Governor Fallin has officially called the Oklahoma Legislature into a special session beginning September 25 in order to fix the state budget, which has a more than $200 million hole due to the Oklahoma Supreme Court’s rejection of a cigarette fee. However, the specific way that lawmakers address the budget hole is still up for grabs, and various state leaders have laid out very different visions of what they hope to come out of it.
Even before the court threw out the cigarette fee, Oklahoma’s state budget massively underfunded core services. The budget was worsening the teacher shortage, forcing the closure of senior nutrition sites, cutting support for foster families, taking money out of child support, and not even beginning to undo the damage to our communities caused by years of cuts. On top of that, its use of more than $400 million in one-time funds has already dug a large budget hole going into next year. With the upcoming special session, lawmakers have a second chance to fix the budget by passing widely-supported revenue options.
What state leaders are saying about special session
In her call for a special session, Governor Fallin challenged lawmakers not just to close the immediate budget hole, but also to address Oklahoma’s long-term budget shortfalls and pay for a teacher raise. House Minority Leader Scott Inman similarly called for a broad variety of revenue options to be considered that could address these problems while balancing out the more regressive impact of a cigarette tax that takes the largest percentage from low-income Oklahomans. Conversely, House Speaker Charles McCall said that that the cigarette tax is the only new revenue he’s willing to consider in special session, and if it again fails to get a three-fourths majority vote, he’ll make up the difference by spending down the Rainy Day Fund and imposing even more cuts on state agencies. House Appropriations Chair Kevin Wallace released a similar plan, with the added element of expanding tribal gaming to bring in another $12 million in state revenues for FY 18. Both plans would increase the use of one-time funds this year, deepening the budget hole that lawmakers will face in the next regular session.
Senate leaders have been more circumspect about what they want to do, but it’s clear that Republican lawmakers are divided on this issue. Passing a broader deal to fix the budget will hinge on whether Republican legislative leaders can hold out against both Democrats and members of their own party who want more options on the table. Getting the votes to pass any new tax or remove a tax break will be a challenge, but if lawmakers do find the political will to raise revenues, they have plenty of good options.
What new revenues could lawmakers approve in special session?
Lawmakers should spread the cost of increased taxation fairly and not insist on only one option. Here are some ideas that should be on the table in special session:
- Increase the cigarette tax. A logical starting point for any plan would be to pass the cigarette fee as a tax to pass constitutional muster. Since this would require a 3/4ths supermajority to pass, it would need at least some Democratic votes and would likely need to be paired with other measures to get Democratic buy-in. Since we’re already well into the fiscal year, and since any new tax they approve won’t go into effect for at least 90 days after passage, a cigarette tax will only be in effect for about 6 months of the current year. That means it will bring in significantly less revenues this year than the fee that was originally approved, so it will have to be paired with other revenue measures to close the full budget shortfall.
- End tax breaks for oil and gas production. During regular session, ending excessive tax breaks for oil and gas drilling was the main ask for Democrats to get their support for a cigarette tax. Oklahoma’s current 2 percent tax rate for the first 36 months of new oil and gas wells is well below the taxes in other energy-producing states. Historically, the oil and gas industry has been highly prosperous while paying a tax rate of 7 percent. If a 7 percent tax rate is imposed only on new wells, it would have a limited impact on the current budget, but would bring in much more money in future years as gas prices rebound.
- Assess a high-income surcharge. Oklahoma has cut the top income rate from 6.65 percent to 5 percent since 2004. These cuts have contributed to chronic budget shortfalls by reducing annual revenue by over $1 billion. A large majority of the benefit has gone to the highest-income households. Oklahoma could assess a surcharge of 6 percent on income over $200,000 ($100,000 for single individuals) and 7 percent on income over $400,000 ($200,000 for singles). Only 3 percent of households would be affected by the surcharge. Even after this change, all households would be paying less income taxes compared to before recent tax cuts.
- End the capital gains exemption. Oklahoma allows a 100 percent income tax deduction on capital gains from the sale of property located in Oklahoma or the sale of stock of a company headquartered in Oklahoma. Oklahoma is the only state that offers a tax break like this; it primarily benefits taxpayers making over $1 million annually; it is of questionable legality and economic benefit; and it is costing Oklahoma more than $100 million annually.
- Increase the fuel tax. Oklahoma has the second lowest fuel taxes in the nation (17¢ per gallon for gas and 14¢ per gallon for diesel), and it has not been adjusted since 1987. Since that time the fuel tax has lost nearly half its value to inflation. Nearly half of the fuel tax in Oklahoma is paid by out-of-state drivers, so much of the tax increase would not fall on Oklahomans. Fuel tax increases could also be set to go into effect only when gas prices are relatively low. This would offset the loss in gross production taxes that Oklahoma experiences during times of low oil and gas prices and ease the tax at times when drivers are paying more at the pump.
- Cap itemized deductions. Capping or repealing certain itemized deductions received serious consideration during regular session. Oklahoma has several options for itemized deduction reform, including ways to limit them while preserving popular deductions like those for charitable contributions.
Another way to increase support for these or other revenue options would be to pair them with reforms that reduce burdens on low- and moderate-income households that can least afford to pay more taxes. Good options include restoring the refundable Earned Income Tax Credit or ending the sales tax on groceries. You can use Together Oklahoma’s newly updated budget simulator to decide for yourself what should be done and share the results.
The bottom line
Governor Fallin and a growing number of lawmakers have woken up to the reality that Oklahoma’s structural budget deficit is endangering our future. Adopting some or all of these options in special session could resolve our structural deficit and make a huge difference in the lives of regular Oklahomans. Instead of being a state that is losing its best public school teachers, denying help for people with mental illness, and slashing support for foster care families and seniors, we could be a place with great teachers, stable care for those in need, and a prosperous future. To make it happen, it’s important to tell your lawmakers and legislative leaders today that they should put more revenue options on the table and not waste their chance to fix the budget in special session.