In recent years, as Oklahoma struggled through chronic and severe budget shortfalls, there was growing awareness that the state faced a structural budget deficit, a situation where revenue collections fail to pace with the cost of providing services. “We have created a structural budget deficit in Oklahoma that has got to stop,” then-State Treasurer Ken Miller said in 2015. Similarly, Governor Mary Fallin acknowledged in her 2017 State of the State address that, “Oklahoma will continue to struggle if we don’t fix our structural deficits in our budget.”
This growing awareness of the structural budget deficit strengthened the resolve of Oklahoma’s elected leaders to approve a series of revenue-generating measures, culminating last year in passage of HB 1010xx that marked the first outright tax increase in Oklahoma since passage of State Question 640 in 1992.
A new research brief prepared by Dr. Kent Olson, Professor of Economics Emeritus at Oklahoma State University, examines the effect that passage of HB 1010xx and other recent revenue measures will have on the state’s long-term fiscal outlook. He finds that these revenue measures reduce the state’s budget shortfalls over the next decade, but a significant and growing funding gap will remain in the absence of new revenues.
Closing part of the gap
Dr. Olson’s long-term budget projections are based on a current-services appropriations budget, which is a budget that compares projections of revenues generated by applying the current tax code to the costs of maintaining the current services provided by state government. His current services budget is based on separate projections of 19 revenue sources and eight expenditure categories for the period from 2019-2030. His major findings are that:
- Revenue increases approved by the Legislature from 2016-18 will reduce the state’s long-term budget shortfall. Lawmakers approved over $900 million in new revenue from 2016 to 2018, 80-85 percent of which is recurring rather than one-time revenue. Without this new revenue, the state would be facing a $2.3 billion annual deficit by 2030. The new revenue offsets nearly two-thirds (64 percent) of this projected deficit;
- Total revenue will still not grow enough to cover the cost of maintaining existing programs. Over the next decade, revenues are expected to grow an average of 3.34 percent per year, while the cost of existing programs due to price and population increases is 4.4 percent per year. This creates a deficit of $98 million beginning in FY 2020, rising to $1.1 billion by FY 2030 (see chart).
The challenges ahead
Olson concludes that, “In the absence of additional revenues, the persistent future shortfall in appropriations is large enough to exact a significant toll on government-provided services.” The effects could include larger class sizes and continued teacher unrest, higher college tuition and greater college debt, and reductions in essential medical care for physical and mental illness.
“In the absence of additional revenues, the effects could include larger class sizes and continued teacher unrest, higher college tuition and greater college debt, and reductions in essential medical care for physical and mental illness.”
To close the structural deficit and avoid further rounds of steep budget cuts in the years ahead, Dr. Olson presents a number of revenue options for lawmakers to consider. Increasing the top bracket rate of the individual income tax from the current 5.0 percent to 6.0 percent in several annual increments would close the gap, he says, as would broadening the sales tax to include additional services. A final option he considers is raising the gross production tax. Olson cautions that the effective rate on oil and gas production would have to be nearly doubled — from 5.5 percent to 10 percent — to raise sufficient revenue to close the budget gap; however, he contends that “there is more than enough economic rent (the value of oil and natural gas deposits less all costs of exploration, development and extraction) to do this and still leave a generous margin for profitability.”
This new research confirms that Oklahoma has taken important steps towards fiscal stability in recent years, but the work isn’t done. 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, preparing prudently for the next downturn, 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 for the years ahead.