Tax cut trigger shoots Oklahoma deeper into hole

Last month, the Board of Equalization certified that revenues will grow enough next year to trigger a cut in the state’s top income tax rate. At the same time, the Board determined that the state will have nearly $300 million less available revenue for next year’s budget. How can both these things be true?

Last year, the Legislature passed a bill, SB 1246, to cut the top personal income tax rate to 5 percent from 5.25 percent. Out of concern that Oklahoma couldn’t balance its budget this year if the tax cut took effect immediately, the cut was deferred to January 1, 2016 and set to kick in only if the Board of Equalization projected that General Revenue (GR) for FY 2016 would be greater than the projected revenue for FY 2014 that was certified in February 2013.

The Equalization Board was presented in December with projected GR for FY 2016 that was $60.7 million more than the FY 2014 estimate from February 2013. This growth was enough to trigger the top rate cut effective January 1, 2016. The Board’s determination is binding, even if the revised revenues estimates that will be certified by the Board in February were to lower the revenue projections below the trigger threshold.

The income tax cut is expected to reduce FY 2016 revenues by $48.9 million.  Since the cut will take effect midway through FY 2016, this is only a partial-year impact. Last year, the Oklahoma Tax Commission projected the full-year impact of the cut in FY 2017 to be $147.0 million.

Even with the tax cut, and despite the recent sharp fall in oil prices, the state is projecting General Revenue collections to increase by $99 million in FY 2016 compared to the estimate for FY 2015. Sales tax, personal income tax, and gross production tax on gas are expected to increase, while corporate income tax and gross production tax on oil are expected to decline.  The Tax Commission is projecting the average price of oil next year at $59.97 per barrel and gas at $3.96 MCF; its economic forecasts account for the anticipated impact of lower energy prices on employment and sales.

If tax revenues are expected to grow, how then did the Equalization Board certify $298 million less available revenue for next year than was appropriated this year? The answer is that in building this year’s budget, the legislature included lots and lots of one-time revenues that are no longer available. The non-recurring revenue includes $132 million in cash from the General Revenue Fund, $101 million from the Cash Flow Reserve Fund, and $181 million from agency revolving funds and other funds. The unavailability of over $400 million in one-time revenues more than offsets the anticipated growth in tax revenues.

We will examine in another post what a projected $298 million revenue shortfall means for Oklahoman, and what options might be on the table to fill the budget gap. For now, there are two important conclusions that are worth drawing.

The first is that our current situation shows that tying tax cuts to a trigger is misguided and irresponsible. Last year’s lawmakers made a decision that is binding on this year’s Legislature without any idea of what our budget situation would look like. A $50 million tax cut will kick in despite the unavailability of $400 million in one-time revenues and despite plummeting energy prices that leave the state economy in a precarious state. Whatever may happen between now and 2016, be it a recession, a major natural disaster, or an expensive federal court order, the tax cut is locked in. As Treasurer Ken Miller rightly stated:

I just don’t see any financial reason to pass a measure predicated on future revenue growth when they could have waited to preserve flexibility for challenges like the ones we are facing today with a $300 million budget hole … (T)he most responsible thing is wait until that revenue growth occurs and make a decision based on other factors at the time.

Note that SB 1246 will automatically drop the top rate down to 4.85 percent in 2018 based on a similar revenue trigger.

The second point is that the certification again confirms, in stark terms, our structural budget deficit, or the growing gap between the cost of services and the revenue we generate to pay for them. We are facing large budget shortfalls for the second straight year despite enjoying one of the strongest economies in the nation. Many factors, including tax cuts,  ballooning tax breaks, growing off-the-top allocations, economic shifts, court decisions and more, have ensured that even in good times, we fall far short of meeting our obligation to fund our schools, public safety, health care, and other core services at appropriate levels. The need for an honest assessment of what we expect from state government, how much it will cost, and how we will pay for it is more urgent that ever.