Causes of the Structural Deficit

Structural deficits have many causes. Demographics, the nature of relations between governments, and self-inflicted wounds all contribute to a worsening fiscal gap for Oklahoma’s state and local governments.

• Health care costs. Because governments are the largest providers of health insurance, they bear the brunt of the nation’s inability to control health care costs. According to the Centers on Medicare and Medicaid Services, overall health costs, including Medicaid costs, are expected to grow 5.5 percent per year, or 0.8 percent per year faster than the economy each year through 2027.
• An aging population. Between 2020 and 2040, the working age population (age 20-64) of Oklahoma is expected to grow 10 percent, while the population over age 65 will grow 29 percent. That means fewer Oklahomans will pay taxes compared to the growing population that will need costlier public services. In addition to heath care, costs will grow for public safety, social services, and even corrections to care for an aging prison population.
• Retirement costs. The increasing number of state and local public retirees compared to workers guarantees that costs will rise faster than resources to meet the costs. In the Teachers Retirement System, for example, there are presently 1.4 active members for each retiree, down from 1.8 in 2010. Retirement costs are increasing steadily as many employees reach retirement age and as retirees live longer.
• Incarceration costs. As a result of strict sentencing laws and a growing number of felony offenses, the Oklahoma’s prison population has grown from 23,181 in 2000 to 28,231, according to the federal Bureau of Justice Statistics. With longer sentences, the inmate population is also growing older, which leads to higher health care costs. Of the many factors driving up future costs, this is one that can be addressed and reversed, and Oklahoma has begun to do so.
• Federal actions. Increasing mandates for such things as educating students with special needs, driver’s license security, and homeland security come from Washington without funding to pay for them.
• Spending decisions. While Oklahoma spends less than other states, we may not be spending as effectively as we should, because we often fail to hold programs accountable for results and rarely consider the long term cost implications of individual spending decisions.
• A narrowing tax base. Oklahoma has a 1930s tax structure that does not fit the 2020s economy. We now have a service-based economy, yet our sales tax exempts most services. The state struggles to find a way to effectively tax sales from the Internet and other growing forms of commerce. The globalizing economy has also allowed corporations to escape much of the state’s corporate income tax and it threatens individual income tax collections as well.
• Revenue reductions. Decisions to cut tax rates and to grant more exemptions and credits have cut into the tax system’s ability to keep up with the rising cost of services. Cuts to the top personal income tax rate from 6.65 percent in 2004 to 5.0 percent in 2016 have led to an annual loss of some $1 billion in state revenue, while all tax cuts combined since the mid-2000s have had a revenue impact of $1.5 billion.
• New tax exemptions. Legislators have increased various deductions and exemptions for retirees and military veterans, two fast-growing population groups, while the state’s voters in 2012 opted to exempt intellectual property from the property tax. Local governments in Oklahoma face many of the same problems. Cities, counties, school districts, and special districts also can expect growing costs to serve an aging population, for such services as public safety responders and recreational and social programs for seniors. An aging population may expect lower taxes for schools and more exemptions to sales and property taxes as well.   

Local governments face the same costs of health insurance and retirement as the state. Indeed, the state has passed higher costs of retirement on to schools and cities in the past and may increase these mandates again in the future. Local governments face faster growing salary costs than the state since most local governments give raises to police officers, firefighters, and many other employees every year, while the state only increases pay for state employees when the Legislature acts. The state Legislature mandates minimum pay and benefits for teachers and other school employees. It also allows many city employees to unionize and gives police and fire employees the right to binding arbitration in salary disputes.

Local governments face increasing pressures from urban sprawl. The costs for new schools, roads, and utilities are extensive and are not recovered from the taxes on the new development. That means all taxpayers share in the costs of serving new development. Local governments also are faced with an antiquated revenue system. Cities mainly rely on the sales tax, which cannot be expected to grow as fast as the economy. It is difficult to raise taxes at the local level because the state Constitution limits tax options.

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