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 Congressional Budget Office, Medicaid costs, of which states contribute a significant share, are expected to grow faster than the economy each year through 2035.
- An aging population. Between 2015 and 2035, the working age population (15-64) of Oklahoma is expected to grow 9 percent, while the population over age 65 will grow 43 percent. That means fewer Oklahomans will pay taxes compared to the growing population that will need more costly 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 retirees compared to workers guarantees that costs will rise faster than resources to meet the costs. Retirement costs are increasing steadily as many employees reach retirement age and as retirees live longer, often more years than they worked for the state.
- Incarceration costs. As a result of strict sentencing laws and a growing number of felony offenses, the Oklahoma’s prison population has grown steadily for the past several decades. With longer sentences, the inmate population is also growing older, which leads to higher health care costs.
- Federal actions. Increasing mandates for education, driver’s license security, and homeland security come from Washington but without adequate resources to pay for them. At the same time, the federal government has been paying less of the costs of Medicaid, community development, social services, and highways. In the long run, the federal government’s growing debt load and its own structural deficit will force Oklahomans to bear more of their own cost of government.
- 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 2010s 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. Only the property tax, Oklahoma’s lowest, yet least popular tax, is relatively safe from losses due to economic changes.
- 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. 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. The state also made permanent a cut on gross production taxes to just 2 percent for the first three years of a well’s production, which will reduce state revenues by hundreds of millions of dollars a year.
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 limits tax options.