With the doomsday clock ticking, how might the state’s budget emergency be solved?

Last week’s Supreme Court’s ruling that struck down a $1.50 per-package smoking cessation fee passed by lawmakers in May has created a genuine state emergency. Without quick and decisive action, Oklahoma faces unimaginable cuts to health care and other protections for our state’s most vulnerable citizens. However, if they can overcome partisan differences and ideological rigidity, our leaders have an opportunity to not only resolve this crisis, but to come out of it with even stronger investments in Oklahoma families and communities.

Where We Are and How We Got Here

To recall, the Legislature approved the smoking cessation fee in the final hours of the 2017 session as part of a last-ditch effort to pass a budget that filled most of the state’s nearly $1 billion budget shortfall.  After negotiations to produce a bipartisan agreement broke down, Republican leaders gambled that the smoking cessation fee, along with the partial removal of a sales tax exemption on motor vehicles, were not subject to the Constitution’s supermajority requirements for “revenue bills” and could be passed with a simple majority using only Republican votes.

The smoking cessation fee, which was set to take effect August 24th, was expected to generate $215 million for the FY 2018 budget. With the exception of $1 million directed to the ABLE Commission for tobacco enforcement, the revenue was allocated to just three agencies: $69 million to the Department of Human Services (10 percent of the agency’s total appropriation); $70 million to the Oklahoma Health Care Authority (7 percent of the agency’s total appropriation); and $75 million to the Department of Mental Health and Substance Abuse Services (23 percent of the agency’s total appropriation). The four agencies affected by the Court’s ruling have been instructed to submit revised FY 2018 budgets removing those funds. 

Without quick legislative action to restore the lost funding, the consequences will be catastrophic. Even with the tobacco revenue, the initial state budget was “massively underfunded,” in the words of then-House Appropriations Chair Leslie Osborn. The Department of Human Services has already been forced to enact $30 million in cuts to critical programs, including senior nutrition services, in-home support services for those with severe disabilities, foster care provider payments, and child care subsidies for low-income working parents. Additional cuts would be devastating to health care and human services providers and the populations they serve.

The Oklahoma Hospital Association projects that due to the loss of federal matching funds, cuts would total close to $520 million. As this article from The Oklahoman makes clear, the impact of further rate cuts and limits on services would be especially devastating for rural health care providers — including hospitals, nursing homes, and mental health centers — in places where accessible care is already hard to find.

What Happens Now?

In response to the Court’s ruling, Governor Fallin quickly made clear that she intends to call legislators into special session to address the budget, stating that “these agencies and the people they serve cannot sustain the kind of cuts that will occur if we do not find a solution.” Once special session is called, and assuming that the Court does not also strike down the motor vehicle sales tax bill, we can imagine four possible options being considered:

  1. Tobacco Plus: Ideally, Republican and Democratic leaders could come together in support of a grand bargain that includes a tobacco tax increase and tax proposals that Democrats have promoted, especially an increase in the gross production tax. Such an agreement was nearly reached in May, but fell short with Democrats demanding that the initial gross production tax be raised to 5 percent and Republicans refusing to go higher than 3 or 4 percent. If agreement could be reach on a “tobacco tax plus” plan, it could provide additional revenues beyond the $215 million from the smoking cessation fee that could be used to reverse cuts to social services or provide teachers a raise (The Save our State coalition has a detailed blueprint of revenue options and spending priorities).
  2. Tobacco Only: The Legislature can take another try at getting supermajority support for a straight $1.50 per-pack increase in the cigarette tax. Republican leaders tried passing tobacco tax bills the past two sessions, but most House Democrats withheld their support in the absence of additional revenue measures, such as an increase in the gross production tax or a higher top income rate. With the doomsday clock ticking, Democrats would be under even greater pressure to support a straight tobacco tax increase, but they would still be unlikely to approve a stand-alone increase in a tax that is seen as regressive and that ignores the state’s structural budget issues.
  3. The 51 Percent Solution: In the absence of a bipartisan agreement, Republican leaders could again try to approve new revenues that need only a simple majority. If the Court rules in the motor vehicle sales tax case that eliminating a tax exemption does not constitute a revenue bill, there are a few major tax breaks that could be repealed to raise significant revenue, including eliminating the capital gains exemption on the sale of Oklahoma property and limiting itemized deductions. The Legislature could also look at expanding the sales tax to some group of services, although it’s not clear that could be done without a supermajority.
  4. Spreading the Pain: If no agreement can be reached on new revenues to fill the hole created by the cigarette tax being struck down, lawmakers could be asked to pass a new budget that spreads the additional $215 million shortfall more evenly across state agencies. If applied proportionately, the full shortfall would equate to 3.1 percent cuts for all agencies, which is big enough to cause substantial hardship to Oklahomans, especially coming on top of multiple rounds of cuts in recent years.

Admittedly, doing nothing in special session and letting the three health agencies bear the full brunt of cuts is another possible outcome, and one that some Capitol observers see as favored by some current leaders. It is up to all those who would be harmed by that doomsday scenario, and all of us who care about the health and safety of our family members, neighbors, and communities, to inform state leaders that doing nothing is unacceptable. Lawmakers have good solutions to this crisis if they have the will to enact them.

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Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

3 thoughts on “With the doomsday clock ticking, how might the state’s budget emergency be solved?

  1. 5) Part of me wants the state to pass an even higher $2 per pack tobacco tax increase. There is a point of diminishing return because every increase comes with a corresponding number of people who stop smoking or start getting their cigarettes from Indian smoke houses. Although the Indian smokeshops usually split the tax 50/50 with the state, the other loss of tax revenue will hurt convenience stores and decrease our general tax revenues. But, it would be a greater incentive for people to stop smoking and hurt the tobacco companies for the lawsuit they passed.

    Are their any calculations that show how much revenue has been lost the last two years because Dems and Repubs couldn’t agree on increasing the tobacco tax? I would guess at least $430 million.

  2. Just about everything the legislator is trying to do will impact individuals, what about business? The gross production tax increase will impact the oil industry but 3 or 4% will hardly be noticeable. Why not 10 or 12% with a promise to roll back in the future when economy better?
    What about the casinos? Collect a tax on food and drinks with a similar promise. Businesses and Casinos can’t function with uneducated people. What about a 2% education tax on gross payroll? A business with an annual payroll of $200,000 would pay $4000 which could be paid on income tax return. As long as the money actually goes to education I don’t believe businesses will mind.
    Our legislators must get creative, try something new and take care of their constituents not the PACs.

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