Oklahoma’s Fiscal Outlook: Moving from Crisis to Stability

February 2013

dblatt@okpolicy.org (918) 794-3944

David Blatt

Oklahoma’s Path to Prosperity What does Oklahoma need to be a prosperous state?

Oklahoma’s Path to Prosperity What Prosperity Looks Like
 

Good-paying jobs Well-educated, well-trained workforce  

Quality education system from early childhood to post-secondary More college graduates

 

Well-functioning infrastructure Healthy communities  

Access to timely and affordable care Public health

 

Safe streets and neighborhoods Stable safety net for those in need

Oklahoma’s Path to Prosperity We’re In This Together

Successful outcomes for our families, businesses and communities depend on effective public structures and systems Government is among our means of achieving our common goals as a state – working with private businesses, non-profits, philanthropies, faith groups, and families

Oklahoma’s Path to Prosperity
We Lag Behind
 We fall short in many of our common goals:
 Students in bottom third in reading and math proficiency (2009)  43rd in share of population with a college degree (22.2 percent, 2008)  43rd in overall health; in the bottom 10 states for rates of smoking, obesity, diabetes, physical fitness, preterm births, preventable hospitalizations, premature deaths, days lost to mental and physical illness, and other health indicators (2012)  1 in 6 Oklahomans (17.2 percent) and nearly 1 in 4 children (23.0 percent) live in poverty (2011)  4th in total prisoners per capita and 1st in female incarceration rates (2009)  9th worst road conditions

Oklahoma’s Path to Prosperity
We Already Lag Behind
 Oklahoma invests less than most states in our public structures.
State and Local Spending per Person by Function, 2007-08
$9,000
Spending per Person

$7,000 $5,000 $3,000 $1,000 -$1,000
Oklahoma US Average

Source: U.S. Bureau of the Census

Oklahoma’s Path to Prosperity
We Already Lag Behind
 Four years of budget cuts or flat funding and growing obligations threaten to corrode our public structures and weaken our prosperity  Can we provide a quality education for all students and produce the skilled workforce that businesses need?  Can we fix our crumbling infrastructure?  Can we improve our physical health and well-being?  Can we ensure the safety of vulnerable children and seniors left in our care?

Budget Trends: FY ‘10 – FY ‘13

Budget Trends: FY ‘10 – FY ‘13 The Recession Hit in Late 2008
 Oklahoma experienced six straight quarters of negative growth (declining state personal income) in late 2008 –2009  Economy has mostly grown faster than the nation’s since start of 2010
% Change from Prior Quarter

7.0% 2.0% -3.0% -8.0%

Quarterly Change in Personal Income, Oklahoma and National, th Quarter 2007 to 3rd Quarter 2012 4

2007.4

2008.2

2008.4

2009.2

2009.4

2010.2

2010.4

2011.2

2011.4

2012.2

National

Oklahoma

Budget Trends: FY ‘10 – FY ‘13 The Recession Hit in Late 2008
  Oklahoma’s unemployment rate rose quickly from under 4 percent to around 7 percent between Sept 2008 and June 2009 Unemployment was less severe, recovered more quickly than the nation
Monthly Unemployment Rate, National and Oklahoma, January 2008 to December 2012 (seasonally adjusted) 10.5 9.5 8.5 7.5 6.5 5.5 4.5 3.5 2.5
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
5.1% 7.2% 7.8%

10.1%

9.8%

National

Oklahoma

Budget Trends: FY ‘10 – FY ‘13 State Budgets Hammered
All but four states faced budget shortfalls in FY ‘11.

