budget challenges we are facing and the limited tools at our disposal for mitigating the severity of budget cuts, Treasurer Meacham shared a conversation he had a couple of months back with a friend who expressed frustration at the inability of state government to operate more like a business. Businesses in the downturn are responding by cutting back, reducing expenses and payroll, and simply doing whatever it takes to get through until the economy recovers. Why, asked his friend, can’t state government just do the same?

The Treasurer’s response, which he echoed in this Oklahoman article,  is worth sharing and elaborating upon, because it gets to the very heart of why the state fiscal crisis is so difficult and why this matters so much. Businesses are driven by supply and demand, and by the obligation to maximize profit for shareholders. To use the proverbial private sector example, if demand for widgets declines in a downturn, then Acme Widget company will produce fewer widgets. This may mean laying people off or even going out of business, which will have an unfortunate impact on employees, their families, and communities.  But there is no obligation on any widget maker to  produce more widgets than can be profitably sold. Read the rest of this entry »

The latest revenue collections announced today (PDF) by Treasurer Scott Meacham continue to confirm that while revenues are recovering from their precipitous drop during the worst of the downturn, the recovery is slow and far from complete.

September’s General Revenue (GR) collections totaled $459.7 million, which is $25.9 million, or 6.0 percent, above last year and $7.5 million, or 1.7 percent, above the certified estimate. For the now-completed first quarter of FY ’11, collections are running $74.8 million, or 6.8 percent, ahead of last year, and $45.4 million, or 4.0 percent, above the certified estimate that formed the basis of this year’s appropriations.

As can be seen from the first chart, monthly collections have come in between 5 and 10 percent above the same month for the prior year in four of the past five months. While this shows that a recovery is under way, the gains have been far less than we might hope given the magnitude of the drop between January 2009 and February 2010.

Read the rest of this entry »

Treasurer Scott Meacham today announced that General Revenue (GR) collections for the first month of the new state fiscal year, FY ’11, came in 9.9 percent above the prior year and 11.9 percent above the official certified estimate. The sales tax and corporate income tax saw the strongest growth compared to July 2009, while personal income tax collections were off by 0.1 percent from a year ago, likely reflecting the persistence of weak employment numbers.

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. Read the rest of this entry »

Today’s announcement of the monthly General Revenue collections brought incontestable good news:

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. 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 »

There is definitely something in the air. Over the past several weeks, there has been a heavy flurry of attention paid to the state’s system of tax expenditures, the array of over 450 exemptions, credits, deductions and the like that allow taxes not to be paid when they otherwise would. Yesterday, we released an in-depth issue brief which we titled “Let There Be Light: Making Oklahoma’s Tax Expnditures More Transparent and Accountable.” In our press release, we stated:

While the merits of granting tax preferences can be debated as a matter of principle, the reality is that they are unlikely to be abandoned entirely. There is a chance now to build on important progress made in recent years in increasing disclosure and scrutiny of tax expenditures to really get a handle on which tax breaks are worthwhile and effective, and which are wasteful giveaways.

Read the rest of this entry »