| March 6, 2012

Policymakers Should Craft a State Budget that Respects Your Family Budget

With the legislative session now in its second month, state lawmakers are in the process of putting together a budget for Fiscal Year (FY) 2013. As they do so, we hope they will consider the recommendations in the model state budget recently released by OCPA.

OCPA’s recommended state budget provides what Oklahomans want: lower taxes and a smaller state government.

It returns government spending to pre-spending-spree levels while providing much-needed tax relief for Oklahoma families.

It allows private businesses and families the opportunity to use more of their hard-earned money according to their priorities, not state government’s priorities.

In short, it’s a state budget that respects your family budget.

Now of course our “progressive” friends like to say Oklahoma is a “low-tax state.” To which one must reply: By what standard? University of Oklahoma historian J. Rufus Fears has pointed out that “the American public pays an amount of taxes that no despotic pharaoh in antiquity would have ever dreamt of imposing upon his people.”

The average Oklahoman was forced to work more than three months last year before he was able to enjoy the fruits of his own labor. “Tax Freedom Day” arrived on April 2, 2011—that’s the day the average Oklahoman had finally earned enough money to be able to pay the federal, state, and local tax collectors. This tax burden is inappropriate for a free people.

Regardless of whether Oklahoma’s tax burden ranks first or 50th in 50-state comparisons (and here’s hoping we can one day get to 50th), the burden is too heavy.

Accordingly, the OCPA budget provides for a significant reform of the Oklahoma personal income tax code by eliminating all loopholes, individual-income-tax deductions, exemptions, and credits. This reform, coupled with much-needed spending reductions in areas that are not core functions of government, allows for a significant reduction in Oklahoma’s individual income-tax rate from 5.25 percent to 2.25 percent—another step toward eliminating the tax altogether and replacing it with nothing.

This will put money back into the hands of Oklahoma’s private sector, thus spurring economic activity and even providing some offsetting revenues for the state. But make no mistake, the goal is not to be “revenue neutral.” The OCPA budget provides what Oklahomans want: a smaller government that provides fewer services.

In light of the irresponsible spending spree of FY 1996 to FY 2002 (wherein state appropriations increased more than $1.9 billion—or 49 percent) and the irresponsible spending spree of FY 2004 to FY 2010 (wherein state appropriations increased more than $2.1 billion—or 41 percent), the OCPA budget returns government spending to a level more appropriate for a state with Oklahoma’s level of capital, job creation, and population.

This is necessary. For despite legislative and executive branches filled with professed conservatives, Oklahoma government spending is at an all-time high (as the chart on page 8 indicates). According to the Office of State Finance, total state expenditures have increased every year from FY 2001 ($9.6 billion) to FY 2011 ($16.64 billion). Policymakers at 23rd and Lincoln do not have a revenue problem.

What they have is a spending problem, which is in part a bureaucratic-overhead problem. According to a 2011 publication of The State Chamber’s research affiliate, Oklahoma’s government bureaucracy is among the nation’s largest. Among the 50 states, Oklahoma ranks 14th in the number of state and local government employees as a percent of the population.

For all the talk of “maintaining core services,” what policymakers are actually maintaining is bureaucratic bloat. And they’re doing so on the backs of the hardworking taxpayers who elected them to do otherwise. It’s clear that they have more than enough money for their state budget. Now is the time to show some concern for their constituents’ family budgets.

What is the core mission of government? This, of course, “is the debate at the heart of government budgeting,” says the John Locke Foundation (JLF), a free-market think tank in North Carolina. “What should government do? What does the constitution allow it to do? What does it do well? What can it reasonably hand off to other sectors of society?”

Government is like Microsoft before broadband, handing down a proprietary operating system (law) for everyone with little ability to fix bad lines of code. It assumes that a few people running “government-modified organizations (GMOs)” can make better decisions than the natural, organic interaction of millions of service users and providers. This setup results in, among other things, a Medicaid program that provides less health care than promised, schools that graduate half of African-American males, colleges and universities that graduate less than a quarter of their students in four years, and targeted tax incentives that fail to create or keep jobs.

How did Oklahoma manage to pile up $16.6 billion worth of government? “In good times, I do think that it’s true that government is subject to ‘mission creep,’” former state treasurer Scott Meacham once observed. “When the revenue is flowing maybe there’s a trend to drift into areas that are outside of the core mission or missions of government. What happens when things are going well is that things that are ‘nice to do’ become new programs, but in hard times or tight times, it’s time to look at maybe pruning the tree of government.”

Total State Expenditures

Oklahoma, with 3.75 million people and a Gross Domestic Product of $148 billion, is too complex for 149 legislators and several thousand bureaucrats to manage. Oklahoma has a vibrant private sector, and it makes more sense, as JLF points out, to leave more activities in the hands of “individuals and companies who can be contractually bound to produce results, instead of spelling out the methods to state employees and allowing them to choose the results they will achieve.”

Government exists to secure our rights to life, liberty, and property. It does not exist to own and operate a third-rate motel chain, to bribe poor women to leave the fathers of their children, to give people food stamps with which to buy cigarettes, or to provide employment for termed-out state legislators. If policymakers focus on providing core services, government can be smaller and taxes can be lower.

In crafting a state budget, the analysts at JLF have developed what they call the “9 R’s of Fiscal Responsibility” (reprinted below, adapted for Oklahoma).