Budget Trends: FY ‘10 – FY ‘13
It’s a Revenue Problem
 Five consecutive quarters of worsening collections  Revenue dropped more than twice as steeply as in the previous downturn  Revenues recovering from late 2010 thru 2012 but have weakened in past four quarters
30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY '02 '02 '03 '03 '04 '04 '05 '05 '06 '06 '07 '07 '08 '08 '09 '09 '10 '10 '11 11 12 12 13
-3.2%

Quarterly Year-over-Year Change in General Revenue Collections, FY '02 - FY '13
16.1%

Budget Trends: FY ‘10 – FY ‘13 It’s a Revenue Problem
  FY ‘10 General Revenue 23 percent below FY ‘08 pre-downturn levels Revenues increased by 10.5 percent in FY ‘11 and by 8.3 percent in FY ‘12 but remain below pre-downturn levels

$7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 $4,717 $4,408

Annual General Revenue Collections, FY '00 - FY '13
$5,701 $4,174 $4,616 $4,966 $5,935 $5,953 $5,544 $4,621 $5,138 $5,565 $5,601

FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10 FY '11 FY '12 FY '13 (proj.) (est.)

Budget Trends: FY ‘10 – FY ‘13 It’s a Revenue Problem
Tax Cuts Had a Long-Term Impact
   Tax cuts were large, permanent, and back-loaded Tax cuts were stretched out over several years; full impact will not be felt until FY ’13 Major cuts were almost all to the personal income tax
Lost Revenues from Select Tax Cuts Enacted 2004 - 2006 FY'05 through FY'10 (in $ millions) $800.0 $600.0 $400.0 $200.0 $0.0 $18.7 FY'05
source: Oklahoma Tax Commission

$561.8 $333.3 $144.8 FY'06 FY'07 FY'08

$651.1

$776.9

FY'09

FY'10

Budget Trends: FY ‘10 – FY ‘13 It’s a Revenue Problem
  In FY ‘11 tax collections equaled 5.6 percent of state personal income, compared to 7.2 percent in FY ‘01 Tax collections have not kept pace with personal income since FY ‘06
Oklahoma State Taxes, Total and as Share of Personal Income, FY '82 - FY '11

Tax Collections Are at Historic Lows

S t a t e T a x e s ( i n 0 0 0 0 s )

$10,000,000

8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0%

$8,000,000 $6,000,000 $4,000,000 $2,000,000 $0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

State Tax Collections

Tax Collections as % of State Personal Income

Sources: State personal income from Bureau of Economic Analysis; Tax collections from Annual Executive Budget

Budget Trends: FY ‘10 – FY ‘13
Budgeting Through the Crisis
 Three consecutive years of declining appropriations (FY ‘10 – FY ’12) followed by modest increases (FY ‘13)  FY ‘13 appropriations of $6,855.8 million:
  $253 million, 3.8 percent, above FY ‘12 $269 million, 3.8 percent, below FY ‘09
State Appropriations, FY '06- FY '13 (in $ Millions, includes supplementals, excludes Rainy Day "spillover" funds)
$7,500
$7,043

$7,000 $6,500 $6,000 $5,500 $5,000 $4,500 $4,000 FY'06
$6,217

$30

$6,760

$224 $273
$838 $554

Total= $6,603
$100
99

$6,856

$7,095 $6,404 $5,897 $5,938

FY'07

FY'08 State Revenues

FY'09 Federal Relief

FY '10

FY '11

FY '12

FY '13

Rainy Day Fund

See FY ‘13 Budget Highlights at: http://okpolicy.org/files/FY13Highlights.pdf

Budget Trends: FY ‘10 – FY ‘13
Budgeting Through the Crisis
 Just under 90 percent of appropriations consistently goes to 10 agencies that provide core services  Over 65 agencies share remaining funding
FY '13 Appropriations: Total and 10 Largest Agencies (in $millions)
OHCA (Medicaid); $934 ; 13.6% DHS; $587 ; 8.3% Corrections; $464 ; 6.8% Transportation; $206 ; 3.0% Mental Health; $311 ; 4.5% Higher Ed.; $955 ; 13.9% All Other Agencies; $731 ; 10.7% Common Ed.; $2,347 ; 34.2% Career Tech; $135 ; 2.0% Juv. Affairs; $96 ; 1.4% Public Safety; $90 ; 1.3%

