Budget & Tax
Beware the flood of federal dollars
April 8, 2021
The Biden Administration’s “American Rescue Plan” would send $3.5 billion to Oklahoma, with $2.1 billion being allocated to the state government. Like all federal money, it comes with heavy strings attached. All money must be spent and accounted for by 2024 and any state that accepts the money would be prohibited from cutting taxes. This prohibition on tax cuts alone is enough to give the state pause on accepting any federal money. However, the long-term impact these funds could have may be the biggest threat to Oklahoma.
History shows that a massive flood of federal money, while short-term, can overinflate state budgets. Just before the Great Recession of 2007-09, the state’s total revenue grew at an average pace of 4.5 percent. The growth of the federal portion of that revenue grew at a slower rate of 2 percent. Throughout the recession, total state revenues remained relatively flat. However, the share of federal dollars in the state budget grew by an average of 11.7 percent, increasing by $2.1 billion.
Source: State of Oklahoma, Comprehensive Annual Financial Reports
This surge in federal funding caused the state government to hit record highs in revenue for three consecutive fiscal years between fiscal year 2009 and 2011, despite the fact the nation was experiencing the worst recession since the Great Depression.
However, that flow of federal money—much like the current proposal from the feds—was temporary. Between fiscal years 2011 and 2014, the share of federal money in Oklahoma fell by 15.3 percent, or $1.3 billion. Even with the loss of all that federal money, Oklahoma’s budget remained relatively stable as state GDP began to rise to pre-recession levels and beyond starting in 2011. The problem was what happened next.
In 2015 Oklahoma entered another recession. Oklahoma’s GDP had fallen by $13.9 billion, or 8.7 percent, during the Great Recession. Between 2014 and 2016 Oklahoma’s GDP fell by $15.7 billion, or 8.1 percent.
Source: U.S. Bureau of Economic Analysis
This time, however, there was no federal bailout, as it was only a statewide recession and not national. This lack of national attention may have kept some from seeing just how severe the state recession was. As state revenue fell, there were cries that Oklahoma’s legislature was cheap and was underfunding the government. Those advocating for more government spending used the Great Recession-era funding levels as the benchmark to show how far Oklahoma’s state budget had declined. They ignored the fact that this was almost entirely caused by the loss of federal money. In fiscal year 2011, Oklahoma’s total state revenue reached its peak at $20.6 billion—but $8.9 billion, or 43 percent, of that was made up of federal dollars. In 2016, Oklahoma’s total revenue was $18.8 billion with only $7.4 billion in federal money. That means that, when excluding federal dollars, Oklahoma’s budget was only $255 million less in 2016 than in 2011.
For many, the flood of federal money during the Great Recession created a new baseline for which to judge Oklahoma’s state finances. The result was the passage of a multitude of tax and revenue measures culminating in the passage of HB1010xx and HB1011xx during the teacher walkout. In all, the state legislature raised more than $1.1 billion through tax and revenue increases between the 2015 and 2018 legislative sessions.
Oklahoma’s state government has already received $2 billion from CARES Act funding and would receive an additional $2 billion from the American Rescue Plan. The potential $4 billion would far outstrip what was received during the Great Recession and would create another overinflated state budget. Tax consumers could then use this as the new benchmark when arguing for tax increases. Combine this with the ban on tax cuts, and lawmakers should seriously consider rejecting this new round of federal money.