NOTE: This post was initially based on preliminary budget numbers, and it was updated on 5/27/21 to reflect final FY 2022 budget numbers.
More than 100 days into the 2021 legislative session, and with only two weeks remaining, Oklahoma legislative leaders introduced the state budget for FY 2022, which starts on July 1. Most of the allocations can be found in House Bill 2900, which passed out of both Senate and House committees on May 17 and is quickly working its way through the legislative process, with little or no opportunity for meaningful input from other legislators or members of the public.
The $8.3 billion budget represents a modest increase from last year’s pandemic low. It makes some key investments in core services, such as fully funding Medicaid expansion and restoring the refundability of Oklahoma’s Earned Income Tax Credit (EITC). However, rather than trying to change Oklahoma’s overall trajectory through smart spending choices, lawmakers enacted tax cuts that will largely benefit out-of-state corporations, high-income households, and special interests. Addressing issues that would help everyday Oklahomans will take bold investments rather than short-sighted tax cuts.
Revenues continue to fall
The $8.3 billion budget is a seven percent increase from last year’s pandemic-related cuts for the current budget year and a two percent increase when compared to FY 2020. At first glance, it appears that Oklahoma has modestly increased appropriated dollars in recent years.
However, in reality, appropriations have decreased by 23 percent over the last two decades when accounting for inflation and population growth. The state has cut spending during each recession and then increased spending during subsequent recoveries, but never to the same level as before.
This budget makes a few important investments
Though the state budget has shrunk over time, lawmakers are making some thoughtful and necessary investments this year. Voter-mandated expansion of Medicaid will be funded permanently through a mix of federal funds and a phased increase in the SHOPP fee, a fee paid by hospitals. This long-awaited program will bring significant health and economic returns to our state.
Next year’s budget also increases the state’s investment in education by $173 million (5.7 percent) to $3.16 billion. Of this, $60 million is dedicated to textbooks, a significant increase over recent years. This appropriation also provides long overdue funding that will require schools to meet the maximum class size limits for kindergarten and first-grade classes. In 2020, we still lagged behind all states in our region for per pupil funding, and it will take years of targeted investments like these to fix this problem.
After five years, the lowest-income working parents will once again receive the full value of the Oklahoma’s EITC. This credit for working Oklahomans was made nonrefundable in 2016, which cost low-income families an average of $121 annually. This year’s budget restores refundability, meaning any amount left over after an individual’s tax bill has been paid will be refunded to the taxpayer. The amount of the EITC still remains at five percent of the federal credit, lower than all but three other states.
The budget invests in broadband services through a sales tax exemption for providers. It is essential to build out the state’s broadband network to attract businesses and home-based workers, provide access to services regardless of income, and support education.
Leaders also announced that they set aside $850 million for savings to replenish rainy day accounts that were heavily tapped for the current year’s budget when lawmakers spent down more than $750 million last session. This substantial increase in savings will leave a record balance of $1.1 billion in savings, which should be more than sufficient to protect essential services in coming economic downturns.
Tax cuts come at the expense of all Oklahomans
In addition to restoring refundability of the EITC, lawmakers reduced rates on the state’s individual income tax by one-fourth of a percentage point. When fully implemented in FY 2023, this reduction will cost $236 million in state services (roughly a three percent budget cut), with half of the savings going to those making more than $100,000 per year. The top rate, which applies to income over $30,000 for a family of four, will decline from 5 percent to 4.75 percent. In 2000, the state’s top individual income tax rate was seven percent. Repeated cuts since then have had no impact on Oklahoma’s economy, but has significantly reduced the amount of revenue available for lawmakers to invest in vital programs and services. The supermajority requirements of State Question 640 will make it very difficult to reclaim this lost revenue when needed in the coming years.
The budget also reduces the state’s corporate income tax from six percent to four percent of Oklahoma profits, at a cost of $110 million every year. This cost will be a net loss to the state’s economy, because most of the savings to corporations will end up out of state in the form of dividends to shareholders and perhaps wage increases to employees outside Oklahoma.
Too many possibilities went unexplored in favor of these tax cuts this session. A request to add school counselors to move toward the recommended counselor-student ratio was again left out of the budget. This budget continues to inadequately fund our courts, forcing them to continue relying on unjust and unreliable fines and fees to operate. Lawmakers failed to fulfill their duty to invest in rehabilitative services as required by State Question 781. And we again failed to meaningfully invest in providing services to the 5,758 Oklahomans who wait for disability services an average of 13 years. We can and must do better.
Better times make for a better budget, but not the best one
The environment for budgeting was far better this year than last, and lawmakers took advantage of the turnaround. They restored funding for major agencies and made important commitments to providing health insurance for those who need it most, helping low-income workers, and educating our children. However, our state’s needs remain great. The proposed tax cuts and incentives this year mean that, at best, we’ll delay our ability to address these needs; at worst, it means we’ll be cutting services again too soon when the next economic downturn hits.
Paul Shinn, Budget and Tax Senior Policy Analyst, contributed to this article.