Total Appropriations: $6,855.7 million

Total Ten Largest: $6,125M; 89.3%

Budget Trends: FY ‘10 – FY ‘13
 Budgets for three straight years (FY ‘10, FY ‘11 & FY ‘12) involved variations on a theme:
 Large shortfalls in projected revenues  Fear of devastating budget cuts  Use of non-recurring revenues to partly bridge the budget gap  Budget cuts across state government but less severe for core education, health, human services, and public safety agencies

Budgeting Through the Crisis

Budget Trends: FY ‘10 – FY ‘13
Budgeting Through the Crisis: FY ‘10 – FY ‘12
 Governors Henry and Fallin and the Legislature used various revenue enhancements to bridge budget shortfalls and reduce the severity of cuts:  Revenue enhancements totaled close to $3 billion over 3 years  Half from federal stimulus bills; remainder divided between Rainy Day Fund, cash transfers, enhanced tax compliance, and suspending and deferring tax credits  Most new revenues were one-time/non-recurring  Budget cuts for almost all agencies for 3 consecutive years  Some 40 agencies – more than half of all appropriated agencies – absorbed cuts of greater than 20 percent  Cuts to some key health, human services, education, and public safety agencies were less severe

Budget Trends: FY ‘10 – FY ‘13
Budgeting Through the Crisis: FY ‘13
 Total appropriations increased by $253 million (3.8 percent) from FY ‘12  Most agencies received flat funding in FY ‘13
 46 of 78 appropriated agencies will receive the same amount or less

 Several agencies received funding increases for targeted priorities, including:
    DHS for the child welfare reform plan Transportation to fill budget holes after end of bond issues Health Care Authority for Medicaid expenditure growth Mental Health and Corrections for criminal justice reforms

 Education agencies received no additional funding or very small increases
 Support for public schools through the state aid formula kept flat

Budget Trends: FY ‘10 – FY ‘13
Impact of Cuts
 State appropriated spending reached its lowest level in at least 30 years in FY ’12  Budget cuts and funding shortfalls continue to affect Oklahoma students, teachers, public employees, nonprofit organizations and private sector businesses
State Appropriations as Share of State Personal Income, FY '80 - FY '12
7.0% 6.5% 6.0% 5.5% 5.0% 4.5%
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Sources: State personal income from Bureau of Economic Analysis; Appropriations from various sources

Budget Trends: FY ‘10 – FY ‘13
Impact of Cuts: Education
 Per pupil funding in Oklahoma down by 20 percent since 2008 (inflation-adjusted)  Third steepest cuts in the nation

Budget Trends: FY ‘10 – FY ‘13
Impact of Cuts: Education
 State aid funding has declined by $214 million since FY 2008 while public school enrollment has increased by over 31,000 students. Public School Enrollment and State Formula Funding, 2008 - 2013
$2,050 $2,037 654,542 641,721 644,777 $1,924 $1,894 $1,815 $1,816 $1,800 $1,700 $1,600 FY '08 FY '09 FY '10 FY '11 FY '12 FY '13 Public School Enrollment (October)
State Formula Funding (in Millions)

680,000 660,000 640,000 620,000 600,000 580,000

659,615

666,150

673,190

$2,100 $2,000 $1,900

Note: State Funding excludes money allocated for textbooks

Budget Trends: FY ‘10 – FY ‘13
Impact of Cuts: Education
 Almost 1,000 fewer teachers than in 2008, leading to larger class sizes and reduced class offerings.  Department of Education eliminated funding for adult education, alternative education, research-based teacher training programs, evaluation contracts, and other programs.  Despite new testing requirements, funding reduced for ACE remediation and eliminated for Reading Sufficiency in FY ‘13.  Common education has fallen to lowest share of state appropriations since at least FY ’00.  Funding for higher education down 8.1 percent since FY ‘09 and down 14.6 percent for Career Tech

