The mystery of the disappearing revenue

gross-collections-v-general-revenueThe latest headlines about Oklahoma’s finances seem oddly contradictory. On the one hand, State Treasurer Ken Miller has announced gross revenue collections are hitting an all-time high. Oklahoma’s total collections of $6.64 billion dollars are $278 million higher than the same period last year.

At the same time, the General Revenue Fund and other funds relied on for the state’s annual budget are facing large shortfalls. The latest estimate shows lawmakers will have $188.5 million or 2.6 percent less to appropriate than last year. But if the same percentage of gross collections were going into General Revenue as in FY 2012, this year’s GR would be almost $200 million higher through January. And legislators might not be staring at a large budget shortfall next year.

So where’s the money going? Read on for the explanation or scroll down to the end for the short version.

Mandatory Spending

The first suspect identified by Governor Fallin are policies that “skimmed off the top” of the General Revenue Fund for dedicated purposes. The largest of these are several funds dedicated to education: the HB 1017 Education Reform Fund, lottery revenues going to education, and the first $150 million of oil gross production revenues which go to education technology, college student aid, and higher education capital improvements. Although education funds are the biggest revenue diversions, they are not the cause of the recent drop in General Revenue, because the proportion going to education has not changed. Revenue for the 1017 Fund is actually down $29 million from last year.

However, another major diversion has shot up in recent years. In order to fix Oklahoma’s decaying roads and bridges, Governor Fallin and the Legislature increased income tax revenues going into the ROADs Fund. Income tax revenue going into the ROADs Fund has skyrocketed from $250.7 million in FY 2012 to $352.1 million this year. Next year it is set to jump again to $411.8 million — altogether a $161.1 million increase over three years.

Lawmakers also redirected a portion of the motor vehicle tax, the fuel tax, and gross production tax to several transportation funds. This diverted about $21 million from General Revenue this year and $31 million in FY 2015.

Another growing diversion of revenue is the Quality Jobs Program. This program makes payments to Oklahoma companies equal to five percent of the payroll cost for qualifying new jobs. Like many other tax credits in Oklahoma, the Quality Jobs payments have no cap. They can increase without limit, even when core services are facing shortfalls. And they are increasing. Oklahoma spent $78.9 million on Quality Jobs payments in FY 2013; this year the tax commission estimates we will spend $91.5 million.

 Clearly these mandatory spending policies are part of the issue, but by themselves they don’t account for enough funds to explain it. That leads us to suspect #2:

Tax Refunds

income-tax-refundsGross collections are what Oklahoma brings in before sending back any tax refunds. So even if “gross collections” are at an all time high, it doesn’t mean tax revenue is that high. In fact, the growth of tax refunds is a large part of the missing General Revenue.

The chart to the right shows that individual and corporate income tax refunds through January 2014 are about $80.2 million above the same period last fiscal year. The increase can be seen for both individual income tax refunds (up $36.5 million) and corporate income tax refunds (up $43.7 million). The increase on the corporate side is especially dramatic, because it starts from a smaller base. The $75.0 million paid out in corporate income tax refunds through January is more than double the equivalent number for FY 2013 ($31.4 million).

Many corporations seem to have filed amended returns this year and are getting more money back from the state. No one has yet explained why this is happening. Rep. David Dank suggested it may due to out of control tax credits for corporations. Another possibility is that more companies are shifting their profits to out-of-state tax shelters, because Oklahoma has not adopted combined reporting to make sure profits made in Oklahoma are taxed here.

Growing refunds are another piece of the puzzle, but it is not yet complete. We must move on to suspect #3:

Oil and Gas Industry Rebates

In FY 2012, 52.0 percent of gross production taxes through January went to General Revenue. In FY 2013, only 12.7 percent did. This year, the percentage rose slightly to 25.8 percent. The gap between this year and 2012 is equivalent to $126.2 million of missing General Revenue.

The biggest reason for this drop are rebates being paid to industry for accrued tax breaks. The tax rebates were put on hiatus during the recession to be paid back later. They were initially expected to cost $50 million a year over three years, but they ended up costing more than twice as much — $118 million a year from 2013 to 2015.

At the same time, taxes paid by the industry for current production have fallen off the map, primarily because we are giving away $252 million in tax breaks for horizontal drilling (commonly known as fracking). Some of the remaining revenue is dedicated to transportation and education funds before it reaches General Revenue. But the tax has fallen so far due to rebates and tax breaks that in several months there has been nothing left for General Revenue.

Short Version

Oklahoma’s gross revenue collections are at an all-time high, but funds for the state’s discretionary budget have a $188 million shortfall. The lost revenue is going mostly to transportation spending and oil and gas industry tax breaks. To a lesser extent, it’s going to individual and corporate tax refunds and business subsidies.

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Gene Perry worked for OK Policy from 2011 to 2019. He is a native Oklahoman and a citizen of the Cherokee Nation. He graduated from the University of Oklahoma with a B.A. in history and an M.A. in journalism.

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