Oklahoma’s Fiscal Outlook: The Perilous Path Ahead

Updated March 30, 2012

David Blatt Oklahoma Policy Institute
dblatt@okpolicy.org - (918) 794-3944

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;  Stable safety net for those in need.

Oklahoma’s Path to Prosperity
We Lag Behind
 We fall short in many of our common goals as a state:
 Students in the bottom 1/3rd in reading and match proficiency (2009);  43rd in the share of the population with a college degree (22.2 percent, 2008)  46th in overall health; bottom 10 states in smoking, obesity, diabetes rate, job-related deaths, premature deaths, infant mortality, and days lost to mental and physical illness (2011);  1 in 6 Oklahomans live in poverty (16.9 percent) – and 1 in 4 children (24.5 percent) (2010);  4th in total prisoners per capita and 1st in female incarceration rates (2009);  9th worst road conditions.

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 common goals as a state – alongside private businesses, non-profits, philanthropies, faith groups, and families

 Government is among our means of achieving our

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
 The ongoing state budget crisis threatens a serious and long-term corrosion of our public structures that will weaken our prosperity  Can we provide a quality education for all students and produce the skilled workforce that our economy will require?  Can we fix our crumbling infrastructure?  Can we improve our physical health and wellbeing?  Can we ensure the safety of vulnerable children and seniors left in our care?

Budget Trends: FY ‘10 – FY ‘12

Budget Trends: FY ‘10 – FY ‘12 The Recession Hit in Late 2008
 Oklahoma experienced six straight quarters of negative growth (declining state personal income) in late 2008 –2009;  Economy growing faster than the nation’s since start of 2010.
% Change from Prior Quarter 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% 2007.4 2008.2 2008.4 2009.2 U.S. 2009.4 2010.2 Oklahoma 2010.4 2011.2

Quarterly Change in Personal Income, Oklahoma and National, th Quarter 2007 to 3rd Quarter 2011 4

Budget Trends: FY ‘10 – FY ‘12 State Budgets Hammered
 All but four states faced budget shortfalls in FY ‘11.

Budget Trends: FY ‘10 – FY ‘12
It’s a Revenue Problem
 Five consecutive quarters of worsening collections;  Revenue dropped more than twice as steeply as during the last downturn;  Revenues recovering over past eight 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 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 -12.1% -29.5%

Quarterly Year-over-Year Change in General Revenue Collections, FY '02 - FY '12
16.1%

Budget Trends: FY ‘10 – FY ‘12 It’s a Revenue Problem
 FY ‘10 General Revenue 23 percent below pre-downturn (FY ‘08) levels;  Revenues increased by 10.5 percent in FY ‘11 but remained 16.5 percent below FY ’08.
Annual General Revenue Collections, FY '01 - FY '11 (in $ Millions)
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10 FY '11 4,717 4,408 4,174 4,616 4,966 5,701 5,935 5,953 5,544 4,621 5,138

Budget Trends: FY ‘10 – FY ‘12
 Budgets for each of the past three years (FY ‘10, FY ‘11 & FY ‘12) have been successive variations of a similar 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 service, public safety agencies.

Budgeting Through the Crisis

Budget Trends: FY ‘10 – FY ‘12
Budgeting Through the Crisis
 FY ‘12 appropriations of $6.603 billion:
 Three consecutive years of declining appropriations;  $163 million, 2.4 percent, below FY ‘11;  $522 million, 7.3 percent, below FY ’09;  $157 million, 2.3 percent below FY ’07.
State Appropriations, FY '06- FY '12 (in $ Millions, includes supplementals, excludes Rainy Day "spillover" funds)
$30