Budget Trends: FY ‘10 – FY ‘13
Impact of Cuts: State Government
 Agencies have not been funded for four years to cover rising operating and employee benefit costs  State government workforce has shrunk by 9.8 percent compared to FY ‘09 and is 4.4 percent smaller than in FY ‘01  Staffing cuts have been especially severe for correctional facilities  Many state workers have not received a pay increase in 6 years.
State Employee FTE Count by Fiscal Year Average, FY 01 - FY '12 (excluding Higher Education; FY '12 YTD Apr)
40,000 35,000 30,000 25,000 20,000 FY-01 FY-02 FY-03 FY-04 FY-05 FY-06 FY-07 FY-08 FY-09 FY-10 FY-11 FY-12
39,350 38,231 38,834 38,924 38,154 37,139 37,486 37,684 36,723 37,403 36,081 35,504

Budget Trends: FY ‘10 – FY ‘13
Impact of Cuts: Public Safety
 The Department of Corrections remains critically understaffed. Staffed positions are just over 60 percent of recommended levels, while facilities are consistently at 98 percent to 99 percent of inmate capacity  Stress from being required to work frequent double-shifts and low pay is leading to high staff turnover. Often just one officer may be on duty in a dining hall of 160 inmates  Juvenile justice facilities are overcrowded and understaffed for highest-level offenders  The number of state troopers on Oklahoma highways is at its lowest level in 22 years

Budget Trends: FY ‘10 – FY ‘13
Impact of Cuts: Health and Human Services
 In the past four years, the Health Department has been cut by 18 percent, forcing layoffs for at least 300 employees  Health Department eliminated 17 child guidance centers serving pre-school children with developmental delays  Department of Mental Health and Substance Abuse Services reduced beds and closed centers for children’s mental health and adult substance abuse, cut contracts to all providers  Over 6,000 families on waiting list for developmentally-disabled home and community based waiver program  Significant reductions in counseling programs for abused women and children and prenatal education for low-income mothers  Office of Juvenile Affairs cancelled youth detention and gang prevention programs

Budget Trends: FY ‘10 – FY ‘13
Impact of Cuts
Oklahomans expect state government to:  educate our children  train our workforce  maintain our infrastructure  protect our communities  aid our most vulnerable family members and neighbors Have years of underfunding and the extended period of flat funding and cuts shrunk state government to where it can no longer perform these core functions?

The Challenges We Face

The Challenges We Face
An Incomplete Recovery
Substantial demands on scarce resources Short-Term – In a hole
    Need to restore cuts and pay for ongoing costs of state government Strengthen our child welfare system in accordance with settlement agreement Serve thousands with developmental disabilities and mental illness on waiting lists for services Add back more teachers and provide raises to teachers & state workers

Long-Term – Structural deficit
    Hazardous physical infrastructure – roads, bridges, state buildings Water infrastructure needs - $80 billion over next 50 years Unfunded pension liabilities still exceed $10 billion Aging population will require increased health care, social services spending

The Challenges We Face
Growing Long-Term Obligations
Oklahoma faces a ‘structural deficit’
Normal growth of revenues is insufficient to finance the normal cost of services year after year.
Projected Annual Budget Surpluses and Deficits Before and After 2 0 0 4 -2 0 0 6 Tax Cuts (2 0 0 7 to 2 0 3 5 )

1,000 500
M i l l i o n $2005

0 (500) (1,000) (1,500) (2,000) (2,500) 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 Ye ar B e fo r e Tax Cut s A ft e r Tax Cut s

Source: Projections conducted in 2007 by Dr. Kent Olson, Professor of Economics, Oklahoma State University

The Challenges We Face
Growing Long-Term Obligations
Federal Deficit Reduction Will Compound State Problems
 Budget Control Act established caps on discretionary spending though 2021 to reduce federal deficits by $917B  Sequestration: Failure of “Super Committee” to agree on deficit reduction measures triggered automatic procedures to reduce spending by additional $1.2 trillion beginning in 2013. Deferred two months by 2012’s “fiscal cliff” agreement  Exempts Medicaid, mandatory programs  Half the cuts would be from defense budget  Discretionary programs facing 9 percent cuts  Includes all education and worker training funding streams, many social services and health grants, agriculture, environment, others  Effective March 2013

