The education funding package is a major step forward. There’s more work to do.

The Oklahoma Legislature last week passed a set of bills to provide pay raises to teachers, school support staff, and public employees funded primarily by a tax increase on tobacco, motor fuels, and gross production. Passage of the revenue bill was a truly landmark moment: it marked the first time that a major revenue bill has surpassed the three-quarters supermajority threshold for tax increases since passage of State Question 640 over a quarter-century ago, and it followed at least two years of intense but unsuccessful efforts to reach agreement on a grand bargain on the budget. More broadly, it signified a belated but clear recognition by Oklahoma lawmakers that renewed investment in education and other core services is critical for Oklahoma’s prosperity and requires significant new recurring revenue.

These bills mark a crucial step in tackling some of the state’s most urgent problems. But they in no way mark an end to the state’s budget challenges.  The new revenues fall short of fully funding new spending commitments. The state will also need additional revenue to balance this year’s budget and make greater investments in education and other needs in the future.

What happened last week

Last Monday, House leaders unveiled and quickly voted to approve a set of bills intended to provide teachers, school support staff, and state employees a pay raise, as well as increasing school operating support.

The House passed three revenue measures to fund the increases:

•  HB 1010xx increases the cigarette tax by $1.00 per package and changes how other tobacco products are taxed; raises the motor fuel tax by $0.03 per gallon for gasoline and $0.06 per gallon for diesel fuel; raises the initial gross production tax rate from 2 percent to 5 percent for the first 36 months of production, and assesses a new $5.00 per night hotel occupancy tax. The bill is projected to raise $475 million in FY 2019, of which $448 million will be available for appropriation.  The bill managed to win supermajority support in both chambers, passing the House 79-19 and the Senate 36-10, and has been signed by the Governor. Senate passage was based on an agreement to rescind the new hotel tax, which lowers the bill’s fiscal impact by $44 million in FY 2019. HB 1012xx, the vehicle to repeal the hotel tax, passed the House on March 29th.
• HB 1011xx  caps itemized deductions at $17,000 per year but excludes charitable contributions and medical expenses that are deductible for federal income tax purposes. HB 1011xx is expected to generate $94 million, of which $84 million may be appropriated for FY 2019. HB 1011 also passed both chambers and was signed by the Governor.
• HB 1013xx modifies state-tribal gaming compacts to allow for non-house banked table games, commonly known as ball and dice games.  HB 1013 is estimated to generate $24 million in FY 2019. HB 1013xx has not yet passed the Senate and it is uncertain if the Senate will take up the measure.

The House and Senate gave overwhelming approval to three pay raise measures:

• HB 1023xx adjusts the minimum teacher salary schedule to provide increases of 15.8 percent to 18.25 percent for certified education personnel (except superintendents), depending on their years of experience and degree level. In dollar terms, the raises range from $5,000 for a first-year teacher with a bachelor’s degree to $8,395 for a 25-year teacher with a doctorate. The average salary increase is $6,100. The bill is projected to cost $353.5 million in FY 2019. An amendment to HB 1023xx that was part of the final bill requires districts to provide the full pay raise to all teachers, including those who were already paid above the minimum salary schedule.
• HB 1024xx provides raises to state employees ranging from $2,000 per year for employees currently earning under $40,000 per year to $750 per year for workers earning over $60,000 a year. The measure is expected to cost $63.8 million.
• HB 1026xx provides a raise of $1,250 to all school support employees, at a cost of $52 million.

In addition, the House passed HB 3705, a regular session bill, that funds the State Department of Education for FY 2019. The Department’s total appropriation will be $2.912 billion, which represents a $480 million increase, or 19.7 percent, from their FY 2018 appropriation. (All amounts in the table below include supplementals and mid-year cuts.)

In addition to funding for teacher and support staff pay raises, the Department receives an additional $50 million to fund textbooks and instructional materials ($33M) and restore cuts to this year’s education budget ($17M), along with some $24 million to cover increased health benefit costs. This was just the second time in 15 years that the Legislature met their mandate to fund education by April 1st.

There’s more work to do

It’s a genuine achievement that the Legislature approved permanent new revenues to pay for the funding increases in this package. But there are several ways in which the state will continue to face serious fiscal challenges:

• Lawmakers were already looking at a shortfall of at least $70 million for the FY 2019 budget based on February’s certification.
• There is a both a short-term and a long-term hole built into the education and state employee funding package.
  • Assuming that the Senate does not take up the bill to authorize expanded tribal gaming,  the revenue bills are projected to generate a combined $488 million in FY 2019, compared to increased spending commitments of $543 million, for a FY 2019 shortfall of $55 million. Measures to expand tax collections on online sales or other measures could make up some or all of the difference in FY 2019.
  • Beyond the first year, annual revenues in HB 1010xx are projected to increase by some $45 – $50 million, according to the Tax Commission’s projections. But revenue from the $1 increase in the tobacco tax – $144 million – are being used to fund the pay raises next year. After next year,  cigarette tax revenues will go to a new Health Care Enhancement Fund, which will be dedicated for health care purposes (HB 1016xx). This means that other revenues will be needed to pay the recurring cost of the pay raises and school operating expenses.
• The three-year funding plan submitted by OEA demands additional raises for teachers, support staff, and public employees, along with continued increases for school operations. The total increased costs are $321 million in FY 2020 and $275 million in FY 2021. Lawmakers will face strong pressure over the coming days and weeks to commit to future raises and more money for school operations.

If the economy remains strong, growth revenue will fill some of this hole in future years. There is also expected to be money freed up for future budgets as existing bond payments are paid up and as contributions to the ROADS Fund reach their cap. 

Ultimately, however, if we are going to build on the progress of the education package and continue to make the investments Oklahoma needs to thrive,  lawmakers will need to approve additional revenues. The package adopted last week was a significant start, but many good revenue options were left on the table, including ending the ineffective and expensive deduction for capital gains deduction that benefits a small number of taxpayers, reversing a portion of recent income tax cuts on high-income earners, taxing luxury services, ending various sales tax exemptions, adopting combined corporate reporting, or going higher on cigarette or gas tax increases. On a longer-term basis, there will need to be less reliance on declining revenue streams such as the tobacco tax, fuel tax, and gross production tax, and a greater openness to raising taxes that are likely to grow in the future, especially the income tax and currently untaxed services.

Both teachers and regular Oklahomans are concerned that, after the hard-won passage of last week’s funding package, the Legislature will return to their old ways of refusing to raise revenues and neglecting core services. Understandably, many will continue to keep the pressure on lawmakers to fully fund core commitments. With last week’s progress behind them, Oklahomans are still focused on fixing the budget, and they are urging lawmakers to do better. Legislators should listen.