$7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 $4,000

Total= $6,603
$641

$224
$838

$273
$554

$100
$99

$6,217

$6,760

$7,043

$7,095

$6,590 $5,897 $5,938

$6,404

FY'06 State Revenues

FY'07 FY'08 Federal Relief

FY'09 FY'10 Rainy Day Fund Initial

FY '10 Final

FY '11

FY '12

See FY ‘12 Budget Highlights at: http://okpolicy.org/fy-2012-budget-highlights

Budget Trends: FY ‘10 – FY ‘12
Budgeting Through the Crisis
 Governors Henry and Fallin and the Legislature used various revenue enhancements to help bridge budget shortfalls and reduce the severity of cuts;  Most new revenues were one-time/non-recurring;  Totaled close to $3 billion over 3 years, including:
 Federal funds from the stimulus bill (~$1.5 billion);  State Rainy Day Fund ($597 million);  Cash transfers from various funds ($525 million);  Enhanced tax compliance ($154 million);  Suspending and deferral of tax credits ($129 million).
Revenue Enhancements, FY '10 - FY 12 (in $millions)
Total: $2,988
Suspension and deferral of tax credits, $129 Tax compliance efforts, $154 Fee increases, $34 Other measures, $59

Rainy Day Funds, $597

Transfers from State Funds, $525

Federal stimulus funds, $1,491

Budget Trends: FY ‘10 – FY ‘12
Budgeting Through the Crisis
 90 percent of appropriations consistently goes to 10 agencies that provide core services;  Over 65 agencies share remaining 11 percent of funding
FY '12 Appropriations: Total and 10 Largest Agencies (excludes supplementals)
DHS; $537 ; 8.3%

Total Appropriations: $6,510.5 million

OHCA (Medicaid); $983 ; 15.1%

Corrections; $460 ; 7.1% Transportation; $107 ; 1.6% Mental Health; $187 ; 2.9% Career Tech; $134 ; 2.1%

Total Ten Largest: $5,811.9; 89.2%

Higher Ed.; $945 ; 14.5% All Other Agencies; $699 ; 10.7% Common Ed.; $2,278 ; 35.0%

Juv. Affairs; $96 ; 1.5% Public Safety; $85 ; 1.3%

Notes: Transportation also received $70 from bond issue; OHCA excludes revenue from hospital provider assessmber (SHOPP)

Budget Trends: FY ‘10 – FY ‘12
Budgeting Through the Crisis
 Almost every agency has absorbed repeated and significant cuts over past three years;  Some 40 agencies – more than half of all appropriated agencies – have absorbed cuts of greater than 20 percent since FY ’09;  Cuts to some key health, human service, education and public safety agencies have been less severe:  Mental Health -12.7%; DPS -12.6%; Higher Ed -9.1%; Corrections -8.6%; Common Education -7.9%; DHS -3.9%; OHCA +12.7%  No agencies have been funded to cover rising operating and employee benefit costs over the past three years;  Budget cuts and funding shortfalls continue to impact Oklahoma students, teachers, families, public employees, non-profit organizations and private sector businesses.

Budget Trends: FY ‘10 – FY ‘12
Impact of Cuts
 Agencies have reduced staffing, eliminated or cut back programs, closed offices and facilities, cut rates to private contractors, and raised user fees. Some examples:  About 1,600 fewer teaching positions this school year than last, while the number of students has increased by nearly 6,000. Some districts have turned down thermostats and required teachers to do janitorial work.  Department of Education eliminated bonuses for National Board Certified Teachers, research-based teacher training programs, evaluation contracts, and other programs;

Budget Trends: FY ‘10 – FY ‘12
Impact of Cuts
 In the past three years, the Health Department has been cut by 20 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;  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 ‘12
Unmet Needs
 Oklahoma is ranked 49th in overall health of its residents, ahead of only Mississippi.  Seventy percent of those needing treatment for serious mental illness and 77 percent of adults in need of substance abuse treatment not receiving appropriate care. For youth who need substance abuse treatment, 80 percent not receiving care.  DHS waiting list for services for individuals with developmental disabilities at over 6,000; some on list as long as 10 years.  Oklahomans receiving Medicaid assistance are at an all-time high. At the same time, Medicaid reimbursements have been reduced, which means fewer physicians are willing to take Medicaid patients.

