Note: This is an updated and expanded version of a column that ran in the Journal Record.
Faced with a $611 million budget shortfall, elected leaders have many tough decisions to make. But one decision should be easy: halting a tax cut that was never meant to take effect in these conditions.
Lawmakers approved the quarter-point drop in the top income tax rate, from 5.25 to 5.0 percent, last session in SB 1246. But since they knew they’d be unable to balance this year’s budget if the tax cut took immediate effect, they deferred it a year and made it contingent on revenue being back to prior year levels. That way, if revenues were falling, the tax cut would be delayed.
When the tax cut passed, House Speaker Jeff Hickman commented, “This measures provides a responsible means to lower the tax burden on our citizens, while making sure there is sufficient revenue growth to fund core government services.” (emphasis added)
Yet somehow, we’ve ended up in the precise situation that legislators who crafted and supported last year’s bill promised to avoid.
SB 1246 was written so that the tax cut would kick based on a convoluted formula: if the state’s December 2014 revenue projections estimated that fiscal year 2016 revenues would be equal to or greater than the February 2013 revenue estimate for fiscal year 2014, then the tax cut would go into effect on January 1, 2016. Back in December, the revenue estimate was just high enough to trigger the tax cut. But by February, revenue estimates fell sharply due to the economic slowdown associated with plunging oil prices. Next year’s tax revenues are now projected to be $240 million below the benchmark set in SB 1246 for triggering the tax cut. But the tax cut trigger, once tripped in December, cannot be undone without legislative action.
We now find ourselves in a position akin to a family that decides it will head off to the beach on Sunday if the Saturday evening forecast provides for only a slight chance of rain. It’s now Sunday morning, it’s raining steadily, and the revised forecast shows 100 percent chance of heavy storms. But we’re going to the beach anyways because we tied ourselves to last night’s mistaken forecast.
The cut to the top income tax rate will provide minimal benefit to all but the wealthiest Oklahomans. The average middle-income household will see its taxes lowered $31 a year, or $2.60 per month. Forty percent of households will get no benefit at all. Yet the cut will add some $50 million to the budget hole for the upcoming fiscal year and $150 million in 2017, when out budget outlook is likely to look equally grim.
The tax cut is by no means exclusively responsible for the budget shortfall and halting it will not make the shortfall disappear (for our full set of proposals for addressing the shortfall, click here). But allowing the cut to proceed needlessly digs us deeper into a hole and will result in more severe budget cuts and more reliance on one-time revenues. It will mean less funding for public schools at a time when we face severe teacher shortages and less funding for corrections when our prisons are critically understaffed. It will mean that we must slash funding further for struggling community health centers and medical providers who serve the Medicaid population. It will mean even longer waiting lists for our family members and neighbors with developmental disabilities and treatable mental illness. It will mean larger tuition increases for colleges and universities, and even greater reliance on fees and fines across state government. How can any of this be justified for a $31 tax cut?
Politics makes this tax cut hard to stop. The House of Representatives already defeated one amendment to block the tax cut on a straight party-line vote. But Oklahomans need to tell their legislators that they still have a chance to do the right thing, and they will be held accountable if they don’t.