Archive for 2012

Flawed trigger proposal language could create serious unintended problems

by | May 21st, 2012 | Posted in Blog, Taxes | Comments (0)

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.

 

Quick Take: Rainy Day Fund basics

by | July 18th, 2011 | Posted in Blog, Budget | Comments (4)

This is a revised and updated version of a page authored by Paul Shinn from OK Policy’s Online Budget Guide

Oklahoma’s Rainy Day Fund helps protect against economic downturns. The Rainy Day Fund (formally known as the Constitutional Reserve Fund) was created in 1985 in response to a dramatic revenue downturn. It is designed to collect extra funds when times are good and to spend those funds when revenues cannot support ongoing state operations.

Money flows in to the Rainy Day Fund when revenue is more than estimated. Any General Revenue Fund collections beyond 100 percent of the estimated amount must be deposited into the Rainy Day Fund (unless it already has the maximum amount specified by the Constitution, 15 percent of the current revenue estimate for the General Revenue Fund).

The Constitution allows the Fund to be spent in four instances:

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Quick Take: March revenue collections

by | April 12th, 2011 | Posted in Blog, Budget | Comments (2)

Yesterday, State Finance Director Preston Doerflinger announced that March General Revenue (GR) collections came in 9.3 percent above March 2010 and 10.5 percent above the certified estimate.  This marked the 11th straight month that GR showed improvement over the prior year. For the 3rd quarter of FY ’11, GR was up just under 14 percent from FY ’10. This marked the strongest year-over-year growth since 2005, the peak of the last economic cycle.

All major tax categories increased in March over the same month a year ago with the exception of the personal income tax. In a press release, the State Finance Directors downplayed the importance of this drop:

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The three part test for tax credits – and the fourth part we should be asking

by | March 10th, 2011 | Posted in Blog, Taxes | Comments (4)

When we discuss government budgets, direct spending receives the most attention by far. Less noticed is the substantial expenditure on tax credits and incentives, what some have called the “submerged state.”

That inattention may have allowed several unconstitutional measures to sneak through in Oklahoma. At the end of 2010, outgoing Attorney General Drew Edmondson issued an opinion on the constitutionality of Oklahoma tax credits. The opinion was requested by Rep. David Dank, R-Oklahoma City, who chairs the House Revenue and Taxation subcommittee. An AG opinion does not have force of law–only a court can legally determine constitutionality–but it can provide guidance to lawmakers and the courts.

continue reading The three part test for tax credits – and the fourth part we should be asking

State Revenues: One-third full or two-thirds empty?

by | December 15th, 2010 | Posted in Blog, Budget | Comments (0)

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.

Quick Take: Revenue collections recovering very slowly

by | October 12th, 2010 | Posted in Blog, Budget | Comments (3)

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.

continue reading Quick Take: Revenue collections recovering very slowly

Crisis or correction? Exploring the sharp swings in state spending

by | August 26th, 2010 | Posted in Blog, Budget | Comments (0)

The recent history of state appropriations, displayed here from our FY ’11 Budget Highlights fact sheet, shows a  series of successive ups and downs:

We see that the state appropriated budget for the current year, FY ’11, is 5.8 percent less than two years ago and slightly less than the budget in FY ’07.  With revenue collections having plummeted by more than 20 percent compared to pre-downturn levels, only the  adoption of various revenue enhancements and the injection of almost $2 billion in non-recurring revenues from the federal stimulus bill, Rainy Day Fund and other sources have averted more drastic cuts to agency budgets. Still, over half of all appropriated state agencies will have absorbed funding cuts of at least 15 percent, and across state government, shortfalls have forced agencies to eliminate programs and services, reduce hours of operation to the public, cut payments to private providers, and lay off or furlough employees (our online budget presentation runs through the full story).

