Jonathan Small | August 10, 2017
Throughout the entire 2017 legislative session, we heard sky-is-falling rhetoric from politicians and lobbyists. We were told Oklahoma must increase revenue or state agencies will face dire consequences.
But despite all that noise, Oklahoma state government is now on track to spend more money next year—more than $17.9 billion—than at any time in state history. Yet some still demand more attempts to increase taxes on Oklahomans.
Their argument is simple: More revenue will make it easier to fund state government. All we need to do is bring in more money. Problem solved.
Lessons from Connecticut
Not so fast. The state of Connecticut offers us a cautionary tale when it comes to tax increases and state budgeting. According to The Connecticut Mirror, the state now has a “$5.5 billion budget crisis, looming over every government agency and legislative decision like a tidal wave.”
Keep in mind, Connecticut is one of the most heavily taxed states in the country. Besides all the ordinary taxes, it has a death tax and the nation’s second-highest cigarette tax. How can a high-tax state be in such a corner?
One reason is income tax collections in Connecticut dropped this year for the first time since the recession due to lower earnings. And, many productive residents retreated to lower-tax states when politicians raised the top individual rate.
In the past five years, more than 27,000 Connecticut residents have moved, and seven of the state’s eight counties have lost population since 2010. This population flight has depressed economic growth as well as home values and sales-tax dollars.
Simply put, Connecticut state government has refused to make cuts and live within its means. Instead, it has adopted the quick fix of raising taxes. Higher taxes can lead to deeper budget holes, and before too long, people and businesses will simply vote by moving to lower-tax states.
Lessons from Illinois
Which brings us to Illinois, where lawmakers face deficits that total $30 billion or more—and that’s before they even start discussing a $250 billion pension debt. Illinois lawmakers have failed to balance the state budget every year since 2001 and annual tax increases have failed miserably to keep the state afloat.
Illinois has made the same fatal mistake we saw in Oklahoma this year. They keep raising revenue while refusing to implement most cost-saving reforms.
The Illinois fiscal picture is the stuff of budgetary nightmares. Total state pension debt has been estimated by the Illinois Policy Institute at $250 billion. There are currently more than $14 billion in unpaid state bills, with a deficit for the fiscal year now ending of $6.2 billion. Next year’s deficit is projected to top $7.7 billion.
Illinois is in such bad shape that Moody’s Investors Service recently downgraded the state government’s credit rating to Baa3, just one notch above the rating for junk bonds.
All this despite a record tax increase in 2011. The four-year income tax boost was supposed to bring in $30 billion by raising the personal income tax rate from 3 to 5 percent. It actually yielded $32 billion, but the state’s bill backlog still stood at $6.6 billion and the pension debt increased by another $25 billion.
What happened? Lawmakers simply refused to stop spending. That sent a pretty persuasive message to Illinois residents. The message was, “Don’t let the door hit you on the way out.”
Between 2013 and 2016, 78,000 people abandoned Illinois. In 2016, another 114,000 bailed out. Chicago is the only major American city to lose population in recent years.
Illinois did do one thing right. They implemented audits of state Medicaid enrollment, a move OCPA recommended for Oklahoma this year.
As you might expect from Illinois, policymakers there had blindly expanded Medicaid services—only to find immediately they had to cut services to their aged, blind, and disabled populations and their most vulnerable. In Illinois, expanding Medicaid has resulted in the deaths of more than 700 people who were on the waiting lists for those with severe disabilities and severely debilitating diseases.
When they instituted file checks, they found 34 percent contained errors, revealing that some 600,000 people were receiving benefits for which they were not eligible. This resulted in a savings of $430 million.
Of course, that was the proverbial drop in the bucket for a state as badly managed as Illinois. The lesson is clear: Perpetual revenue increases without disciplined, reformed spending reductions is the road to bankruptcy and depopulation.
Hopefully, Oklahoma lawmakers will study the experiences of Connecticut and Illinois.
Oklahoma is in a recession compared to 2014, after more than 21,800 energy and manufacturing jobs have been cut, when Oklahomans have lost more than $13 billion in taxable income and reduced their purchases subject to sales and use tax by $4.1 billion.
Oklahoma’s budget issues are not due to too few, or too low, taxes. They stem from two clear causes—an extended recession that hit the core oil and gas industry especially hard and the persistent failure of state leaders to truly address the convoluted, wasteful structure of government.
Jonathan Small is the president of the Oklahoma Council of Public Affairs. A Certified Public Accountant, he previously served as a budget analyst for the Oklahoma Office of State Finance, as a fiscal policy analyst and research analyst for the Oklahoma House of Representatives, and as director of government affairs for the Oklahoma Insurance Department. Small’s work includes co-authoring “Economics 101” with Dr. Arthur Laffer and Dr. Wayne Winegarden.
Jonathan Small, C.P.A., serves as President and joined the staff in December of 2010. Previously, Jonathan served as a budget analyst for the Oklahoma Office of State Finance, as a fiscal policy analyst and research analyst for the Oklahoma House of Representatives, and as director of government affairs for the Oklahoma Insurance Department. Small’s work includes co-authoring “Economics 101” with Dr. Arthur Laffer and Dr. Wayne Winegarden, and his policy expertise has been referenced by The Oklahoman, the Tulsa World, National Review, the L.A. Times, The Hill, the Wall Street Journal and the Huffington Post. His weekly column “Free Market Friday” is published by the Journal Record and syndicated in 27 markets. A recipient of the American Legislative Exchange Council’s prestigious Private Sector Member of the Year award, Small is nationally recognized for his work to promote free markets, limited government and innovative public policy reforms. Jonathan holds a B.A. in Accounting from the University of Central Oklahoma and is a Certified Public Accountant.