Trigger Warning: Legislature sets itself up for another ill-timed income tax cut

This time last year, Oklahoma was in the middle of a massive budget crisis. As revenues came in below projections, the state twice made across-the-board budget cuts that hit our schools, health care, roads, and other key building blocks of our economy. Then the Legislature came into session facing a $1.3 billion shortfall, which led to even deeper cuts. In the midst of this agony, another tax cut took effect at the start of this year — adding at least $150 million to the budget hole and ensuring that critical services were slashed more deeply than would have been necessary without the tax cut.

That tax cut kicked in because of a poorly-designed trigger mechanism passed by legislators in 2014. This year could be déjà vu all over again. As a result of the same legislation passed nearly three years ago, Oklahoma could face another automatic tax cut simultaneously as we grapple with another huge budget hole and the likelihood of even more painful cuts. It’s time to learn from our mistakes. Making sure that this tax cut does not take effect should be a top priority of next year’s Legislature.

Under the bill passed in 2014, another tax cut lowering the top income tax rate from 5 percent to 4.85 percent could take effect in January 2018. The tax cut is automatically triggered if the Board of Equalization determines that General Revenue collections are projected to grow next year by more than the cost of the tax cut in 2018. Last year, the cost of the 0.15 percentage point cut was estimated at $94.8 million by the Oklahoma Tax Commission. The Equalization Board is set to make a preliminary determination on the trigger at the end of this month and a final determination in February as to whether the tax cut takes effect in 2018.

The problem with the trigger mechanism can be seen clearly in the chart below: even if revenues grow enough to reach the trigger, next year’s estimated GR collections will still be more than $400 million below what they were in FY 2015. And even with revenue growth, the  state is facing another huge budget hole due to the substantial amount of non-recurring revenue — some $550 million to $700 million — that was used to balance the FY 2017 budget. As Tulsa World editor Wayne Greene noted, “We’re still stumbling around from the last time, and we’re getting ready to hit ourselves in the head with another hammer.”

Knowing that the state budget needs more time to bounce back from the current drop in revenues, legislative leaders almost succeeded last year in deferring the next tax cut. Under a bill that was introduced in the final days of session, SB 1618, the 4.85 percent rate would kick in only when total expenditure authority as certified by the State Equalization Board exceeds $7.25 billion. By comparison, last February, the Equalization Board certified total expenditure authority of $5.851 billion. The threshold amount in SB 1618 is roughly equal to the level of total state appropriations in FY 2015 ($7.235 billion).

SB 1618, which was introduced in the waning days of the 2016 session, passed the full Senate 44-3 two days before legislative adjournment. Before the bill could be brought up for final passage in the House, however, a glitch in the bill’s drafting was discovered. (Specifically, the bill mistakenly identified the Tobacco Settlement Endowment Fund instead of the Oklahoma Education Lottery Trust Fund among the funds that would determine total expenditure authority.) As a result, the Governor indicated she would have to veto the bill; since there wasn’t time to pull the bill back and get a revised version through both chambers, the bill was left to die.

Legislation filed early for the 2017 session by Sen. Ron Sharp, SB 13, would postpone the next tax cut to at least 2019 and make the trigger subject to projected revenue growth equal to the cost of the tax cut plus $500 million.

Ideally, the Legislature would stop enacting triggers entirely and would base its tax policy decisions on conditions at the time, not some point in the future when the state’s full financial situation is unforeseeable. The Legislature should also reject the idea that a modest level of revenue growth means we can afford more tax cuts — an idea that ignores the reality that state government must spend more over time to provide the same services as populations grow and costs rise. At the very least, the Legislature must act in 2017 to push the trigger back and give Oklahoma more time to recover from repeated budget cuts.