The Challenges We Face
An Incomplete Recovery
 2010 – mid 2012: Monthly General Revenue collections came in above the same month for the prior year for 25 of 27 months  Since June 2012, collections have been flat
Change in Monthly General Revenue Collections, Compared to Same Month Prior Year, Jan '09 - Jan '13
30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% Jan-09
-8% -19% -22% -21% 1.6% 0% -7% -17% 6% 10% 2% 5% 6% 3% 20% 13% 12% 13% 9% 9% 10% 18% 16% 15% 5% 23% 19% 15% 7% 6% 4% 8% 2% 3% 10%

6%

-1% -8% -7%

-4% -13%

-24% -28% -26% -30% -31% -29% -30% -32%

May-09 Sep-09

Jan-10

May-10 Sep-10

Jan-11

May-11 Sep-11

Jan-12

May-12 Sep-12

Jan-13

The Challenges We Face
An Incomplete Recovery
 This year’s revenues virtually unchanged from last year  FY ‘13 revenue collections through January up 23 percent from FY ‘10 but still 5 percent below FY ’07  Revenues still below nominal levels of 6 years ago
Cumulative General Revenue Collections, July-January, FY '06 - FY '13 (in $millions)
$4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $FY '06 FY '07 FY '08 FY '09 FY '10 FY '11 FY '12 FY '13 $3,225 $3,410 $3,382 $3,574 $3,223 $2,610 $2,855 $3,226

The Challenges We Face
An Incomplete Recovery
 Income tax and sales tax growth has been offset by plunging gross production tax revenues  Low natural gas prices, growing cost of tax breaks for horizontal and deep well drilling have eroded GPT revenues
Year-to-Date General Revenue Collections by Tax, July - January, FY '11 -FY '13 (in $millions)
$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0
Net Income Tax

+10.1%

+7.0%

+11.0% -83.1%
Gross Production Tax

-1.4%
Sales Tax Motor Vehicle Tax Other Sources

FY '11

FY '12

FY '13

The Challenges We Face
FY ‘14: Looking Ahead
 Board of Equalization certified $7.045 billion as available for appropriation in FY ’14  $189 million (2.8 percent) more than total FY’13 appropriations  Several agencies are seeking FY ‘13 supplemental appropriations
FY '13 Total Appropriations and FY '14 Available for Appropriations, in $ millions (Feb. certification)
$7,045

$6,856

FY 13

FY 14

The Challenges We Face
FY ‘14: Looking Ahead
 Governor’s FY ‘14 budget proposes total funding increases of $106 million  Largest increases for DHS, Health Care Authority, Mental Health & Substance Abuse Services  Funding virtually flat for education, corrections  No pay increase for state employees or teachers
State Appropriations, FY ‘07 – FY ‘14 (in $millions, includes actual and proposed supplementals; FY ‘13 & ‘14 are Gov’s Budget
$7,200 $7,100 $7,000 $6,900 $6,800 $6,700 $6,600 $6,500
FY'07 FY'08 FY'09 FY '10 FY '11 FY '12 FY '13 FY '14 (Gov. budget)

$7,125 $7,043 $6,959 $6,760 $6,765 $6,803 $6,845 $6,951

The Challenges We Face
A Fiscally Responsible Course

“ “

Whatever our tax structure is in Oklahoma, it’s doing a good job of not holding us back, and on the other hand we don’t want to do anything to mess it up. And that’s what you always have to be careful of when you start getting political solutions to problems that may not really exist.
- Scott Meacham, Former State Treasurer, April 2012

You have to be sure you're right before cutting tax rates or shrinking the tax base. The Legislature and the governor cannot say in following years, ‘Oops, we made a mistake.’
- Larkin Warner, OSU Regents Professor of Economics, Nov. 2011

The Challenges We Face
A Fiscally Responsible Course
Preserve the Income Tax
 The essential cornerstone of a balanced tax system  Single largest state revenue source:  $2.2 billion in FY ’10 - 32.1 percent of total collections.

