Revenue Options for Closing the Structural Deficit
Oklahoma’s low taxes make revenue options feasible for closing the structural deficit. Because Oklahoma’s tax levels are among the lowest in the nation, ranking 42nd per person and 47th as a share of personal income, we have some flexibility to reduce the structural deficit through raising revenues. These should not, of course, be the only solutions. We should use existing revenue more effectively and, as discussed in the next section, make better long-term spending decisions.
Raising revenue is not always a popular option but it is one that will be necessary to solve the structural deficit. Many options are available.
- Restore taxes that have been cut or that have not kept pace. Deep cuts to the personal income tax have contributed to chronic budget shortfalls while making the tax system less equitable. The severance tax on oil and gas has been cut from 7 percent to 2 percent for the first three years of production on all wells drilled after July 2015. At the same time, excise taxes on fuel and alcohol haven’t been raised in decades, which mean that they are contributing a declining share of the cost of providing services.
- Apply the sales tax to a greater range of services. Oklahoma taxes fewer services than most other states. In a service-based economy, this contributes to the growing fiscal gap and serves to distort economic behavior.
- Eliminate corporate tax avoidance strategies. A 2015 analysis estimated Oklahoma loses $40 to $80 million (ten to twenty percent of what could have been collected) in corporate taxes annually. This results from shifting transactions outside the United States and from tax sheltering techniques within the United States. One way to reduce corporate tax avoidance is to adopt “combined reporting,” which treats parent corporations and their subsidiaries as one unit for the purposes of paying state income taxes. Read the latest update on combined reporting from Multistate Associates.
- Eliminate ineffective tax breaks. The Legislature took important action in 2015 when it passed legislation requiring that tax incentives be evaluated on a regular basis. An Incentive Evaluation Commission has been formed; in November 2016, national consultants who were hired to evaluate the state’s tax incentives issued their first report. It will still be up to the Legislature to take action to ensure that the recommendations of the Commission are enacted by eliminating or curbing incentives deemed to be inefficient or overly costly. We also could consider temporarily suspending some existing credits and exemptions when revenues do not grow enough to support services.
- Reduce revenue restrictions. Available revenues could be used more efficiently for the greatest need if their use was not restricted. Restricted or “earmarked” funds favor some government functions at the expense of those that are funded from the General Revenue Fund. Earmarking also increases the chances that programs will be funded at either a higher or a lower level than they would be without earmarks, reduces the chances that program performance is reviewed, and freezes priorities in a world where they should be changing
- Revisit State Question 640. This constitutional provision permits taxes to be raised only by a three-fourths vote of both houses of the Legislature or by a vote of the people. Local governments also face election requirements for tax increases. Eventually, significant tax changes will be required. The sooner they are made, the smaller they need to be and the faster we can shift our attention to the many public service challenges we face.
Regardless of what action is taken, we should preserve a balanced tax structure. We should not rely too much on a single tax stream (as cities are currently too dependent on sales taxes). We must continue to emphasize the income tax, which is our fairest tax and the one most able to keep up with economic growth. Sales taxes remain an important part of the revenue structure since Oklahoma voters have supported many state and local sales tax measures. At the same time, the property tax is the one least likely to lose revenue in the changing economy, so it too must be part of the revenue solution.