Revenue estimates don’t make budgets. Leaders do.

On Friday, the State Board of Equalization provided the revenue certification that will serve as the basis for Oklahoma’s budget year that starts July 1, 2021 (FY 2022). The news was better than expected, but doesn’t suggest the state’s long-term budget slide is over. The Board estimates next year’s budget will be $749 million, or 10 percent more than the current budget. The good news is tempered, though, by the fact that the FY 2022 estimate is buoyed by more than $300 million in unspent cash available from prior years (which might not be available in later years), and temporary reallocation of more than $300 million from the Teachers Retirement System and the ROADS Fund, both of which end for the following year. 

So it’s best to think of this revenue estimate as a one-year reprieve from the pattern of long term budget decline, which likely starts anew in FY 2023. Even with the estimated increase for FY 2022, spending will be 27 percent or $3 billion, below  FY 2000 when we adjust for inflation and population growth. In other words, the Board’s estimate shows we are only going up a short, small hill on the ongoing rollercoaster that is Oklahoma’s state government.

It’s important to remember, though, that a revenue estimate isn’t a budget. It’s a forecast — a binding one in the case of the Board of Equalization — of what will happen without any action by Oklahomans and our elected leaders to raise revenue to fund our core services. But lawmakers must take action, and have many options to change our long-term budget path. These include smart choices to spur economic growth in the next year and beyond, as well as increasing the state’s revenue and spending more of it on essential services. Budgets don’t just depend on the economy, they depend on choices. It’s time our leaders make the right ones.

We can’t treat this shortfall as a one-year problem

Oklahoma can’t afford to repeat the mistakes of the last recession when we waited for the economy to get back on track and took too long to restore lost revenues. From 2007 to 2020, Oklahoma employment grew only 6 percent, well behind the 10 percent experienced nationwide, and our income growth was 14th lowest among the states. That meant our spending on public services stayed at recession levels too long. Adjusted for inflation, our tax revenue in 2019 was only 2.7 percent above the pre-recession peak, well behind most of our neighboring states. If revenue had grown at the 18.2 percent national average, we’d have 15 percent more ($1.6 billion) in revenue to invest in vital state programs and services.

There are signs our next recovery will be similarly slow. While the economy is expected to return to normal growth after 2021, but that growth won’t be shared by everyone. In Oklahoma, 83,000 fewer people were working in October than a year earlier, and the number of people working is expected to be only three percent higher (roughly 50,000 new jobs) in 2025 than it was in 2019. That’s not even enough to keep up with the growth in populations and workers who need jobs.

Oklahoma faces a steeper climb yet due to our economic and revenue reliance on petroleum production. Oil prices may not reach 2019 levels until the 2030s, and total production could be more or less flat through 2050. Oil jobs aren’t expected to recover before 2023 and when they do, they’ll require different skill sets than the ones where Oklahoma has excelled.

The state can help jump-start the economy

We can spur immediate and long-term economic growth through smart policies. The smartest of all is to fully and quickly implement Medicaid expansion. Medicaid expansion is forecast to add 29,000 jobs and about $125 million in new tax revenue to help restore the budget. It will also reduce health barriers that keep people from working. 

We can boost the economy by putting more money in the hands of low-income households. They will spend more of their resources than the more affluent, and our struggling restaurants and other small businesses will feel an immediate impact. Medicaid expansion will increase resources and thus spending for hundreds of thousands of our neighbors. We can also make a meaningful difference by restoring refundability of the Earned Income Tax Credit and by increasing the Sales Tax Relief Credit

But we need to expect more from the private sector as well. We can start by competing with the 29 states, including four of our seven neighbors, who have increased state minimum wages. If we fail to do so, we’ll continue to lose the young talented workers who would benefit most from a higher minimum wage to other states. Higher minimum wages help businesses, too, by cutting employee job turnover by more than half. Paid family leave is another economic booster for states. Like the minimum wage, it improves productivity for businesses and reduces turnover. It also reduces pay gaps for women and for people of color.

Just turning around the budget decline will also improve the economy. A smaller budget hurts everyone because it slows economic growth. According to the Economic Policy Institute, studies “generally find that raising taxes and using the additional revenues to pay for more public services enhances economic growth and expands employment.” A dollar of state government spending leads to $1.50 to $2.50 in economic growth.

Turning around the budget will require us to use tax dollars more carefully

According to Gov. Stitt’s FY 2021 budget, the state could collect more than $15 billion in taxes at their current rates. However, we only collect $9.8 billion after the many exemptions, credits, and rebates. Less than $6 billion of that is left for the General Revenue Fund, the largest part of the state budget and the only one that can fund most core services. We must re-prioritize core state programs and services. That starts with reducing, limiting, and eliminating business “incentives.” Incentives, like tax credits and rebates for new and favored businesses, are unfair because firms with similar ability to pay have different tax responsibilities. These incentives often help high-income communities more than the low-income ones that need our help the most. They mostly employ people moving into the state rather than Oklahomans. Most important of all, tax incentives simply don’t work. Only 3 of 32 peer-reviewed academic studies found that such incentives have positive impacts on communities’ economies. Many Oklahoma incentives return a lot of state dollars to just a few taxpayers. For example, expenditures that incentivize the purchasing of Oklahoma-mined coal cost the state $3.1 million in 2018, and only benefitted seven tax filers. Of the high-cost credits, two are for energy production and cost the state more than $300,000 per project. Other high-dollar exemptions are provided to favored industries including railroads and historic rehabilitation (at about $70,000 per project). 

Our lawmakers also need to re-examine all the tax dollars that are diverted, or “earmarked,” away from the General Revenue Fund by law. That means they are never considered as available for the budget, no matter how great the need to support core services like schools, hospitals, mental health care, and social services. Many of these earmarked funds go to important purposes like highways, local government, and education, but in times of budget shortfalls, it’s important to examine each of these. The chart below shows how our failure to examine earmarks has cut the General Revenue Fund share of taxes from 38 to 27 percent over the last 15 years; it also shows that we earmark more than the average state.

We know how to do better

A revenue estimate is not a budget. Some of our lawmakers — and special interests who benefit from the low-tax thinking that put us in our current situation — will pretend it is, but we shouldn’t be fooled. We have options to build a stronger economy, not just next year, but for decades to come. We can cut back on wasteful and ineffective incentive programs. We can reexamine the spending decisions of the past to better meet the spending needs of the present and future. 

Tough times don’t call for giving up; they call for tough people to make tough choices. Now and throughout the coming Legislative session, tell your elected officials that you want Oklahoma to be a state that invests in our residents today and tomorrow. Tell them it’s time to do the right thing for Oklahoma’s future.

ABOUT THE AUTHOR

Paul Shinn

Paul Shinn is a Budget and Tax Senior Policy Analyst with OK Policy. Shinn has held budget and finance positions for the Oklahoma House of Representatives, the Department of Human Services, the cities of Oklahoma City and Del City and several local governments in his native Oregon. He's also taught political science and public administration at the University of Oklahoma, University of Central Oklahoma, and California State University Stanislaus. While with the Government Finance Officers Association, Paul worked on consulting and research projects for the U.S. Environmental Protection Agency, the U.S. Department of Transportation, and several state agencies and local governments. He also served as policy analyst for CAP Tulsa. He holds a Ph.D. in Political Science from University of Oklahoma and degrees from the University of Oregon and the University of Maryland College Park. He lives in Oklahoma City with his wife Carmelita.

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