Out of step

A new report by our friends at the Center on Budget and Policy Priorities shows that the approach Oklahoma policymakers are taking to the current fiscal crisis – implementing budget cuts without drawing down reserves or looking at raising revenues – is increasingly out of step with the nation as a whole:

The current recession has taken a heavy toll on states’ ability to meet public needs. The combination of declining revenues and increasing demand for services has created budget shortfalls in 47 states.

To begin closing the gaps between the cost of programs and the amount of money available to pay for them, so far at least 34 states have cut services to families and individuals, including services that benefit vulnerable families. But these cuts have not solved state budget problems, because the sheer size of state budget shortfalls is so great – estimated to exceed $350 billion over the next two and a half years. Were states to rely on spending cuts alone to close their gaps, it would require unprecedented reductions in such essential public services as health care, education, and assistance for the elderly and disabled.

Instead of a cuts-only approach, states increasingly are employing a combination of budget solutions that also involves drawing down reserve funds, maximizing the use of federal dollars, and raising taxes. A number of prominent economists have pointed out that budget cuts are more harmful to state economies during a recession than properly structured tax increases, so it is good policy to use tax increases to fill a substantial portion of deficits that exceed the amount that can be closed with reserves or federal funds.

So far, in 2009, 16 states have raised new revenue through tax measures. Another 17 are giving serious consideration to doing so. These actions are in addition to revenue actions taken by 10 states in late 2007 and 2008 as the recession’s effects began to be felt. Although some of these measures are relatively small in terms of the amount of revenue raised, others — such as packages enacted in California and New York and under consideration in Illinois — are very significant.

The paper also shows that states that enacted significant tax increases over the course of the last state fiscal crisis (2002-04) saw growth rates in personal income, employment and the median wage from 2004-07 that were virtually indistinguishable from the national average.

In Oklahoma, the constitutional constraints of SQ 640 and political realities have effectively kept tax increases off the table as revenues have collapsed in recent months. However, the unwillingness even to tap into our Rainy Day Fund has left Oklahoma with few tools other than budget cuts at our disposal to manage the fiscal crisis.

You can find full coverage of the state fiscal crisis from the Center’s state budget and tax website.