Why tax increases would be less harmful to Oklahoma’s economy than budget cuts

With the oil and gas industry in freefall and a state budget hole that has grown to $1.3 billion, Oklahoma lawmakers’ best budget scenario this year is to find the least bad among many terrible options. While the federal government can simultaneously cut taxes and increase spending to provide a short-term economic boost, Oklahoma and most other states are required by law to maintain a single-year balanced budget.

That leaves us with a difficult trade-off. Do we close the budget hole with deep cuts to core services like schools, public safety, infrastructure, and health care? Do we make what is an unpopular choice even in good economic times by raising taxes? While almost no one wants to cut core services or raise taxes if it can be avoided, the budget won’t be balanced without one, the other, or both. But we can ask: between these bad options, what is likely to do the least harm?

Spending cuts take more money out of the economy than tax hikes

A few years ago, nearly every state was dealing with the problem that Oklahoma confronts today. The Great Recession of 2007-2009 forced state and local governments to make very hard choices to maintain balanced budgets. At the time, a group of 120 leading economists argued that spending cuts would be more harmful to state economies than tax hikes during the recession. They wrote:

“In a recession, you want to raise (or not decrease) the level of total spending—by households, businesses and government—in the economy. That keeps people employed and buying things, and makes it more likely that businesses will want to invest to serve that consumer demand. Budget cuts reduce the level of total spending. Raising taxes on high income households also will reduce spending, but by much less than the amount of the tax increase since those with plenty of income typically spend only a fraction of their income.”

The logic is not hard to follow. A large majority of money spent by state government goes directly to Oklahomans who are part of our state economy — whether they are government employees like teachers and child welfare workers, state-funded health care providers like doctors and nursing home aides, or one of the many private businesses that contract with government to provide office supplies, vehicle maintenance, lawn care, technology, and much more. These dollars spent by state government become income for hundreds of thousands of Oklahomans both inside and outside government, who can then go out and spend on their own needs so that it multiplies throughout the economy.

Of course, we get some of that same effect when a dollar goes untaxed. However, when states must choose between taxing higher-income households or cutting spending in a downturn, the dollars lost to spending cuts will not go nearly as far as they would have otherwise. That’s because, as the economists pointed out, these high-income households are more likely to save rather than spend a significant portion of that money. They are also more likely to spend the money on out-of-state purchases by going on vacation or purchasing from businesses located out-of-state.

Oklahoma has already deeply cut spending while lowering taxes

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“We’re contemplating drastic measures like throwing tens of thousands of low-income parents off Medicaid, buying out or laying off hundreds of DHS workers, increasing class sizes even more and cancelling advanced courses, and eliminating school bus service.”

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Oklahoma’s particular case presents an even stronger case for tax increases to deal with the shortfall. We’ve already cut budgets substantially while also cutting taxes. Even during good economic years, Oklahoma never fully restored funding lost during the Great Recession, so that today most state agencies are funded at 10 to 30 percent below 2009 levels. Nearly every state agency has been forced to dig deep to cut less important and less efficient programs — the easy savings are already squeezed out.

Now we’re contemplating drastic measures like throwing tens of thousands of low-income parents off Medicaid, buying out or laying off hundreds of DHS workers, increasing class sizes even more and cancelling advanced courses, and eliminating school bus service, among other difficult cuts.

We’re contemplating disastrous cuts even as quite a few sensible revenue options have been left untapped. Meanwhile, we’ve repeatedly cut the top income tax rate so that the share of income we are paying in state taxes is near a 30-year low. In this context, the least bad options to get us through this crisis are almost all on the revenue side.

Appropriate tax increases will do the least harm to Oklahomans struggling most in the downturn

During the Board of Equalization meeting that determined Oklahoma’s shortfall had grown to $1.3 billion, Governor Fallin defended maintaining this year’s income tax cut despite the crisis. She said, “Giving the middle class and the poor a tax break is a smart thing to do, letting them keep more of their hard-earned money, especially when people are losing their jobs right now.”

But as we’ve shown before, middle-class and poor families are getting little to no benefit from the top income tax rate cut. But these families do stand to suffer most from budget cuts that would take away their health care and child care, take teachers out of their schools, increase their fees and co-pays, and eliminate their broad-based tax credits. These families have already taken the biggest hits from cuts in many of these areas. If we refuse to rethink the tax cuts for top earners in this situation, Governor Fallin and other lawmakers will have done precisely what they claim to warn against — pushed extra suffering onto the poor and middle-class during a difficult economy for everyone.

The least bad choice on this menu of bad choices should be clear. Oklahoma should prioritize tax increases on those who can most easily afford them over doubling down on budget cuts. That’s the best option for our economy and for struggling Oklahoma families.