Leadership failure

An earlier version of this post appeared in the Journal Record

Today, as Oklahomans gather together to enjoy the first day of  the new year by watching Bowl Games, feasting on black-eyed peas, and nursing hangovers, two significant and seemingly irreconcilable events are occurring simultaneously in the world of state budget and taxes.

The first is that the budget cuts occasioned by the state’s mid-year revenue failure take effect. As a result of tax collections coming in below projections, the Office of Management and Enterprise Services last week announced that every agency funded by the General Revenue Fund (GRF) would take a 3 percent cut beginning in January. Since the cut is happening half-way through the year, agency’s monthly allocations from the GRF will actually be cut 6 percent (see this spreadsheet for details).  These cuts, totaling $179 million, come on top of the cuts many agencies took going into the current budget year and repeated years of cutbacks and flat funding that have hammered state services.

Today also marks the day when Oklahoma’s top income tax rate falls from 5.25 to 5.0 percent. This tax cut will allow the median Oklahoma household, with an income of $45,700, to pay an average of $29 less over the course of the year, or about $2.50 less per month. Four-fifths of families, those with incomes under $97,000, will receive less than $100 per year. Two out of five households will get no benefit at all from the tax cut because they make too little to have any of their income taxed at the top rate. Meanwhile, a full 24 percent of the total cut will go to the wealthiest 1 percent of households, with an average income well over $1 million; these families, on average, will see their state taxes reduced by over $2,000.

While the tax cut does not bear sole or primary responsibility for the state’s current budgetary woes, it is making the problem worse. Last year, while  legislators wrestled with a $600 million shortfall, the tax cut was expected to reduce this year’s revenues by $48.9 million.  Since the cut takes effect midway through FY 2016, this was only a partial-year impact. For FY 2017, when the budget shortfall is at $900 million, the tax cut will cost the state $147.0 million in lost revenue, according to Oklahoma Tax Commission projections. This means deeper budget cuts that will inflict more harm to our economy and greater hardship on our teachers, students, service providers, and neighbors in need than would otherwise be required.

How did this happen? How do we find ourselves moving ahead with a tax cut in the midst of a revenue failure and a projected $900 million shortfall?

The technical answer is that in 2014, the Legislature approved a bill, SB 1246, to provide for this tax cut to take effect in 2016. They tied it to a revenue trigger that was supposed to ensure that the cut would kick in only if revenues were growing. Specifically, the bill stated that the tax cut would be triggered if, as of last December, FY 2016 revenues were expected to be higher than estimated revenues for FY 2014. As can be seen from the graph, twelve months ago, it appeared that revenues would in fact grow slightly this year, so the trigger mechanism kicked in. By February, it was clear that this year’s revenues would in fact be lower than previous years. But because SB 1246 wasn’t written to respond to changing circumstances, and the Legislature last session refused to take action to halt it, the tax cut moved ahead. Now the latest projections are for FY 2016 estimates to be some $650 million below the trigger threshold.  And the drop in tax collections shows no sign of abating: General Revenue Fund collections are projected to fall an additional $180 million in FY 2017, to $5.1 billion.

However, the real answer for why this is happening is a failure of leadership, because our elected officials lacked the sense and the courage to stop it. The Legislature had the chance last year to suspend the tax cut when the state’s worsening financial situation was clear, but didn’t – even though Oklahomans, by more than a two-to-one margin, favored halting the tax cut amid budget shortfalls. The governor could have called the Legislature into special session this past fall, but didn’t. In the end, our elected leaders put their perceived political fortunes above their responsibility to act in the people’s best interests.

This situation already feels like a bad joke, but there may another vicious laugh yet to come.  Unless the Legislature takes action this year to repeal or amend it, SB 1246 contains another cut to the top rate that would take effect in 2018 if revenues are projected to rise at all from their current trough.