In late December, the State Equalization Board met and approved a preliminary estimate of state revenues for the upcoming budget year, FY 2018. This estimate will be the basis of Governor Fallin’s Executive Budget, to be released on the first day of session in February. The Board will meet later in February to approve revised revenue estimates that will be binding on the Legislature as it develops the FY 2018 budget. The Board also reviewed revised estimates for the current year.
Here are six things you should know about Oklahoma’s budget outlook based on the December certification:
1. Revenues will remain far below historical levels
General Revenue collections for this year (FY 2017) and next year (FY 2018) are projected to be at their lowest levels since FY 2011, when the state was emerging from the depths of the Great Recession. The General Revenue fund, which is the principal funding source for most Oklahoma government operations, is expected to collect 10 percent less this year and next than in 2006, even without adjusting for inflation.
2. The state should avoid a revenue failure this year – barely
Revenue collections for the current year (FY 2017) are now projected to come in $231.4 million, or 4.4 percent, below the final estimate certified back in June. Since the Legislature must provide for a 5 percent cushion between the certified estimate and the amount that can be appropriated, this shortfall is not quite large enough to trigger a revenue failure and mid-year cuts, as happened twice last year. Through the first five months of FY 2017, collections are just 0.4 percent below the estimate, which indicates that collections are expected to miss the mark by a widening margin over the remainder of the year.
3. Revenues are expected to grow very modestly next year – but will not trigger an automatic tax cut
General Revenue collections for FY 2018 are expected to be $135 million, or 2.7 percent, above the revised estimate for FY 2017. But since the FY 2018 estimate is below the FY 2017 estimate from June, an automatic cut in the top income tax rate from 5.0 to 4.85 percent will not be triggered. However, the Board will make another determination on the trigger in February; if next year’s revenues are projected to grow by more than the cost of the tax cut ($97.8 million) compared to the FY 2017 estimate from June, the trigger target would still be met.
4. Personal income tax collections are rising slightly – but corporate income tax collections are plummeting
The main contributor to falling collections in FY 2017 and 2018 is the corporate income tax. Corporate income tax collections are now projected to be just $108.0 million in FY 2017 and $120.6 million in FY 2018. This is less than half of actual collections for FY 2016 ($260 million) and nearly $200 million less than what was initially projected for FY 2017 ($296.3 million). There has been nothing reported on why corporate tax collections have plummeted so dramatically.
Of the other major taxes:
- This year’s personal income tax collections are now projected to be up $28.4 million, or 1.5 percent, compared to the June estimate. Next year they are expected to grow by 1.0 percent but remain 3.5 percent below FY 2016;
- This year’s sales tax collections are now projected to be down $100 million, or 5.2 percent, compared to the June estimate. Next year they are expected to grow by 3.1 percent and recover to the exact same amount as in FY 2016;
- Gross production taxes on oil and natural gas are projected to bring in $139.8 million to the General Revenue Fund in FY 2017 and to rise to $160.6 million in FY 2018. These amounts are above both the June FY 2017 projections ($128.1 million) and FY 2016 collections ($95.0 million), but still well below historic levels;
- The tax with the strongest growth is the use tax, which is applied to purchases of out-of-state goods. The use tax is projected to grow by $43 million, or 25 percent, between FY 2016 and FY 2018.
5. Lawmakers will have roughly $700 million to $900 million less to appropriate next year
Even though GR collections are projected to decline by less than $100 million next year, lawmakers will still face a massive budget hole next session. This is primarily due to the large amount of one-time revenue that was used in this year’s budget – over $600 million, which included issuing bonds to fund transportation, transferring money out of dozens of funds, and tapping the Rainy Day Fund.
The exact size of the shortfall is open to interpretation. The Equalization Board certified that a total of $6.038 billion is available to appropriate in FY 2018. This is $868 million less than the total authorized budget for FY 2017, which includes money from the Rainy Day Fund and agencies revolving funds that are not part of the total authorized expenditures certified by the Board. Without those amounts, the shortfall is $692 million. However, the FY 2017 authorized expenditures includes money that was used as supplemental appropriations for FY 2016. The graph above, which reflects money appropriated for FY 2017, shows a shortfall of $740 million.
6. Things could get better – or worse
There is no real way to know whether February’s revised certification will look better or worse than December’s. This is the third straight year of sizable shortfalls. Two years ago, the FY 2016 shortfall grew from $298 million in December to $611 million in February, while last year, December’s $900 million deficit grew to over $1.1 billion in February. Unlike last year, energy prices have been trending up over the past year; on the other hand, Oklahoma’s unemployment rate is rising, and this past quarter, Oklahoma’s state personal income grew by just 0.3 percent, the worst growth in the nation.
Whether the budget hole gets a little bigger or a little smaller in February, the situation facing lawmakers this year will be enormously challenging. As top officeholders are now acknowledging, the state has already imposed deep and damaging cuts to core services over recent years and faces enormous needs in education, public safety, human services, and other areas. This year, lawmakers are out of excuses to avoid finding the new recurring revenues necessary to bring our budget into balance.