Budget & Tax

Oklahoma state budget crisis? I should say so

May 19, 2017

J. Scott Moody, Wendy Warcholik, Ph.D.

By J. Scott Moody and Wendy P. Warcholik

When it comes to government spending in Oklahoma, the 800-pound gorilla in the room that everyone ignores is this simple question: Should government grow faster than the private sector’s ability to pay?

To answer that question, a little history needs to be explored so we can put the growth of government in Oklahoma, at all levels, into perspective. Looking at the publicly available data going back to 1929, we clearly see an overwhelming preference for growing government over growing the private sector.

There are two major components of government spending in Oklahoma—state and local government worker compensation (SLGWC) and personal current transfer receipts (PCTR, which mostly consists of Social Security, Medicare, Medicaid, and welfare).

First, Chart 1 illustrates the growth differentials between state and local government worker compensation and private sector income. The data are for calendar years 1929 to 2016 (the latest year of data available).

During the Great Depression in the 1930s, the rate of growth for SLGWC was faster than for private-sector income. But by 1944, SLGWC and private-sector income were virtually identical, with ending index values of 1.16 and 1.18, respectively.

However, after 1944 the growth in SLGWC began to pull away from the growth in Oklahomans' private-sector income. Between 1944 and 2009, the gap between the two is the largest.

Since then, growth in SLGWC has slightly receded while an oil-and-gas boom reinvigorated private-sector growth, thus shrinking the gap. The subsequent (post-2014) reversal of the oil-and-gas boom has seen the gap widen again. Clearly, much more needs to be done to close the chasm.

Second, Chart 2 illustrates the growth differentials between PCTR and private-sector income over the same time period.

As distressing as growth in SLGWC has been, that in PCTR has been meteoric in comparison. The growth in PCTR outstripped private-sector income right out of the gate in 1929 and has not looked back. By 2010, PCTR had an index value of 132.4, while private sector income had an index value of only 7. Fortunately, since 2010, growth in PCTR has also plateaued. [Note: The comparative growth indexes shown in Charts 1 and 2 were created by setting the base year (1929) equal to one and then multiplying each successive year by the growth rate. The values were adjusted for inflation, using the GDP deflator, prior to creating the indexes. This makes it easier to visualize the relative growth differentials without worrying about the differences in starting values.]

What can Oklahoma policymakers do to prevent the further crowding out of private-sector income? Though PCTR is a much bigger problem, SLGWC is the realm most under the control of state policymakers. Both employment levels and compensation levels must be critically examined.

At a minimum, a hiring and pay freeze would be welcome relief to the private sector, especially if the savings were invested into a complete overhaul of the income tax system (such as a flat tax) or as a down payment on eliminating the income tax altogether.

In addition, policymakers at the state and local levels must refrain from imposing unnecessary regulations on businesses that make it harder for the private sector to do its job—creating new jobs and income.

OCPA research fellow J. Scott Moody (M.A., George Mason University) is a senior fellow at the American Conservative Union. Formerly a senior economist at the Tax Foundation and a senior economist at the Heritage Foundation, he has twice testified before the Ways and Means Committee of the U.S. House of Representatives. Moody is the co-creator of the Tax Foundation’s popular “State Business Tax Climate Index.” His work has appeared in Forbes, CNN Money, State Tax Notes, The Oklahoman, and several other publications.

OCPA research fellow Wendy P. Warcholik (Ph.D., George Mason University) is a senior fellow at the American Conservative Union. She formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”