The Challenges We Face

The Challenges We Face
Budget Outlook: An Incomplete Recovery
  In FY ‘10 tax collections equaled 5.5 percent of state personal income, compared to 7.2 percent in FY ‘01. Tax collections have been failing to keep pace since FY ‘06 due to:  Largest tax cuts in Oklahoma history;  Economic downturn
10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 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 5.0% 7.0% 6.0%

TAX COLLECTIONS AT HISTORIC LOWS

Oklahoma State Taxes, Total and as Share of Personal Income, FY '82 FY '10

8.0%

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

The Challenges We Face
Budget Outlook: An Incomplete Recovery
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

The Challenges We Face
Budget Outlook: An Incomplete Recovery
 State appropriated spending has reached its lowest level in at least 30 years – and will fall even further in FY ‘12
Appropriated Budget as % of State Personal Income, Oklahoma, FY '80 - FY '11
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

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

The Challenges We Face
Budget Outlook: An Incomplete Recovery
Federal Deficit Reduction Will Compound State Problems  Budget Control Act established caps on discretionary spending though 2021 to reduce federal deficits by $917B;  Failure of ‘Super Committee’ to agree on deficit reduction measures triggers automatic procedures to reduce spending by $1.2 trillion;  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 service and health grants, agriculture, environment, others.  Effective January 2013.

The Challenges We Face
Budget Outlook: An Incomplete Recovery
Substantial demands on scarce resources Short-Term – In a hole
 Partly restore cuts of past three years and pay for ongoing operating costs of state government.  Strengthen our child welfare system in accordance with settlement agreement  Thousands with developmental disabilities and mental illness on the waiting list for services.

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

The Challenges We Face
Budget Outlook: An Incomplete Recovery
 Twenty-two consecutive months of revenue growth compared to the same month prior year
Change in Monthly General Revenue Collections, Compared to Same Month Prior Year, Jan '09 - Feb '12
30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
-8% -7% -17% -19% -22% -21% -24% -26% -28% -30% -31% -29% -30% -32% 1.6% 0% 10% 6% 2% 5% 6% 3% 9% 20% 13% 12% 16% 13% 10% 9% 5% 18% 15% 6% 23% 19% 15% 7%

The Challenges We Face
Budget Outlook: An Incomplete Recovery
 FY ‘12 revenue collections through February up 23.9 percent from FY ‘10 but still 8.0 percent below FY ’09;  Revenues are still below nominal levels of 6 years ago.

$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 FY '01

July - February General Revenue Collections, FY '01 - FY '12 (in $Millions)
$3,538.5 $3,002.2 $2,863.9 $3,003.8 $2,662.4 $3,192.2 $2,830.3 $3,811.7 $3,714.5 $3,685.1 $3,102.2 $3,506.5

FY '02

FY '03

FY '04

FY '05

FY '06

FY '07

FY '08

FY '09

FY '10

FY '11

FY '12

The Challenges We Face
A Critical Juncture
(Oklahoma is) reeling from the effects of year after year of state budget cuts… The state has fewer employees. Classrooms are more crowded.
- The Oklahoman, December 21, 2011

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 Werner, OSU Regents Professor of Economics, Nov. 2011

The Challenges We Face
A Critical Juncture
 Projections of a ‘Flat Budget’ in FY ’13  Continued revenue growth largely or fully offset by loss of one-time revenues and incurred obligations  Governor’s FY ‘13 budget: increase of $26 million in total appropriations*  No additional funds for common education, higher education, Medicaid, human services, health department, veterans facilities, etc.  Modest funding increases for a number of targeted priorities  No funding to cover increased costs and caseloads  $111 million set aside for tax cuts
* After FY ‘12 supplementals

The Challenges We Face
A Critical Juncture
 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 differ as to:  Fiscal impact (revenue-neutral vs. revenue reduction)  Which tax preferences are eliminated  Reduction or elimination of income tax
See OK Policy’s Summary and Comparison at: http://okpolicy.org/files/TaxPlanComparison.pdf

The Challenges We Face
A Critical Juncture
Tax Plan #1: Tax Reform Task Force (SB 1623)
 Legislative Tax Reform Task Force recommended:  Lowering the top income tax rate from 5.25 to 4.75 percent;  Fully offset lost revenue by eliminating the personal exemption, sales tax relief credit, child tax credit, earned income tax credit and economic development incentives  Tax increase for most Oklahomans and shift more of tax load to middle-income and low-income households  SB 1623 restores personal exemption for those under $30,000/$60,000 yr. income;  Further cuts in the top income tax rate in future years as revenues rise;  Long-term goal of making Oklahoma a “no income tax state”.

