Budget & Tax
Economists differ on Oklahoma’s budget future
April 22, 2019
Despite approval of roughly $1 billion in tax increases over the last three years, a new report claims Oklahoma will face “persistent” shortfalls that reach more than $1 billion by 2030 and “draconian cuts” to state services will occur unless lawmakers approve additional large tax increases.
But some economic experts say policymakers should view such claims with caution.
In a new issue brief, Kent Olson, professor of economics emeritus at Oklahoma State University, argues that Oklahoma government needs to raise taxes by amounts that match or exceed the historically large tax increases approved in the past three years.
In the brief, “Oklahoma’s Long-Run Budget Prospects: Better, But Not Good Enough,” Olson predicts that the rate of growth in state tax collections will not keep pace with the spending required to maintain all existing state government programs at their current levels, calculated on a per-capita basis that accounts for population growth and inflation.
Olson predicts the amount of Oklahoma state tax collections available for legislative appropriation will increase steadily from $7.6 billion in 2019 to $11.2 billion by 2030. But he still predicts an ever-growing “deficit” each year from 2020 to 2030 with the 2030 deficit hitting $1.1 billion.
How do steadily increasing tax collections translate into a shortfall? Because Olson argues that spending should increase at an even faster rate and increase from $7.6 billion in 2019 to $12.3 billion in 2030. The brief predicts Oklahoma state tax collections will increase by 3.34 percent annually, but argues the amount spent on existing government programs should increase by 4.4 percent per year.
Although they did not specifically address Olson’s report, other economists cautioned policymakers against overreacting to such straight-line projections.
“Anyone evaluating forecasts of state or local revenue needs, if you are seeing these, you have to look at them with a very critical eye in this environment,” said Mark Snead, an economist and president of RegionTrack whose work focuses on regional economic modeling and forecasting.
He notes that trends since 2007, both in Oklahoma and nationally, have defied expectations that are often reflected in the built-in assumptions used in many forecasts. Economic growth has been subpar for years, which reduced government revenue, but interest rates have also been low, which reduced upward pressure on government spending.
“At this point, growth is suggesting revenues might grow somewhat faster than they have, but not extremely fast, but because inflation is low there’s no real reason to think expenditures will be growing particularly quickly,” Snead said. “We’re somewhat in that same environment we’ve really been in for the past dozen years or so.”
Rex Pjesky, associate dean and professor of economics at West Texas A&M University, says it is not surprising an analysis would suggest a future “deficit” in which tax collections fall short of projected spending needs in government, and that such projections are typical regardless of a state’s tax system or current economic conditions.
“Any projection like that you’re always going to have a situation where you’re going to think your needs are going to exceed your ability to satisfy those,” said Pjesky, who has a Ph.D. in economics from the University of Oklahoma and a B.A. in economics from Oklahoma State University. “I have a 16- and a 13-year old, so if I project my budget over the next 15 years, over the next five, there’s absolutely no way that I’m going to have ‘enough’ income to satisfy everything that I need to spend money on in the next five to 10 years, but what I’ll do is adjust. Things will change.”
What would be unusual, Pjesky said, is for a report to suggest government tax collections are going to meet the spending levels desired by those who advocate for various programs.
“I don’t think there’s ever been a time when any level of government has said, ‘Well, we looked at the numbers and I think we’re going to have plenty for the next 10 years,’” Pjesky said. “That doesn’t happen.”
Olson writes that several tax increases are at lawmakers’ disposal that could prevent the shortfalls he predicts. Among the suggestions offered, he calls for raising the state’s top income tax rate, which kicks in at $8,700 of taxable income for single filers and $15,000 for couples, from 5 percent to 6 percent.
He also suggests applying the sales tax to services. A similar proposal was made by former Gov. Mary Fallin during her tenure. Her plan would have increased state taxes by $839.7 million annually. However, because sales tax expansion also allows cities and counties to tax services, Fallin’s plan was expected to raise total taxes in Oklahoma by $1.7 billion annually.
Olson also calls for nearly doubling the state’s gross production tax, despite the fact that the rate has been increased repeatedly in recent years and a recent report from the State Chamber Research Foundation found Oklahoma’s effective gross production tax now ranks fifth-highest among the top 16 oil-and-gas producing states. The foundation report also found the corporate tax burden for Oklahoma oil and gas companies is already third-highest among the top 16 producing states.
Without such major tax increases, which would hit Oklahomans at all income levels, Olson writes that it is “easy to imagine” a future in which Oklahoma sees “more school dropouts and fewer college graduates,” among other problems.
But other economists say reality may be far more mundane. Each year, lawmakers set and adjust spending priorities, something Snead said is obvious but often overlooked. As legislative decisions are made, the financial trajectory of government continually shifts. Furthermore, today’s hot-button issue and associated spending may be a bottom-drawer item in a decade.
“We’ll spend as much as the Legislature decides to spend,” Snead said.
“The Legislature needs to take the term ‘budget’ to mean exactly what it would mean if they looked it up in the dictionary, and they need to look and see how much money they have and they need to do what every family and household in the world has always done: They need to set their priorities and go with what they have,” Pjesky said. “And if the taxpayers vote to bless them with higher tax rates or something like that, then they can account for that. But every month, every year, every household in the world has some sort of process where they make sure that they don’t spend more than they earn.”