The state budget deficit is not just oil prices

Oklahoma lawmakers are now struggling to write a budget with $611 million less revenue available than what was appropriated last year. It’s easy to blame falling energy prices and accompanying job losses for the shortfall – until we recall that last year, when oil prices were over $100 a barrel and the state was enjoying stronger economic growth than the national average, we still faced a $188 million shortfall. In order to balance last year’s budget and provide some modest funding increases for education and a few other agencies, the Legislature used up over $400 million in one-time revenues from cash reserves and agency revolving funds, and imposed 5 percent cuts on most agencies.

The reality in recent times is, in good times as well as bad, Oklahoma can’t balance its budget. Our state tax system is no longer generating the revenue needed to pay for basic public services. There are numerous indicators of a chronic and deepening budget gap, also known as a structural budget deficit:

• This year’s budget is $680 million, or 8.6 percent, below FY 2009, adjusted for inflation;
• Total state tax collections now make up just 5.6 percent of state personal income, well below the average of 6.9 percent of the quarter-century between 1982 and 2007 (see chart);
• Most of the state’s regulatory, judicial, economic development, and cultural agencies have been cut 20 percent or more since 2009, even before adjusting for inflation;
• The state workforce remained almost 3,000 employees smaller in 2014 than in 2009. Compared to 2001, the state workforce has shrunk by 1,158 employees, even as Oklahoma’s population has grown by some 350,000 residents;
• Our state prisons are staffed at less than 65 percent even while they are over 100 percent inmate capacity;
• Our teachers have gone seven years without a statewide pay raise and school districts across the state are facing a severe teacher shortage, which has led to larger class sizes, unfilled teacher vacancies, and emergency teacher certifications;
• Last year, the state Medicaid agency cut reimbursement rates for most providers by nearly 8 percent, restricted some benefits, and hiked co-payments on participants. This year, the agency could be forced to slash provider reimbursements even more deeply.

The state’s structural budget deficit has multiple causes.  Some have to do with economic and demographic over which state policymakers have little control, but others have been caused or aggravated by policy choice made by state leaders in recent years. The causes of chronic budget shortfalls include:

1. Off-the-top allocations. In recent years, legislators have earmarked a growing share of tax revenues to various priorities, leaving less money for other government functions. This year’s off-the-top allocations include $417 to the ROADS Funds for state roads and bridges, $140 million for county roads and bridges and $61 million for higher education scholarships. Although Republican leaders have focused on off-the-top allocations as the reason for budget shortfalls and have vowed to curb their use, it’s not clear that this will free up much additional money;
2. Rising health care costs. Health care costs have long been the the fastest rising share of the economy, which places pressure on the state budget through the Medicaid program and other health care agencies, as well as on state employee health benefits. The growth in health care spending has been slowing in recent years, but seniors will make up a growing share of the American population in coming decades, which ensures that health care spending will present a long-term challenge for state budgets;
3. Economic changes. The sales tax is the largest revenue source for state and local government combined in Oklahoma. Over time, our economic consumption is increasingly shifting from the purchase of goods in stores, which are taxed, to purchases of services, which are largely untaxed, and to online commerce, where state authority to collect taxes is constrained. This shift is contributing to tax collections failing to keep pace with economic growth;
4. Proliferating tax breaks: Tax credits, deductions, and exemptions grow in number and magnitude each year as a result of legislative action and inaction. There is no precise accounting of the revenue impact of all tax breaks, but figures of $1.8 – $2 billion are commonly cited just for tax incentives. Oklahoma Watch reported this year that the cost of selected economic incentives doubled in just four years, while the tax break for horizontal drilling alone is projected to cost $380 million this year.
5. Tax cuts: Since the mid-2000s, the Legislature has cut the top income tax rate from 6.65 percent to 5.25 percent, along with raising the standard deduction, exempting most or all retirement income, military income, and Oklahoma-held capital gains from taxation, and abolishing the estate tax. In total, these tax cuts have reduced tax collections by over $1 billion every year. Unless halted this session, the top income tax rate is scheduled to fall again to 5 percent in 2016 and to 4.85 percent in 2018, subject to a revenue trigger.

This is not an exhaustive list – growing pension obligations, costs associated with high rates of incarceration, strategies deployed by businesses to avoid state income taxes, and other factors are also contributing to the chronic budget crunch.

While there are specific measures and strategies the state can and should adopt to address each of these components of the structural budget deficit, the broader message is that we need a long-term strategy for getting our revenues back in alignment with what it costs to provide core services for Oklahomans. Unfortunately, our current lawmakers have done the opposite.