The Challenges We Face
A Critical Juncture
Tax Plan #2: OCPA/Laffer Plan (HB 3038/SB 1571)
 Immediately lowers top income tax rate from 5.25 to 4.75 percent  Top rate automatically reduced each year until total elimination (2022)  Eliminates ALL deductions, exemptions and credits, including:  Standard deduction, personal exemption  Low-income credits  All business tax income tax credits  Floor substitutes restores exemptions for retirement income, Social Security benefits, veterans income, military pay  Fiscal impact of $250 - $300M in FY ‘13; $775 - $835M FY ’14, additional $300 million each successive year

The Challenges We Face
A Critical Juncture
Tax Plan #3: Governor’s proposal (HB 3061)
 Governor’s Oklahoma Tax Reduction and Simplification Plan:  No tax on those making <$15k (single)/$30k (married); 2.25 percent on those from $15 - $35k/$30-$70k; 3.5 percent on those earning >$35k/$70K  Taxes ALL income at same rate – creates a ‘tax cliff’  Eliminate itemized deductions, low-income credits, deductions for retirement and military income, and almost all economic development credits  Tax cut for most but increase for low- and moderate-income families with children and seniors.  Fiscal impact in first full year of $350 million, creates >$225 million budget hole for FY ‘14  Further cuts in the top income tax rate in future years whenever revenues rise > 5 percent until income tax is completely eliminated.

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  A wide range of 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
 Taxes are rarely decisive in business investment decisions.

"I will tell you that state income tax had absolutely no impact in terms of the decision of merging the company and where the corporate headquarters is located.”
Phillips Petroleum CEO Jim Mulva, discussing the company’s merger with Houston-based Conoco Inc. and decision to locate its new headquarters in Houston, November 2001

For 24 years, I’ve been conducting interviews with executives of companies that we tried to recruit to Ardmore that ended up locating elsewhere. Not once in all those years did a company that rejected Ardmore base its decisions on taxes.
Ardmore Chamber of Commerce President Wes Stucky, Oct. 2011

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 in 2011

The Challenges We Face
A Fiscally Responsible Course
Preserve the Income Tax
 Cutting the income tax will create great pressure to raise sales taxes or property taxes  Oklahoma’s combined state and local average sales tax rate – 8.66 percent – is already 5th highest in the nation (Tax Foundation);  Untaxed Internet sales already cost Oklahoma $185 to $225 million annually (OK Tax Commission);  Texas has a higher state sales tax rate (6.25 percent) than does Oklahoma (4.5 percent) and assesses the sales tax on 83 categories of services, compared to 32 in Oklahoma;  Every state without an income tax has higher per capita sales tax than Oklahoma;  The average Texan pays three times as much in property tax as do Oklahomans.

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 low-income seniors and families with children

The Challenges We Face
A Fiscally Responsible Course
How do we create a revenue structure that will allow us to meet our obligations?
 Review and reduce tax credit programs;  Adopt combined corporate reporting;  Limit itemized income tax deductions;  Modernize the sales tax;  Expand sales tax base to some additional services;  Pursue collection of online sales through ‘clickthrough’/affiliate programs;  Target any tax relief towards those in greatest need:  Increase the personal exemption;  Stretch and index tax brackets;  Expand the grocery tax credit or earned income tax credit

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.  Improve our budgeting process:  Current services budget;  PAYGO requirements;  Multi-year forecasting.  Give control for making decisions about revenues and spending back to our elected representatives.

For More Information
• Updated Budget Information: okpolicy.org/current-budgetinformation • Tax Policy Information: http://okpolicy.org/tax-reforminformation • Stay informed and get engaged: http://okpolicy.org/take-action Join the ‘Together OK’ group on Facebook

Stay Connected
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