In addition to an immediate cut in the top income tax rate from 5.25 to 4.8 percent,  the tax plan agreed to last week by Governor Fallin and legislative leaders includes an automatic future tax cut tied tied to revenue growth. In tax year 2015, an additional cut in the top income tax rate from 4.8 to 4.5 percent would be triggered if revenues from five specified taxes grow by 5 percent.  This would result in an estimated revenue loss of $170 million.

Previously we argued that triggers are bad policy. We stated:

Proponents of triggers may try to sell this as a “responsible” way to cut taxes, but it’s the opposite. It’s an attempt to avoid responsibility by putting the tax system on auto-pilot. The result could be a wreck that everyone can foresee but no one can prevent.

These kinds of concerns led a bipartisan group of 30 prominent business and civic leaders to urge the rejection of triggers.

Regardless of the problems with triggers in principle, the specific trigger mechanism in the tax bill,  HB 3061, is particularly flawed. The bill states that in December 2014, which is mid-way through FY 2015,  the Board of Equalization will determine if FY 2014 revenues from the five identified taxes rose by 5 percent from FY 2013.  If so, the income tax rate reduction will take effect on January 1, 2015. The Legislature has no involvement in authorizing or approving the cut.

The problem with this approach is that it could lead to automatic tax cuts that will take effect even if the economy is faltering and revenue collections are beginning to fall. As long as revenues grew in FY 2014 by 5 percent compared to FY 2013, the tax cut will be triggered on January 1, 2015. But what if Oklahoma enters an economic downturn in June or September 2014? Revenues could fall below estimates in the first half of FY 2015, yet the tax cut would still kick in automatically based on the previous year’s increase.  The tax cut could create or exacerbate mid-year revenue shortfalls in FY 2015 and lead to greater budget shortfalls for FY 2016. Since the lower rate would already have kicked in, there would be no chance for the Legislature to undo the tax cut without a supermajority.

Unfortunately, there is no provision in HB 3061 that could suspend the automatic tax cut if the state’s economic or fiscal circumstances change in the period prior to the trigger taking effect. By putting the controls on auto-pilot, the result of HB 3061 could indeed be a wreck that everyone can foresee but no one can prevent.

NOTE: This post has been updated as new information becomes available

Yesterday, the Governor and legislative leaders announced agreement on a ‘joint proposal for income tax reduction and tax code simplification’. (Click here for a summary and here for HB 3061 which contains the proposal).  Here are some questions and answers addressing the main aspects of the agreement: tax rates, offsets, fiscal impact and triggers. You can see our statement on the plan here.

Question #1: What are the changes in the income tax rates?

Answer: Personal income tax rates will change in two ways. First, the top rate will be lowered from 5.25 percent to 4.85 percent as of January 1, 2013. Second, the number of brackets is reduced. Currently, there are seven tax rates, ranging from 0.5 percent on the first $1,000 of taxable income for a single individual ($2,000 for a married couple) to 5.25 percent on taxable income above $8,700 ($15,000 for married couples) (see the current brackets here). The proposal will reduce this to three brackets: 1 percent on the first $2,500 of taxable income ($5,000 for married); 3.3 percent on income between $2,501 and $7,500 ($5,001 – $15,000 for married), and 4.8 percent on all income above that. If you make over $7,500 in taxable income  ($15,000 for married), you will be in the top income tax bracket, and your income above that amount will be taxed at the top rate. Read the rest of this entry »

As reported in CapitolBeatOK, a group of 30 prominent business executives, civic leaders and philanthropists recently sent an open letter to the Governor, Speaker and Senate Pro Tem urging them not to adopt a trigger mechanism that would lead to automatic future tax cuts.  The signatories represent business leaders from both political parties, including George Kaiser, Kirk Humphreys, Tom Ward, Larry Mocha, Stacey Schusterman, Ken Fergeson, Bob Ross and Stan Lybarger.  The letter reads in full [click here to download a copy]:

An Open Letter to Governor Mary Fallin, Speaker of the House Kris Steele and Senate President Pro Tempore Brian Bingman:

As business executives and community leaders concerned with Oklahoma’s fiscal stability, we urge you to reject proposals to adopt tax trigger mechanisms that would automatically lower Oklahoma’s income tax in future years based on future growth in state revenue.