Reform Entitlement Programs. State programs to provide cash assistance, medical care, or other services to the disadvantaged exist to provide a basic “safety net.” Even philosophers of limited government have justified such programs as needed to ensure order and protect public assets and spaces. But these programs must be carefully structured to minimize dependency and encourage personal responsibility. When the state pays nursing home bills for the parents of the middle class, subsidizes the daycare expenses of affluent families, and perpetuates social pathologies such as out-of-wedlock births, it strays far from its constitutional moorings. One of the biggest contributors to Oklahoma’s budgetary problems is rapid growth in the state’s Medicaid program. The counter-cyclical nature of this program leads to lawmakers expanding Medicaid programs (such as the Advantage Waiver program) to provide new entitlements (and create new dependents) in good economic times that cannot be sustained when downturns in the economy occur. According to the state’s FY-2011 Comprehensive Annual Financial Report, total state spending on social services has grown from $1.59 billion in FY 2005 to $2.25 billion in FY 2011—an increase of 41.7 percent in six years. Total state spending on health services has grown from $3.13 billion in FY 2005 to $4.85 billion in FY 2011—an increase of 54.3 percent in six years.

Require More User Responsibility. It is inappropriate to require those who receive core state services, such as law enforcement or public education, to cover a significant share of the cost of those services. But for many other state agencies, their programs or services are not constitutional entitlements or responsibilities. If the state is to continue involvement in these enterprises, it would be appropriate to ask those who benefit to shoulder more of the responsibility of paying for them. Services for which this budget recommends additional user responsibility include state museums, historic sites, parks, costs of regulation for particular industries, and other non-core functions of government.

Redirect Spending to Higher-Priority Uses. According to Article II, Section 2 of the Constitution of Oklahoma, “All persons have the inherent right to life, liberty, the pursuit of happiness, and the enjoyment of the gains of their own industry.” Thus, it is incumbent upon Oklahoma politicians, when formulating tax and budget policies, to secure the people’s right to enjoy “the gains of their own industry.” The state is obligated to perform its basic functions efficiently while leaving to the people as much of their hard-earned money as possible. During a time in which policymakers find it difficult to fund obligations already in place, it makes little sense to incur new ones. Another way to apply this principle is to sort out which expenditures within a given department or agency are central to the core mission and which are not.

Reorganize State Government. Even assuming that current fiscal obligations could continue into the next year, there remain different ways of organizing the departments that carry them out. There is unnecessary duplication of core functions throughout Oklahoma state agencies. In short, there are more efficient methods of organizing the various departments. For example, the Oklahoma Scenic Rivers Commission provides mainly tourism- and recreation-related activities by its offering of trails or canoe rides in the Illinois River, yet is a stand-alone agency from the Oklahoma Tourism Department. Following on the heels of the 2011 consolidation of administrative agencies in the Office of State Finance, policymakers should continue to reorganize state government.

Revive Free Enterprise. Responding to Oklahoma’s economic challenges, some policymakers have concluded that state government should take a more active role in attracting investment and guiding development through additional tax credits, cash subsidies, and other incentive programs. This is a mistake. The available public policy research on state economic development does suggest that overall tax rates, especially the marginal rates on individual and corporate income, do have a measurable impact on state economic growth rates. By eliminating individual-income-tax programs, marketing subsidies, and other encroachments on free enterprise, we can reduce marginal income tax rates. These tax changes will improve economic competitiveness across the board. By eliminating all individual-income-tax exemptions, deductions, credits, and loopholes—and lowering the individual-income-tax rate to 2.25 percent—this budget puts more than $275 million (for FY 2013) back in the hands of taxpaying Oklahomans to invest and spend as they choose.

Restore Civil Society. Nonprofits and charities form a “third” or “independent” sector that delivers important services and benefits that neither governments nor profit-seeking businesses can deliver as effectively. The state should be careful not to supplant these institutions of civil society.

Remove Advocacy, Waste, and Race-Based Programs. Laws and programs that invoke racial or ethnic discrimination violate a basic principle of moral government. All such programs should be ended immediately. Similarly, state funds should not be used to subsidize groups that advocate policies or ideas before government bodies. Taxpayers should not be forced to pay for the propagation of ideas with which they may disagree. For example, state law requires the state to administer and process payroll deductions for purposes unrelated to employment benefits. This must end. Government is instituted solely for the good of the whole, not for special interest groups that use taxpayer money to advance their agendas.

Reshape the State-Local Government Relationship. Local control of local revenues should be a central theme whenever possible in the relationship between state and local government. The diverse demographic nature of our state leads to problems in applications of some state programs.

Reduce Biases in the Tax Code. Like most states, Oklahoma has developed its state personal income tax code in a piecemeal fashion rather than using tax reform principles to build a coherent and efficient system. As a result, a variety of special rates, exemptions, exclusions, deductions, and credits litter the code. Another problem is the personal income tax code’s bias against savings and investment, including the investment that families make in their children through private education, health care spending, and at-home parenting. This budget provides the spending controls that will allow for reductions in individual taxes for everyone, thus reducing the need for these individually tailored tax breaks.

These “9 R’s of Fiscal Responsibility” are the principles undergirding OCPA’s proposed state budget. If policymakers will embrace them, they will be able to craft a state budget that respects your family budget.

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