Some have drawn a different conclusion from these numbers.  If you look at the period prior to the downturn, you see a substantial increase in the state budget – about $1.9 billion in growth between FY ’04 and FY ’08. Doesn’t that suggest that state government grew too big, and that the current period represents more of a healthy correction that a crisis? In addition, even with the cuts of the last two years, state appropriations remain 8 percent higher than they were in FY ’06.  If the state could operate with a $6.2 billion budget six years ago, surely it should be able to manage with a $6.7 billion budget in FY ’11?

continue reading Crisis or correction? Exploring the sharp swings in state spending

The Rainy Day Fund debate: Not if, but when…and how much?

by | November 23rd, 2009 | Posted in Blog, Budget | Comments (0)

If state fiscal conditions can be likened to the weather, it’s been apparent for many months that Oklahoma is in the midst of a toad strangler of a rain, to borrow the Tulsa World’s colorful characterization. Going into the current fiscal year, the state faced projected revenue shortfalls of over $600 million.  While most agencies had their budgets cut by 5-7 percent, the use of some $640 million of federal stimulus dollars allowed the largest core agencies to receive smaller cuts or small increases, while the Rainy Day Fund was left intact. This year’s revenue collections, however, are coming in nearly 25 percent below the certified estimate. Agency budgets have been cut 5 percent each month, which has forced a growing number of agencies and school districts to reduce staff and scale back or eliminate core programs.

continue reading The Rainy Day Fund debate: Not if, but when…and how much?

Cutting into the bone: Impact of falling revenues starting to be felt

by | September 17th, 2009 | Posted in Blog, Budget | Comments (0)

Anyone hoping for signs that the state’s budget woes had already hit bottom found little to cheer in Tuesday’s  revenue announcement [PDF] from Treasurer Scott Meacham. August General Revenue (GR) collections came in nearly 32 percent below one year ago. As the chart below shows, this is the worst monthly performance compared to the prior year since the state fiscal crisis hit in January.

continue reading Cutting into the bone: Impact of falling revenues starting to be felt

August budget cuts by agency: not quite across-the-board

by | August 20th, 2009 | Posted in Blog, Budget | Comments (0)

As a follow-up to our earlier post about the announced cuts to state agencies resulting from the shortfall in July revenue collections, we have prepared a spreadsheet that shows how much of a cut each agency will receive in dollar amounts and as a percentage of the initial FY ’10 appropriation. The spreadsheet also includes total FY ’09 and FY ’10 appropriations amounts for each agency. The August cuts, totaling $21.9 million, represent 5 percent of one month’s appropriation from the FY ’10 General Revenue Fund (GRF). This latest development continues to tighten the squeeze on agency budgets.  In June, the state implemented 5 percent across-the-board cuts to agency  allocations as a result of shortfalls in last year’s revenues collections. Most agencies also saw their initial FY ’10 funding reduced by up to 7 percent, at the same time as they are struggling to meet rising employee health care and retirement costs, and in some cases, dealing with growing demands for services as a result of the downturn.

Overall, the August cut represents 0.30 percent of total state appropriations for FY ’10. However, as not all agencies are funded entirely through the GRF, “across-the-board cuts” do not affect all agencies in exactly the same way. This is shown in the graph below, which depicts the cut that the ten largest state agencies must absorb as a share of their total annual appropriation. The Department of Transportation, which is appropriated entirely out of the State Transportation Fund, has not had its funding cut at all. The Department of Education, which receives funding in part through the 1017 Education Reform Fund, the Lottery Fund, and others, was cut by just under 0.3 percent. In addition, this year’s budget included over $600 million in federal stimulus funds from the American Recovery and Reinvestment Act, which is unaffected by the state revenue shortfall. This explains why the cut to the Oklahoma Health Care Authority, which benefits from an enhanced federal Medicaid match under the stimulus bill, was just 0.25 percent of total appropriations. In total, about 30 percent of total state appropriations in FY ’10 – some $2.1 billion – came from funds other than current year GR.augustcuts-agency2

This so-called across-the-board distribution of budget cuts is the only one that can be implemented under the state Constitution and statutes without the involvement of the Legislature. But it does not necessarily reflect the ability of agencies to avoid making cuts that threaten essential public services.  If we are going to be able to navigate these revenue shortfalls in ways that cause the least harm to the health, well-being, and security of Oklahomans, we need to make sure we understand the ways these unequal cuts impact the various agencies’ ability to provide services to the people of Oklahoma. Only then can we determine if across the board cuts will be able to be endured by all agencies or if a different approach is needed.