End of Session Round-Up: A quiet year in taxes

See all of our end of session round-ups: Taxes | Budget | Economic Opportunity | Health Care | Education | Criminal Justice

Before this year, the fiercest battles of recent legislative sessions centered on tax policy, as lawmakers grappled with huge budget shortfalls and debated how to generate enough revenue to stave off deeper budget cuts and direct more dollars for education. This debate culminated in the passage in 2018 of HB 1010xx, which generated several hundred million dollars in new revenue by raising taxes on cigarettes, fuel, and gross production.

Thanks to last year’s revenue increases and a strong economy, fueled especially by booming oil and gas revenues, lawmakers entered the 2019 session looking at a large budget surplus. It was clear from the start that tax policy would be far less prominent and contentious than in past years. Still, OK Policy included several tax policy items as part of our 2019 legislative priorities, and the outcomes were mixed.

Protecting the Revenue Base

In recent decades, when Oklahoma has emerged out of economic downturns and begun to enjoy increased revenue collections, it has not taken long for lawmakers’ attention to turn to tax cuts.  Once the state began to pull out of the recession of 2001-02, Gov. Brad Henry and legislative leaders negotiated a set of deep and permanent tax cuts that led to an annual revenue loss of over $1 billion, with the full impact only taking effect after the Great Recession hit Oklahoma in 2009. Similarly, as soon as Oklahoma began to recover from the depths of the Great Recession, Gov. Mary Fallin and Republican lawmakers began pushing major tax cuts. Ultimately a quarter-point cut in the income tax took effect just as energy prices were plummeting and the state was facing nearly a $1 billion budget shortfall.

It appears that our current crop of elected officials have gotten wiser about the need to protect the state’s revenue base, especially after the gigantic battle that was needed to muster a supermajority for last year’s tax increase. Even with a large budget surplus to work with, there were no proposals put forward to cut tax rates this year. Of the numerous revenue-raising measures the Legislature enacted in recent years to address budget shortfalls, the only one lawmakers considered repealing was the new 1.25 percent sales tax applied to motor vehicles. Ultimately, HB 2355 (Rep. Caldwell and Sen. David), a bill to exempt trucks and other heavy vehicles from the sales tax that would have led to an annual revenue loss of over $50 million, died in conference committee. Other bills with a substantial revenue impact that made it part-way through the process were SB 407 (Sen. Rader and Rep. Echols), which would have expanded the Oklahoma Equal Opportunity Education Scholarship tax credit; HB 2502 (Rep. McCall and Sen. Montgomery), which would have given teachers a $1,000 tax credit for school supplies, and HB 2667 (Rep. Wallace and Sen. Paxton),which would have exempted gambling losses from the current $17,000 cap on itemized deductions.

Although no bills with a substantial revenue impact passed this session, several measures that expanded existing tax breaks or created new ones were enacted. In total these tax breaks are projected to have less than a $10 million revenue impact in FY 2020, but that amount will increase in future years as different provisions take effect. The new or expanded tax breaks include:

• SB 200 (Sen. Thompson and Rep. Dunnington) increases the annual cap on the Film Enhancement Rebate Program from $4 million to $8 million. It also makes payments from the Quick Action Closing Fund available for films that qualify as “high-impact productions”, which has an unknown potential cost.
• HB 2759 (Rep. Wallace and Sen. Thompson) creates an income tax credit for individuals employed as qualified software or cybersecurity employees. The credit, which takes effect for FY 2021, will be capped at $5 million.
• HB 1262 (Rep. Hilbert and Sen.Leewright) expands the sales tax exemption for certain prosthetic devices and durable medical equipment. The tax break is expected to cost $1.6 million in FY 2020 and $1.8 million in future years.
• SB 1078 (Sen. Thompson and Rep. Wallace) provides an income tax credit to qualifying doctors practicing in rural areas. The credit is capped at $1 million annually.

Ending the Capital Gains Tax Break

Although we anticipated that lawmakers would have little appetite for new revenue this year, we included ending the capital gains tax break as part of our legislative agenda. This tax break costs the state over $100 million annually and cannot “be credibly shown to have significant economic impact or a positive return on investment for the State,” according to the policy experts who review Oklahoma’s tax incentives. Several bills to repeal or limit the capital gains deduction were introduced this year but none was allowed a hearing in committee.

Revisiting the Supermajority Requirement of State Question 640

In 1992, Oklahoma voters approved State Question 640, establishing the requirement that any bill to raise revenue must pass with three-fourths of both legislative chambers or be sent to a vote of the people at the time of the next General Election. Even as the state struggled over many years with severe budget shortfalls that led to deep and repeated funding cuts, it took 26 years for any tax increase to overcome the three-fourths super-majority hurdle.

Proposals to allow the voters to revisit SQ 640 have been introduced the past two sessions. Last year, bills to lower the supermajority threshold failed in a Senate committee. This year, three bills to put SQ 640 revisions to a vote of the people — HJR 1003 (Rep. Albright) and SJR 9 and SJR 10 (both by Sen. Mathews) — were introduced but were not brought for a vote in committee.

The Bottom Line

Despite the state’s current healthy budget picture, we can expect to face renewed challenges in generating the revenue needed to fund basic services over the coming decade. Protecting the existing revenue base, ending costly and inefficient tax breaks, and revisiting the supermajority revenue requirement so as not to tie the hands of future lawmakers facing shortfalls should all be part of Oklahoma’s fiscal agenda in the years ahead.