Budget & Tax, Law & Principles

Stitt’s fiscal views a culture shock for Legislature?

June 1, 2022

Ray Carter

The election of Kevin Stitt, a successful businessman who was a political unknown before he became governor, marked a dramatic change in how the Oklahoma state government operates.

Since Stitt entered office, the state government has shifted from having massive annual budget shortfalls to having historic levels of savings, and from constantly enacting tax hikes to debating tax reductions.

That represents a sea change from prior practice at the Oklahoma Capitol.

“One of the most important developments of the last almost-four years has been a change in the culture from spending every dime to actually saving money that we could have spent, and we just don’t,” said Andrew C. Spiropoulos, a professor of constitutional law at Oklahoma City University. “I think that Stitt is certainly the driving force behind that culture change, although the Legislature deserves credit for jumping on board as well. The idea that we would have a cash account in addition to the Rainy Day Fund that doesn’t get spent would have been unthinkable four years ago.”

Spiropoulos, who is also the Milton Friedman Distinguished Fellow for the Oklahoma Council of Public Affairs, has up-close experience with budgeting debates at the Legislature. In 2005 and 2006, Spiropoulos was the senior counselor to the Speaker of the Oklahoma House of Representatives, and his duties included serving as chief policy advisor and negotiator in dealings between the Republican-controlled House, the then-Democratic-controlled Oklahoma Senate, and the governor, who was also a Democrat at that time.

Prior to Stitt’s election, the state government experienced several years of major shortfalls, tied in part to lawmakers’ repeated use of one-time funds to prop up recurring state spending amidst an oil bust. The shortfalls ran as high as $1.3 billion.

Stitt began his term in 2019 with a plan calling for the state to set aside $2 billion into savings over four years, a level far greater than the total savings achieved under any prior governor.

As things stand today, Stitt has achieved that goal—and then some. Officials now expect the state to have $2.6 billion in reserve by the end of June, based on current trends.

But Stitt’s emphasis on spending restraint and tax reductions has apparently been a major culture shock for some legislators.

“I have been hammering flat budgets, don’t spend more than you make—common-sense things that every Oklahoman agrees with,” Stitt said during a recent press conference. “And I think, ultimately, there’s some folks that write those budgets that don’t like to hear that message anymore.”

At that same press conference, Stitt said lawmakers had excluded his office from this year’s budget negotiations. But Stitt called their bluff by vetoing key budget bills and calling for a special session to discuss enactment of permanent tax cuts amidst a year of historic surplus.

Had Stitt not done so, the 2022 session would have ended with no significant, pro-growth tax cuts enacted, despite lawmakers having historic surpluses.

The budget plan crafted by the Legislature instead called for sending one-time $75 checks to Oklahomans—which Stitt noted would be closer to $56 after federal taxes—and cutting a sales tax on automobile purchases.

Stitt vetoed both bills and called for a special session to cut Oklahoma’s personal income-tax rate to 4.5 percent and repeal the sales tax on groceries. He said those two changes would save the average family $453 per year.

Lawmakers agreed to Stitt’s request to hold a special session on tax issues—amidst much grumbling in the Oklahoma House of Representatives.

“We want the most inflation relief for the people of the state of Oklahoma,” House Speaker Charles McCall, R-Atoka, declared in a subsequent press conference. “We have pursued that not just this session, but many sessions prior to this one. And we will continue to pursue that, not because of the demands of the governor, but because that is the expectation we set for ourselves in the Legislature.”

Legislative Votes Counter McCall Claims on House Tax Record

However, legislative records show that lawmakers—particularly in the Oklahoma House of Representatives—have pursued far more tax increases than tax cuts in recent years, including one measure that was found unconstitutional.

The only significant tax cuts approved by the House in recent years advanced after Stitt was elected, and those measures were supported by the governor.

In the 2021 session, lawmakers approved and Stitt signed into law House Bill 2962, which cut the state’s income-tax rate by a quarter-point to 4.75 percent and restored the earned income tax credit, saving Oklahomans $236.7 million per year, and House Bill 2960, which cut the state’s corporate income tax rate from 6 percent to 4 percent.

That’s in stark contrast to the legislative record in the years prior to Stitt’s election.

In 2016, lawmakers approved Senate Bill 1606, which eliminated a commonly used tax deduction to indirectly increase Oklahomans’ income-tax liabilities by $97.3 million annually.

In 2017, lawmakers approved House Bill 2433, which imposed a 1.25-percent sales tax on the purchase of an automobile, increasing Oklahomans’ tax liabilities by $123.3 million annually.

In 2018, lawmakers again voted to increase Oklahomans’ income-tax liabilities by passing House Bill 1011XX, which capped itemized deductions and increased income-tax payments by $94 million per year.