Total State Tax Collections, FY '10
Other, $1,353.6 19.6% Motor Vehicle Taxes, $579.3 8.4% Gross Production Tax, $732.2 10.6% Personal Income Tax, $2,224.8 32.1%

Sales Tax, $1,815.3 26.2%

Corporate Income Tax, $216.4 3.1%

The Challenges We Face
A Fiscally Responsible Course
Preserve the Income Tax
 Largest funding source for state services  Based on the share of agency appropriations funded with income tax revenues, elimination of the personal income tax would leave us unable to pay for:
      Salary and benefits for 17,000 classroom teachers; AND Health insurance coverage for 430,000 low-income children; AND Incarceration of 9,300 inmates; AND Tuition for 19,000 Oklahoma’s Promise students; AND The ROADS transportation improvement plan; AND Many other services and programs across state government.

See: ‘What the Income Tax Pays For’ at http://okpolicy.org/tax-reform-information

The Challenges We Face
A Fiscally Responsible Course
Preserve the Income Tax

“ “

Income tax cuts will not make Oklahoma more competitive If our ability to educate and train employees for a 21st century economy is damaged through lack of funding, if we can’t maintain our roads and bridges, strong health care system, robust research and technology infrastructure, safe streets, etc., then the benefits of a reduction in the income tax rates may be limited.
-Tulsa Metro Chamber Vice President & Former House Speaker Chris Benge, Oct. 2011

I can't sit here and say having no income tax, having low property tax, whatever, is going to make a big difference… We have to have a state that's known for excellence.
-Ardmore Chamber of Commerce Pres. Wes Stucky, Oct. 2011

The Challenges We Face
A Fiscally Responsible Course
Preserve the Income Tax
Oklahoma is already doing better than most states, including those without an income tax

Third best job growth, #1 best manufacturing job growth (2011)

The Challenges We Face
A Fiscally Responsible Course
Preserve the Income Tax
The income tax is essential to tax fairness
 Low and middle-income Oklahomans pay more of their income in state & local taxes than do wealthy households Income tax partly offsets the regressivity of sales and property taxes Broad-based tax preferences help lowincome seniors and families with children

The Challenges We Face
The 2012 Tax Debate
 Various tax cut proposals under consideration  All would lower the top income tax rate, at least partly offset lost revenue by eliminating various income tax credits, deductions and exemptions  Plan differed as to:  Fiscal impact (revenue-neutral vs. revenue reduction)  Which tax preferences were eliminated  Reduction or elimination of income tax  Triggers for future tax cuts
See OK Policy’s Summary and Comparison at: http://okpolicy.org/files/TaxPlanComparison.pdf

The Challenges We Face
The 2012 Tax Debate
The Final Agreement/Disagreement
 Governor, Speaker, Pro Tem announced tax cut deal just prior to final week of session:    Top rate reduced immediately from 5.25 to 4.8 percent Trigger to reduce rate to 4.5 percent based on revenue growth Revenue losses partially offset by limiting eligibility for personal exemption (to families below $70,000, individuals below $35,000); limiting itemized deductions, eliminating some business tax incentives Fiscal impact of $33 million in FY ‘13, $102 million in FY ‘14 Tax increase for 24 percent of filers

    

House leadership refused to let bill get heard by full House Senate rejected last-minute House plan Governor acknowledged defeat

The Challenges We Face
The 2013 Tax Debate
 Governor Fallin proposes cutting the top rate from 5.25 to 5.0 percent         Revenue impact of $40.7 million in FY ‘14, $106 million in FY ’15 Does not “pay for” the bill with offsetting revenues 42 percent of households would get no benefit 73 percent of total benefit would go to 20 percent with highest incomes Of households getting a tax cut, the median household would receive $38 Wealthiest 1 percent of households would enjoy tax cut of $1,870

Senate Republican tax bill (SB 585) takes top rate down to 4.75 percent, eliminates various income tax credits to limit fiscal impact Other proposals would cut top rate lower, phase down top rate over several years

The Challenges We Face
A Fiscally Responsible Course
How do we create a revenue structure that meets our obligations?
   Review and reduce tax credit programs:  Income tax, gross production tax credits Adopt combined corporate reporting Modernize the sales tax:    Expand sales tax base to some additional services Pursue collection of online sales through “clickthrough”/affiliate programs Increase the personal exemption Stretch and index tax brackets Expand the grocery tax credit or earned income tax credit

