Last week, the Office of Management and Enterprise Services (OMES) announced monthly General Revenue (GR) collections for June, bringing Fiscal Year 2013 to a close. While Finance Secretary Preston Doerflinger’s candid assessment of plunging gross production revenues grabbed the headlines, this was just one of several worrisome features of the revenue report worthy of attention.
OMES revealed that state tax credits for horizontal wells totaled $148 million in FY 2013. In addition, the state paid out $102.6 million in rebates and refunds for horizontal production in prior years that were deferred as part of an agreement made with the energy industry in 2010 to help address budget shortfalls during the recession.
As the above chart shows, gross production collections to GR totaled just $222 million in FY 2013, which is $208 million less than last year and the lowest amount since FY 2002. In fact, as OMES explained, this understates the drop, since the FY 2012 total was artificially deflated by the diversion of $93 million of oil revenues for supplemental appropriations.
OK Policy has previously shown that as oil and gas production in Oklahoma shifts increasingly to horizontal drilling, the cost of the tax break that drops the tax rate on horizontal wells to just 1 percent for the first 48 months of productions will continue to rise and could reach $400 million or more annually without legislative action. Secretary Doerflinger rightly called on lawmakers to revisit how horizontal production is taxed, stating:
Any fiscally responsible policymaker needs to seriously consider at what level government should incentivize something that is now standard practice. It’s not responsible for government to give money away as an incentive if no incentive is needed.
Declining gross production revenues were a major contributor to disappointing GR collections for the full year. Preliminary totals, which are likely to be revised slightly upwards, showed that after two years of solid growth, GR was essentially flat in FY 2013, increasing by a mere $10 million compared to FY 2012 (see Figure below). The most significant FY 2013 growth was in corporate income taxes, which rose by $109 million, or 32 percent. Personal income taxes were up $69 million, or 3.4 percent (in addition, an extra $41.7 million in income tax collections was allocated to the ROADS Fund). Sales tax collections rose $71.3 million, or 3.9 percent, while motor vehicle taxes were down by $29 million, or 13.1 percent.
Perhaps the most striking takeaway is that four years into the state’s recovery from the Great Recession, GR collections remain almost $400 million below their pre-downturn peaks. While sales tax collections are now comfortably above pre-downturn levels, the state’s other major taxes have never fully recovered. This reflects a combination of the slow and sluggish economic recovery and the effects of tax cuts, tax breaks, and other policy decisions that have weakened state revenues.
The final worrisome issue contained in the June revenue report was that actual revenue collections came in under the estimates for the year. FY 2013 GR collections ended up $26.5 million, or 0.5 percent, below the certified estimate from last June, and a full $109 million below the FY 2013 projection that was developed back in February of this year, seven months into the fiscal year. Income tax revenues for the full year came in $49 million above February’s projections, but all other major revenue sources were under – gross production taxes (-$16 million), motor vehicle tax (-$34 million), sales tax (-$46 million) and others sources (-$63 million).
The fact that revenues for the final five months of FY 2013 came in substantially below projections should serve as an early warning signal about the new fiscal year that began July 1st. The FY 2014 budget was built based on February estimates that GR will rise to $5,942 million next year. This would have been a or 4.6 percent, or $259 million, increase compared to February’s projected FY 2013 collections. But given actual collections, GR will have to rise next year by 6.7 percent, or $368 million, to meet the estimate. This is certainly not an unimaginable scenario. But if tax credits continue to take a take an ever-larger bite out of gross production collections, and if sales and motor vehicle tax collections continue their recent sluggishness, we could be facing serious shortfalls in the year ahead.