That same year, lawmakers also passed House Bill 1010XX, which increased taxes by a combined $533.7 million per year through increased taxes on fuel, energy production, and tobacco. (That $533.7 million total also included a $50.4 million lodging tax, but lawmakers repealed the hotel tax only days after passing it.)

Notably, lawmakers unsuccessfully sought to raise taxes on numerous other occasions, voting for tax-hiking measures that ultimately did not become law.

Those failed tax-increase efforts included passage of House Bill 2403 in 2017, which would have capped income-tax deductions and raised Oklahomans’ income-tax liabilities by $101.8 million per year.

Lawmakers also voted for House Bill 1033XX in 2018, which would have raised taxes by $581.4 million annually through increased taxes on fuel, tobacco, energy production, and wind power.

Similarly, House lawmakers advanced House Bill 1054X in 2017, which would have raised taxes by $441.3 million annually through a combination of tax increases on fuel, liquor, energy, and tobacco.

Most notably, lawmakers attempted to unconstitutionally raise taxes by passing Senate Bill 845 in 2017. That measure included $257.8 million in tobacco-tax increases but tried to evade constitutional restrictions by labeling the tax increase as a “smoking cessation fee.”

Under the Oklahoma Constitution, tax increases must receive supermajority support in both chambers of the Legislature, but a fee can be passed by a simple majority.

The Oklahoma Supreme Court ruled the Legislature violated the Oklahoma Constitution by trying to pass off a tax increase as a fee. The court opinion noted that “were we to hold otherwise, the distinction between fees and taxes—and thus the protections against taxation provided by Article V, Section 33—would be meaningless. The State Respondents tell us that this is a common refrain from those raising such challenges, and one we should thus ignore. But despite any prior false alarms, this cry of ‘wolf!’ rings true. If this quintessential excise tax can be transformed into a fee merely by calling it a fee and adding some regulatory gloss to the measure enacting it, then the promise of Article V, Section 33—a promise made to citizens in 1992 when they went to the polls and enacted the amended version—will be an empty one.”

Stitt’s Priorities on Taxes Praised Outside the Capitol

While lawmakers may have bristled at Stitt’s call to pass meaningful, pro-growth tax cuts this year, the governor was praised by a host of business and policy leaders outside the Capitol building.

Grover Norquist, president of Americans for Tax Reform, said Stitt’s proposals would better position Oklahoma for future economic growth, while the one-time rebate checks endorsed by the Legislature would not accomplish that goal.

“The Oklahoma Legislature looked at the excess revenue flowing into state coffers and passed legislation to spend much of it by sending out checks to all adults. In addition to that spending they included some tax reductions,” Norquist said. “But this legislation ignored the very real tax competition among the 50 states to attract investment, new businesses, and workers. Today eight states have no income tax. Another eight states have a flat-rate income tax. And another eight states have announced that it is their goal to phase down their state’s income tax to zero.

“Oklahoma needs to move to a single-rate flat tax and then bring that towards zero,” Norquist continued. “All steps in that direction strengthen Oklahoma’s ability to compete.”

Notably, Stitt’s election generated an immediate change in how Oklahomans perceived state government that has been maintained as he has altered the financial trajectory of state government.

When Cole Hargrave Snodgrass & Associates (CHS) polled Oklahomans in early 2019, during the first weeks of the Stitt administration, the firm found a sea change had occurred in public attitude.

“The 2018 Oklahoma state elections were about change—but not of ideology,” wrote Pat McFerron, president of Cole Hargrave Snodgrass & Associates. “This change, led by the election of Kevin Stitt, has altered the perception of how Oklahomans view the state. In just a few months, we have seen an historically negative attitude about the direction of the state become positive. Just last autumn, more than 70% of Oklahomans believed the state was going in the wrong direction. At the start of 2019, less than half that many (32%) are negative and 48% say the state is headed in the right direction—the highest number we have recorded since the last quarter of 2014. During our 30 years of polling the public, this is one of the starkest turnarounds the state has experienced.”

Today, Stitt continues to receive high marks from Oklahoma’s Republican voters.

A SoonerPoll.com survey conducted from April 25 to May 11 found that 71 percent of likely Republican primary voters believe Oklahoma is headed in the right direction.

Cole Hargrave Snodgrass & Associates polling showed that the share of Oklahomans who believed Oklahoma was on the “wrong track” was greater than those believing otherwise from early 2016 until Stitt assumed office, when attitudes changed. The period of intensely negative public perception coincided with repeated legislative efforts to increase taxes with the “wrong track” number surging as high as 71 percent during the pre-Stitt years.

Stitt says the Oklahoma government can easily provide meaningful tax relief this year without harming the financial stability of the government thanks to the budget management measures he has championed.

“There absolutely is enough money to go around,” Stitt said. “We have the largest savings account in state history. We don’t have enough money to spend like drunk sailors and also do things, but if we hold our budgets flat like I want to, we certainly do. We certainly can do it.”