Target any tax relief towards those in greatest need:   

Adopt “pay-go” requirement for tax cuts and new spending

See: Action Items for Oklahoma: Tax Reform at http://okpolicy.org/action-items-for-oklahoma-tax-reform

The Challenges We Face
A Fiscally Responsible Course
Limit Tax Credit Programs
 Tax credits should adhere to the following standards:  Formal eligibility process for businesses applying for credits  Clear performance standards regarding investment and/or job creation, with consequences for failing to meet targets  Full disclosure of how credits are allocated  Sunset provisions, with reauthorization tied to a performance review  Limit state liability through caps on amounts that can be claimed – subject to annual legislative authority  Gross production tax credits should be limited or eliminated

The Challenges We Face
A Fiscally Responsible Course
Adopt Combined Corporate Reporting
 Combines all profit of parent and subsidiary companies within a single corporation  Combats tax dodging strategies by multi-state corporations that shift profits to subsidiaries in states where they are untaxed  23 states, including all Western states except New Mexico, have adopted combined reporting  Recommended by the Tax Reform Task Force

The Challenges We Face
A Fiscally Responsible Course
Limit Itemized Income Tax Deductions
 Itemized deductions mostly benefit upper-income households  Several options could be considered:  Repeal itemized deductions while increasing the standard deduction available to all families, OR  Cap the total value of itemized deductions, OR  Convert deductions to a credit as a set amount of selected federal deductions, OR  Do away with the deduction for state income tax payments  Could generate $100 million to $115 million in new revenue  Additional state tax liability would be partly offset by reduced federal tax liability

The Challenges We Face
A Fiscally Responsible Course
Modernize the Sales Tax
 Expand the sales tax base to cover selected services  Oklahoma currently taxes only 32 of 168 potentially taxable services  Taxing services is needed to maintain the long-term adequacy of the sales tax and make the sales tax more economically fair and rational  Should be careful to exclude services consumed primarily by businesses to avoid pyramiding  Do away with sales tax exemptions benefitting favored industries  Pursue collection of online sales through “clickthrough”/affiliate programs  Combine these measures with ending the sales tax on groceries

The Challenges We Face
A Fiscally Responsible Course
Provide Broad-Based Income Tax Cuts
 If tax cuts are on the table, increasing the personal exemption and stretching income tax brackets would assist more households and distribute benefits more broadly than further cuts to the top rate  Personal exemption has remained unchanged at $1,000 per person since 1982  Failure for decades to index income tax brackets:  Seven brackets all narrowly squeezed together  Bracket creep–56 percent of taxpayers now reach the top bracket; a much greater share of income is taxed at the highest level

The Challenges We Face
A Fiscally Responsible Course
Adopt Pay-Go Requirement
 Ensure that fiscal balance is maintained by requiring that tax cuts be fully offset with:  New revenues  Elimination of tax breaks  Identified spending cuts  New spending obligations would have to be paid for with additional revenues or cuts to other services  Current services budget and long-term budget forecasting would also help policymakers make sustainable budget choices

The Challenges We Face
A Fiscally Responsible Course
 Make smarter expenditure decisions:  Consolidate duplicative agencies and streamline services  Prioritize prevention and surveillance  Ensure adequate funding of public pensions  Give control for making decisions about revenues and spending back to our elected representatives

Looking Ahead A hopeful note?
“The odds of our elected officials doing the right thing are zero unless YOU tell them what needs to be done.”

Together Oklahoma is a grassroots, nonpartisan coalition of citizens, community groups, and businesses working together to ensure important public investments that support a robust economy and quality of life. Website: www.togetherok.org Follow on Twitter: @togetherok Like on Facebook: TogetherOklahoma

For More Information
Updated Budget Information
 okpolicy.org/current-budget-information

Tax Policy Information
 http://okpolicy.org/tax-reform-information

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 http://okpolicy.org/take-action  Join the “Together OK” group on Facebook

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