Recent reports on revenue collected by the state for fiscal year 2019 show significant revenue growth for the year. Thanks to tax increases adopted by the Legislature in previous legislative sessions and a strong economy, state revenue collections are growing at a solid pace, and we’ve begun reinvesting in state services.
In the coming years, state leaders will have to address short-term needs to support programs that improve Oklahomans’ health, safety, careers, and infrastructure, even as they face a growing long-term structural budget deficit. Continuing sensible policies to protect and grow the revenue base is the best way to ensure our state thrives in difficult circumstances.
Revenue growth has started to make up for years of decline
Oklahoma has faced several revenue downturns over the last two decades. These periods primarily reflect economic downturns, as in in 2002-03, 2009-10, and 2016-17. However, revenue decisions made by earlier lawmakers also played a role. The top income tax rate was lowered twice during this period, reducing annual revenue collections by over $1 billion.
Fortunately, changes in both the economy and tax policy reversed the revenue decline in FY 2018, and receipts accelerated further in FY 2019. Gross receipts – all revenue the state collects – grew by $1.2 billion and $1.4 billion respectively in FY 2018 and FY 2019. As a result, FY 2019 receipts were $2.6 billion (24 percent) higher than just two years earlier.
General Revenue Fund (GRF) revenues are the portion – approximately half – of gross receipts that are not legally restricted for other purposes and that constitute the majority of State appropriations. GRF revenues grew by $810 million in 2018 and $1.00 billion in FY 2019, for a two-year increase of 36 percent ($1.8 billion).
In addition to reinvesting in essential public services, particularly education, revenue growth dramatically increased the amount the state has saved for future needs. The Rainy Day Fund (RDF) received an automatic deposit of $382 million in FY 2018 and $355 million in FY 2019. The Fund now holds a record high of over $825 million. In addition, legislators in 2019 added $229 million to other savings funds, to be held until needed when revenue stops growing.
Tax increases were a key to recent revenue growth
Economic growth has been an important driver of the increase in revenues the last two years. However, recent growth in revenue owes as much to tax increases as it does to the economy.
The largest tax increase was contained in HB 1010XX, the first Oklahoma tax bill to receive the three-fourths legislative majority required by State Question 640 since the supermajority barrier was adopted in 1992. The State Treasurer estimates that the tax increases in HB 1010XX on cigarettes, motor fuels, and oil and gas production, increased gross receipts by $550 million in FY-2019.
In addition to HB 1010XX, other bills generated additional tax revenues beginning in FY-2019 by enhancing tax collections of online sales, expanding tribal gaming, and limiting itemized deductions from the personal income tax. The actual revenue from these tax changes are not reported, but the revenue growth is likely at least equal to the $128 million these actions were initially estimated to raise. This amount is shown in the chart below.
OK Policy calculated the impact of tax increases on the General Revenue Fund alone by reviewing the statutory apportionment of each tax source. We estimate that HB 1010xx contributed $478 million to FY 2019 revenue growth, and that other tax changes added $74 million. Tax increases account for 55 percent of the growth in the General Revenue Fund and 48 percent of the increase in Gross Receipts in FY 2019.
Hard decisions remain, and require careful and serious attention
While recent progress is significant and laudable, we are still a long way from fully recovering from years of declining investments. Considering the impacts of inflation, the FY 2020 budget is $1.4 billion (14.9 percent) less than the FY 2007 budget. In fact, the inflation-adjusted budget was higher in 13 of the last 20 years than it is in FY 2020.
To make progress toward the goal of being a leading state, our elected officials will need to make wise budget and tax policy choices. In particular, decisions must look beyond just the next budget cycle. The state still faces a significant structural budget deficit, meaning that the cost just to maintain current services will grow faster than revenue grows under current law. Even with the progress made by lawmakers over the past two years, that deficit “grows steadily larger each year, reaching $1.259 billion in FY 2030,” according to a study by OSU Economics Professor Emeritus Kent Olson. Over time, this gap must be closed, because the budget must be balanced. Doing so successfully will require tax increases, spending cuts, or a combination of the two.
In addressing the budget challenges that will arise both in the short- and long-term, we should apply the lessons from the last few years:
- Tax cuts should not be the first response to a couple of good years. Previous cuts made the job of the 2018 Legislature more difficult and painful than it would have been with a stronger and more consistent revenue base. Those cuts also reduced our investments in schools, public safety, health and economic security below what they would have been without the cuts.
- Decisions should be made for the long run. While we must emphasize stability and adequacy on the revenue side, we need to emphasize expenditures that pay off in the future by growing our economy.