New OK Policy report lays out options for protecting Oklahoma public services

In two years of recession and slow recovery, Oklahoma’s public services have struggled to get by with less. Oklahoma families, businesses and communities are feeling the impact in far-ranging ways, including increased class sizes, higher tuition rates, fewer mental health treatment services, critically understaffed correctional facilities, and more. Even as revenues recover, they remain far below pre-downturn levels, and another large budget shortfall is looming for next year’s budget. Legislative leaders are now warning of cuts from 3 to 7 percent for all agencies, with some agencies facing cuts as high as 10 percent.

Governor Fallin has has made some efforts to minimize cuts to state agencies, especially the core public services of education, law enforcement, health, transportation and corrections. After some of her revenue proposals did not find traction in the legislature, Fallin stated, “If they have a different way of being able to fund the budget and make up for the $500 million budget shortfall, I invite them to bring those ideas forth. There’s room for all kinds of ideas.”

In that spirit, OK Policy has published a new report, titled “Protecting Core Services: Revenue Options for a Balanced Budget,” that sets out a number of options to bolster state revenues for next year. These include budgeting measures to make existing state money available for appropriations, income tax measures such as closing tax loopholes and suspending or cancelling additional cuts to the top income tax rate, and sales tax measures such as requiring online retailers to collect sales tax and eliminating unnecessary exemptions.

These options may not be politically easy to adopt, but compared to the real harm that steep cuts would inflict on Oklahoma, they deserve serious consideration in the remaining weeks of the legislative session. A summary of our proposals continues below, or you can download the full report here.

Budgeting Measures

• Appropriating 5 percent money – If collections come in above 95 percent of projections by the end of the year, the “5 percent money” is saved for appropriation in the following year. At least a portion of this could be used in FY ‘12 to offset cuts as revenues recover. (Legislative leaders have stated they plan to use at least some of these funds.)
• Transferring revolving fund balances – The state maintains over 500 revolving funds with total balances in excess of $1.2 billion. Some of these funds could substitute for state appropriated dollars in next year’s budget or be moved to the General Revenue Fund.

Income Tax Measures

• Deferring more cuts to the top income tax rate – The income tax cut was approved during a time of strong economic growth, yet it is phasing in while revenues and funding levels remain far below pre-downturn levels. Even if not repealed entirely, the tax cut can be deferred until revenues have fully recovered and funding for core services has been restored.
• Limiting itemized deductions – Taxpayers who claim itemized deductions on their federal tax return are allowed to claim the same deduction on state taxes. This primarily benefits upper-income families who need the least help. If legislators decide not to limit all itemized deductions, they can at least do away with the deduction for state income taxes on state tax returns, which has no clear rationale and is allowed in only six states.
• Suspending other income tax deductions – Oklahoma allows for various tax deductions that do not fulfill a vital economic or social purpose, such as deductions for interest and dividends paid on deposits in Oklahoma financial institutions or for contributions to political candidates.
• Adopting combined corporate reporting — Some multi-state corporations seek to avoid paying taxes by shifting income between parent and subsidiary companies. To ensure these corporations pay their fair share of taxes, Oklahoma can adopt a reform known as combined reporting, which has been adopted by more than half of all states that assess a corporate income tax.

Sales Tax Measures

• Suspending sales tax exemptions – Statutes provide nearly 150 exemptions from the general sales tax. Many of these privileges for various industries, sectors and populations lack any clear or consistent rationale.
• Enhancing collection of online sales tax — As a result of US Supreme Court rulings, states are unable to require retailers who lack a physical presence in a state, or “nexus,” to collect tax owed to the state. However, Oklahoma can expand the definition of “nexus” by passing laws that define affiliate programs as sufficient to establish physical presence in the state.

With the significant budget cuts of previous years already disrupting many important public services, we have gone far beyond simply eliminating waste. In addition to addressing next year’s budget crisis, the revenue measures discussed above can make Oklahoma more stable and secure over the long term, while ending arbitrary and inefficient subsidies to special interests. If the legislature and governor want to show responsible leadership, these options need to be on the table.