Tax cuts now reducing state revenues by over $1 billion per year

A new report by OK Policy finds that the cost of state income tax cuts since the mid-2000s has grown to over $1 billion annually. Repeated tax cuts and shrinking state budgets have left state services severely weakened, even before next year’s expected massive budget shortfall that could reach or exceed a billion dollars.

These billion-dollar tax cuts have come at the direct expense of funding for core public services that are important for the prosperity and well-being of Oklahomans. At the same time, the report finds that tax cuts have not brought the boost to the state’s economy that supporters predicted, and they have given the biggest cash benefits by far to the wealthiest Oklahomans while doing little for low- and middle-income families.

Under a series of bills passed under bipartisan agreements between 2004 and 2007, the top rate was cut from 6.65 percent in 2003 to 5.5 percent by 2009. These mid-2000s tax cuts also included a “trigger” that automatically reduced the top rate to 5.25 percent, just as Oklahoma was emerging from recession, in 2012. Now under legislation passed in 2014, the top rate has fallen again to 5.0 percent and could fall to 4.85 percent as early as 2018. Altogether, these tax cuts are reducing state revenues by $1.022 billion per year, according to an analysis prepared for OK Policy by the Institute on Taxation and Economic Policy.

Based on the budget proportions of the largest state agencies, that means without tax cuts Oklahoma could be investing $356 million more into K-12 education, enough to provide raises of about $6,000 per teacher or to combine teacher raises with additional days of instruction, reduced class sizes, and expanded priority programs such as early reading instruction. Higher education could have received an additional $138 million, enough to fully fund the Complete College America Oklahoma Plan initiative. The Department of Human Services would have an additional $97.2 million, more than enough to serve the many thousands of families on the waiting list for home-and community-based services to help those with developmental disabilities. The Department of Mental Health and Substance Abuse Services would have $48.4 million additional dollars — a direly needed boost when Oklahoma has among the highest rates of mental illness in the nation and 60 percent of Oklahoma adults with mental illness are not receiving treatment.

Instead of investing in these and other core public services over the past decade, the state has experienced a continuing budget crisis. Even after the economy recovered from a severe national recession, Oklahoma’s funding for core services remains well below pre-recession levels. That has meant acute teacher shortages, college tuition and fee hikes, critically understaffed correctional facilities, longer waiting lists for services, and lower reimbursement rates for medical and social service providers.

With or without tax cuts, Oklahoma would be facing an immediate budget shortfall as a result of low energy prices. But without the tax cuts of the past dozen years, we would be approaching this latest downturn from a far stronger starting point. And with larger budget surpluses during times of growth, we might also have saved more money in reserves to help us through our current economic challenges.

While some tax cut supporters and state officials have claimed that reducing the top rate helps almost all Oklahoma families because it kicks in at a relatively low amount of taxable income ($7,200 for a single person or $12,200 for a married couple), the reality is that after applying the standard deduction and personal exemptions, a large number of Oklahoma families do not reach this income level.

Of the total $1.022 billion in income tax cuts from lowering the top rate, the wealthiest 20 percent of households — those making on average $246,000 a year — have enjoyed 72 percent of the benefit. And the top 5 percent of households — those making on average $568,000 a year — alone received 43 percent of the benefit. Meanwhile, those with household income of $62,200 and less — 60 percent of households — have received just 10 percent of the income tax reductions. Altogether, the wealthiest 1 percent of households in Oklahoma has received nearly the same share of the tax cuts as the bottom 80 percent.

Meanwhile, based on the experience in Oklahoma and other states that have significantly cut income taxes in recent years, tax cuts have shown little benefit to the economy. Four of the five states that enacted the largest personal income tax cuts in the last five years have experienced total job growth and personal income growth below the national average since the tax cuts took effect. Oklahoma did experience strong economic growth in recent years due to a booming energy industry, but as oil and gas prices have declined, the state economy has reversed course, with growth levels falling to worst in the nation in the most recent quarter. Even during those good economic years, the state has already slashed funding to many agencies by 20 to 30 percent, leaving us more vulnerable and unprepared for an energy industry downturn.

The report concludes that if Oklahoma is ever to emerge from our perpetual budget crisis, we must reexamine the priority being given to cutting taxes without responsibly assessing the impact on the state economy and what it will take to preserve vital public services. The problem has been years in the making and will take years to fix. A sensible place to start is to repeal the most recent tax cut and to cancel the next tax cut already scheduled for as early as 2018. As Oklahoma State Treasurer Ken Miller recently said, “common sense dictates that until the state proves it can live within its means, it really should stop reducing them.”