Lawmakers began the year promising large, immediate cuts to the income tax, but their hopes soon collided with budget reality. With state funding already falling behind Oklahoma’s needs in many areas, legislators have found no easy way to pay for income tax cuts, whether by eliminating tax preferences, reducing services, or raising other taxes. Meanwhile, new obligations are piling up, like the $100 million per year that will be needed to reform the child welfare system.

Even so, a significant danger remains that we will find another way to cripple our state’s finances. Some legislators are pushing an automatic trigger that would ratchet down the income tax any time state revenue grows by a certain percentage.

continue reading The terrible thing about triggers

On April 5, OK Policy sponsored a forum of leading Oklahoma economists, economic developers, and budget experts to discuss plans to reduce or eliminate the state income tax.  The eight speakers exposed fundamental flaws in the research being used to justify eliminating the income tax, explained what’s really needed for sustained economic growth in Oklahoma, and set out  the dangers that further tax cuts pose to our fiscal stability and economic prosperity. We’ve compiled a 10-minute highlight reel, embedded below, with clips from each of the speakers [click here for the transcript].

You can also watch video of the full forum, download the speakers’ PowerPoint presentations, and find supporting materials from the Economist Forum page. For all of our fact sheets, issue briefs, news coverage and other materials from the income tax debate, please go to the tax reform information page.

View other clips from OKPolicy’s Watch This video series:

• Fighting Hunger, Feeding Hope
• The Economy Bowl
• What is an IDA?
• Elderly parole
• Long term unemployment, 1967-2011
• Packed Oklahoma prisons, rising costs

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.

continue reading Guest Blog (Scott Meacham): Rural and Small Business Credits are bad tax policy run amok

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.

continue reading Guest Blog (Tom Adelson, Scott Meacham & Preston Doerflinger): Oklahoma tax credit is subsidizing out-of-state businesses

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.

continue reading Legislative action on pensions shores up system, defuses rhetoric

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.

continue reading FY '12 revenue certification: It still adds up to more hard times

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.

continue reading Play it again: Why government can't be run more like a business

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