This year, Oklahoma lawmakers appropriated $10.68 billion to the state budget for Fiscal Year 2023, which begins on July 1, 2022. The FY 23 state budget includes some long-awaited investments in areas like access to mental health care and reducing the 13-year wait for services for individuals with developmental disabilities. It also, however, includes almost a billion dollars for corporate tax incentives and economic development. Lawmakers also missed crucial opportunities to invest in public education.
No large revenue reductions made it into the FY 23 budget
Ultimately, no broad-based tax cuts were passed and signed into law, which will protect state revenues when revenues return to normal levels in coming years. The Legislature passed Senate Bill 1075 to repeal the 1.25 percent sales tax on vehicle purchases, which would have cost the state $188 million annually. Similarly, lawmakers passed House Bill 4474 to provide direct rebate checks to those who file an income tax return, costing $181 million. Both of these provisions were vetoed by the governor, and the vetoes were not overridden by the Legislature.
Lawmakers did, however, pass several smaller tax breaks and incentives, such as creating a tax credit for rural capital investments (capped at $15 million annually) and new rebates and incentives for oil and gas companies (capped at $35 million annually). These tax cuts are needless continuations of Oklahoma’s recent trend of lessening the tax burden for corporations and Oklahoma’s wealthiest residents, while providing little financial relief for everyday Oklahomans.
Throughout the majority of the legislative season, lawmakers were considering larger cuts to the personal income tax, the corporate income tax, and the grocery sales tax. In the end, none of these revenue reductions were ultimately passed this session; these or similar proposals could still be resurrected during future special or regular sessions. Each of these options would have cost the state significant long-term revenue:
- a 0.25 percent decrease in personal income tax rates — as proposed in House Bill 3350 — would have cost the state around $230 million annually when fully phased in;
- a full phase-out of the corporate income tax — as proposed in HB 4358 and voted down in the Senate Finance committee — would have eliminated the revenue source entirely, which brought the state $601 million in FY 21; and
- a temporary or permanent repeal of the state portion of the sales tax on groceries — as proposed in SB 1495 and HB 33491 — would have cost $305 million annually.
Legislators were right to avoid cuts to the personal and corporate income tax, as they would have overwhelmingly benefited wealthy Oklahomans and out-of-state taxpayers. None of the three proposals were targeted enough to make a true and fair impact on low- and middle-income Oklahomans.
As part of the budget, legislators made several one-time revenue allocations
Taken together, several bills — all passed in the final days of session — represent the $10.68 billion dollar FY 2023 budget.
The budget includes $948 million in funding for corporate and rural economic incentives. In late April, lawmakers passed HB 4455 in an attempt to lure a large company, widely believed to be Panasonic, to build a manufacturing facility in Oklahoma as part of the “Project Ocean” economic development effort. If the company ultimately decides to build its facility in Oklahoma, it will get hundreds of millions of taxpayer dollars in exchange for investing $3.6 billion in the state and creating 4,000 jobs in the first five years. As part of the budget, HB 4454 allocates $698 million to that project. State leaders argued that an investment like this would have a “generational impact.” HB 4455 appeared and was passed in just a single week. Lawmakers should act with the same urgency in providing targeted and meaningful investment in low-income Oklahomans.
Similarly, lawmakers created the “Progressing Rural Economic Prosperity (PREP) Fund” (HB 4456) and deposited $250 million into the fund (HB 4464). Notably, neither bill contains any guidelines or requirements regarding distribution of the funds. Rural economic development initiatives may well pay off in the long run, but passing a $250 million incentive program with no clear goals or guidelines is contrary to best practices of economic development incentive design, and these bills represent another prioritization of amorphous corporations over the very real needs of everyday Oklahomans.
Lawmakers used increased funds to make some investments in Oklahomans
The FY 23 budget does make some investments that will enhance Oklahomans’ quality of life. For example, thousands of Oklahomans with developmental disabilities have long been waiting to receive home- and community-based services — some for more than a decade. This year’s budget allocates $32.5 million towards ending that waiting list and giving service providers a 25 percent rate increase. Additionally, the Department of Mental Health will have $2 million to increase services for children with acute behavioral health needs and $500,000 to conduct pilot programs providing medication-assisted treatment to individuals incarcerated in county jails.
Lawmakers left several opportunities on the table
Despite these investments, lawmakers missed several crucial opportunities. With high revenues this year, state leaders could have made generational investments. They could have provided targeted tax relief to low-income Oklahomans by expanding the Sales Tax Relief Credit, a proposal that passed out of the House but wasn’t heard in the Senate. They had the opportunity to hear HB 3526, which would have slowly increased the state’s Earned Income Tax Credit to 10 percent of the federal credit, and SB 1347, which would have created a tax credit for renters. Neither of those bills were heard in committee. Finally, lawmakers had the chance to make a sizable investment in public education, but they chose to increase the State Department of Education’s budget by just 0.5 percent, which isn’t even enough to cover the cost of inflation over the last year, perpetuating the chronic underfunding of public schools in Oklahoma.
As lawmakers continue their efforts to reduce tax burdens on Oklahomans, the most fiscally conservative approach would be focusing efforts to help Oklahoma’s low- and middle-income taxpayers who need the most relief. For example, an expansion of the state’s Earned Income Tax Credit would have provided significant relief to Oklahoma’s working poor. (The EITC can be claimed only if the taxpayer has employment income.) The credit was claimed by more than 300,000 Oklahoma filers in tax year 2018 for an average of $53 per filer. At a cost of $181 million annually, the expanded EITC proposal would have delivered an average tax credit of $650. This would have resulted in turning around circumstances for many working Oklahomans, keeping individuals from eviction, providing several weeks of groceries, or even allowing some freedom to save or invest.
Future efforts — including during the upcoming special sessions — should focus on Oklahomans who need relief most
This year’s tax changes and budget decisions covered the good, the bad, and the unnecessary. As Oklahoma lawmakers prepare for two special sessions this summer and the meanuevering for the 2023 regular session, capitol watchers should expect these and similar issues to be considered by lawmakers in the near future. It’s wise for lawmakers to remember that every cut to state revenue is very unlikely to ever be replaced thanks to State Question 640’s supermajority revenue requirements. Many of the ideas that failed to advance this session included poorly targeted, across-the-board tax cuts along with tax breaks that favored the wealthy and out-of-state companies. To truly serve the needs of Oklahomans, lawmakers next session should take their fervor for spending on incentives into their discussions on how to truly help low- and middle-income Oklahomans.
1 SB 1495 and HB 3349 were repurposed on 05/18/22 into bills concerning the special legislative session.