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Oklahoma’s Fiscal Outlook: Moving from Crisis to Stability July 2012

Oklahoma’s Fiscal Outlook: Moving from Crisis to Stability July 2012. David Blatt 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

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Oklahoma’s Fiscal Outlook: Moving from Crisis to Stability July 2012

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  1. Oklahoma’s Fiscal Outlook: Moving from Crisis to StabilityJuly 2012 David Blatt dblatt@okpolicy.org (918) 794-3944

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

  3. 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

  4. 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 – alongside private businesses, non-profits, philanthropies, faith groups, and families

  5. 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) • 46th in overall health; in the bottom 10 states for rates of smoking, obesity, diabetes, job-related deaths, premature deaths, infant mortality, and days lost to mental and physical illness (2011) • 1 in 6 Oklahomans (16.9 percent) and 1 in 4 children (24.5 percent) live in poverty (2010) • 4thin total prisoners per capita and 1st in female incarceration rates (2009) • 9th worst road conditions

  6. Oklahoma’s Path to Prosperity • We Already Lag Behind • Oklahoma invests less than most states in our public structures.

  7. 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?

  8. Budget Trends: FY ‘10 – FY ‘13

  9. 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

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

  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 over past eight quarters

  12. 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 are projected to rise 8.1 percent in FY ‘12 – but to remain below pre-downturn levels through FY ‘13

  13. 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

  14. Budget Trends: FY ‘10 – FY ‘13 It’s a Revenue Problem Tax Collections Are at Historic Lows • In FY ‘10 tax collections equaled 5.5 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 Sources: State personal income from Bureau of Economic Analysis; Tax collections from Annual Executive Budget

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

  16. 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

  17. Budget Trends: FY ‘10 – FY ‘13 Budgeting Through the Crisis • 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

  18. 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

  19. 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 will receive 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 held flat

  20. Budget Trends: FY ‘10 – FY ‘13 • Budgeting Through the Crisis • No agencies have been funded 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

  21. Budget Trends: FY ‘10 – FY ‘13 Impact of Cuts • State appropriated spending reached its lowest level in at least 30 years in FY ‘11– and has likely fallen even further this year • Budget cuts and funding shortfalls continue to affect Oklahoma students, teachers, public employees, non-profit organizations and private sector businesses Sources: State personal income from Bureau of Economic Analysis; Appropriations from various sources

  22. 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 24,000 students. • 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. • FY ‘12 budget initially failed to fund full year of health care benefits and stipends for board-certified teachers. • Common education has fallen to lowest share of state appropriations since at least FY ‘00

  23. Budget Trends: FY ‘10 – FY ‘13 Impact of Cuts: Health and Human Services • 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; • 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.

  24. Budget Trends: FY ‘10 – FY ‘13 Impact of Cuts: Other Areas • The Department of Corrections remains critically understaffed. Stress from being required to work frequent double-shifts is leading to high turnover. Often just one officer may be on duty in a dining hall of 160 inmates. • The number of state troopers on Oklahoma highways is at its lowest level in 22 years. • The state owes $36 million to more than 600 cities, counties, electrical cooperatives, state agencies, fire districts, schools and Indian tribes for its share of costs associated with 21 natural disasters dating back to 2007. • State workers have not received a pay increase in 6 years. The number of state workers has dropped by 3,804 (9.8 percent) since FY ‘09.

  25. 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 the point where it is no longer capable of performing these core functions?

  26. The Challenges We Face

  27. The Challenges We Face An Incomplete Recovery • Monthly General Revenue collections above the same month for the prior year in 24 of last 25 months

  28. The Challenges We Face An Incomplete Recovery • FY ‘12 revenue collections through May up 21 percent from FY ‘10 but still 7 percent below FY ’07 • Revenues still below nominal levels of 6 years ago

  29. The Challenges We Face An Incomplete Recovery • Substantial demands on scarce resources • Short-Term – In a hole • Need to 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 services spending • Unfunded pension liabilities still exceed $10 billion

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

  31. 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 • Failure of “Super Committee” to agree on deficit reduction measures triggered 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 services and health grants, agriculture, environment, others • Effective January 2013

  32. The Challenges We Face A Fiscally Responsible Course “ 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 “ 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

  33. 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.

  34. 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

  35. 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

  36. 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

  37. 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)

  38. 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 average combined state and local sales tax rate – 8.66 percent – is already 5th highest in the nation (Tax Foundation) • Untaxed Internet sales already cost Oklahoma $185M to $225M 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 property taxes than Oklahoma • The average Texan pays three times as much property tax as the average Oklahoman

  39. 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

  40. 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

  41. The Challenges We Face The 2012 Tax Debate • The Senate Plan (SB 1623) • Based on 2011 Tax Reform Tax Force recommendations developed by Sen. Mazzei & Rep. Dank • Would have lowered the top income tax rate from 5.25 to 4.75 percent over 2 years • Revenue-Neutral: lost revenue fully offset by eliminating the sales tax relief credit, child/child care tax credit, earned income tax credit and economic development incentives; limited eligibility for personal exemption • Increased taxes for one-third of Oklahomans and shifted more of tax load onto middle-income and low-income households

  42. The Challenges We Face The 2012 Tax Debate • OCPA/Laffer Plan (HB 3038/SB 1571) • Immediately lowered top income tax rate from 5.25 to 3.5 percent • Top rate automatically reduced each year until total elimination (2022) (amended versions included triggers for future cuts) • Eliminated ALL deductions, exemptions and credits, including: • Standard deduction, personal exemption • Low-income credits • All business income tax credits • Floor substitutes restored exemptions for retirement income, Social Security benefits, veterans income, military pay • Huge revenue loss – while raising taxes for almost half of households

  43. The Challenges We Face The 2012 Tax Debate • Governor Fallin’sProposal (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” • Eliminates 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 • Further cuts in the top income tax rate in future years whenever revenues rise> 5 percent until income tax is completely eliminated.

  44. 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 opted against special session

  45. 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 • Limit itemized income tax deductions • Modernize the sales tax: • Expand sales tax base to some additional services • Pursue collection of online sales through “click-through”/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 • Adopt “pay-go” requirement for tax cuts and new spending

  46. 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

  47. 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

  48. 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 “click-through”/affiliate programs • Combine these measures with ending the sales tax on groceries

  49. 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

  50. 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

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