Budget & Tax

House budget debate pits tax increases against spending restraint, savings

May 7, 2020

Ray Carter

House lawmakers voted Thursday to send legislation to Gov. Kevin Stitt that relies on modest spending reductions and use of savings rather than tax increases to cover a $1.3 billion shortfall.

The legislation was opposed by Democrats who said tax increases should be considered and that the budget should incorporate more of the federal funding provided to states for COVID-19 response.

“We have people in this state who need services,” said House Minority Leader Emily Virgin, D-Norman. “We have people in this state who can afford to pay taxes to fund those services, just like in every other state that funds core services at a higher level.”

“Beyond what we’re doing today, changes that can set us in a better direction in the future will require us to broaden our mind and think of new philosophical approaches to the way we govern, to the way we collect revenue, to the priorities that we have,” said Rep. Forrest Bennett, D-Oklahoma City.

Virgin said Oklahoma’s tax structure is too reliant on sales taxes, and that an increase in the personal income tax is needed, including the creation of new brackets with higher rates for those with greater earnings.

“More people than ever are depending on state services, and this is not a time to be cutting those critical state services,” Virgin said. “I know it’s hard to have a conversation about revenue and taxes. We’ve had it several times, but the one thing that we’ve never addressed in the right direction is this progressive tax measure that we can take.”

But House Appropriations and Budget Chairman Kevin Wallace said Oklahoma’s tax structure is not the cause of this year’s shortfall.

“There’s been a lot of talk here about tax structure,” said Wallace, R-Wellston. “But the pandemic, it really isn’t a problem with the tax structure. It’s a problem with the velocity of the economy and money circulating within it. Literally, when everything is shut down, there’s no consumption, number one, of fuel, or much reduced. And then there’s no spending, so there’s no earnings.”

Senate Bill 1922 appropriates funding for state agencies for the state fiscal year 2021 (FY21). Under the bill, which spends more than $7 billion, most agencies will have their appropriation reduced by around 4 percent.

Although lawmakers faced a $1.3 billion shortfall, the legislation cut far less than that thanks to the use of savings and redirection of funding currently provided to various state entities outside the appropriation process. Overall, lawmakers filled $886 million of the $1.3 million gap.

They achieved that feat by taking $243 million from savings in the state’s “rainy day” fund and $162 million in savings from the state’s Revenue Stabilization Fund. They also redirected $180 million from a state road fund, took $115 million from agency revolving funds, redirected $111 million that would have otherwise gone to state pension systems outside the appropriation process, and used $28.9 million reaped from state settlements with opioid manufacturers, among other things.

In some cases, such as the road funding, bond financing will be used to replace lost dollars, which will keep the state’s eight-year plan of bridge and road maintenance on track.

Wallace said the agreement also leaves some reserves in place for future budget challenges, noting the economic impact of COVID-19 may linger into next year’s state budget process. He said this year’s budget plan still leaves $58.6 million in the state’s “rainy day” savings fund that can be used next year. Lawmakers will also have other reserves left over, including $33.5 million held in a fund to prevent cuts to health care providers treating Medicaid patients, and as much as $150 million in the Revenue Stabilization Fund. The redirecting of money from pensions to the state budget will also continue next year, providing another $112 million, Wallace said.

Because SB 1922 reduces this year’s base spending by around $300 million, it indirectly mitigates the likelihood of a shortfall that requires additional cuts next year, he noted.

“We are looking out,” Wallace said. “I am very optimistic, but we are preparing to be able to absorb another reduction if we have to.”

“We didn’t want to burn through all of our available resources in this fiscal year and set ourselves up for failure in FY22,” said Rep. Kyle Hilbert, a Bristow Republican who is vice-chair of the House Appropriations and Budget Committee. “That would be awful.”

Democrats suggested $800 million that the Oklahoma government has received in federal Coronavirus Aid, Relief, and Economic Security (CARES) Act funding should be incorporated more thoroughly into the budget plan. But Republicans noted the federal money is restricted, in many cases, to be used only for costs related to COVID-19 response. However, they said CARES money may eventually free up state funds and generate cash flow that can be tapped next year.

Wallace noted agencies are currently spending state-appropriated dollars for COVID-19 response and will be reimbursed later with federal CARES Act funding.

“I believe, when we come back, there will be additional funds in revolving funds because they’re going to get, basically, refunded the budget money that they’ve spent,” Wallace said.

SB 1922 passed the Oklahoma House of Representatives on a 77-23 vote that broke along party lines with Republicans in support and Democrats opposed.

The bill now goes to Gov. Kevin Stitt.