We are of diverse opinions as to whether cutting Oklahoma’s top income tax rate is the right policy at this time. However, we are all in strong agreement that this legislature should not bind the hands of future legislatures by enacting a tax trigger.

It is the responsibility of each legislature to make decisions based on the state’s needs at the time. Once tax cuts are written into law, it will be almost impossible, constitutionally or politically, to change course, whatever the situation.

Enacting future tax cuts now would especially hinder our ability to address future unforeseen circumstances, such as natural disasters or an abrupt economic downturn.  As the Oklahoman stated in an editorial, “ income tax triggers are a one-way ticket to lower taxes no matter what happens to the economy.”  University of Oklahoma President David Boren notes that, “We have no crystal ball. That is why we should examine tax and budget decisions on an annual basis. That is the conservative approach.”

Deciding tomorrow’s tax cuts today would tie the hands of future legislators, make them less accountable to their constituents, and limit their ability to make the best decisions based on the circumstances that they face.  We sincerely hope you will reject the concept of triggers that would mandate future tax changes..

Sincerely,

Bob Ross	Tom Ward	Kirk Humphreys
Mike Neal	Francis Rooney	John W. Gibson
Bill Cameron	Ken Lackey	Chet Cadieux
Henry Zarrow	Don Millican	George Kaiser
Ken Fergeson	Stacy Schusterman	Melvin Moran
Stan Lybarger	Meredith Siegfried	Becky J. Frank
Fredrick Drummond	Jody Parker	Alan Armstrong
Frod Drummond	David Adams	Guy L. Berry
Larry Mocha	Ken Levit	Robert C. Poe
Vince LoVoi	Renzi Stone	Jeff Dunn

For more on why triggers are bad policy, see our blog posts “Politicians make bad fortune tellers” and “The terrible thing about triggers“.  For full information on the tax debate, go to our Tax Reform page.

A key question in the income tax debate has been whether tax cut supporters were taking a “responsible” approach in their proposals. They have worked hard to convince Oklahomans that we can afford tax cuts without disrupting core services.

Revenue growth triggers are the latest gambit in this effort. Under triggers, automatic tax cuts would go into effect whenever revenues increase by a certain percentage. Supporters say that triggers promote fiscal responsibility because they prevent us from cutting taxes during a recession.

The word out of the Capitol is that Governor Fallin is pushing to include triggers in the final proposal that comes out of conference committee. Triggers were part of the Governor’s original plan, and they have been added by the Legislature to two other bills.

We previously discussed why triggers are bad policy in general. An examination of the specific language in these triggers reveals numerous ways that they would not protect us from cutting taxes when we cannot afford it. Read the rest of this entry »

Even assuming that we are in the early stages of what will eventually be a robust economic recovery, Oklahoma’s budget crisis is not going to end anytime soon. Revenue collections this year and next are projected to come in 20 to 25 percent below their levels of FY ’08, the year prior to the onset of the downturn. The Legislature has been able to use substantial amounts of non-recurring revenue from the federal stimulus bills and the state’s Rainy Day Fund to soften the shortfall and thus far avoid the catastrophic impact of budget cuts in the 20 – 25 percent range across the full range of state government.  However, next year’s cuts look to be substantially deeper than this year’s. After FY ’11, most or all of the non-recurring revenues will likely be exhausted. As shown in the chart below, we project that  revenue collections are likely to remain 10 percent below those of FY ’08 in FY ’12, and may not return to pre-downturn levels until at least FY ’13. Read the rest of this entry »