Budget & Tax
Reports indicate state economic slowdown
January 7, 2020
Revenue projections certified by the State Board of Equalization in December showed Oklahoma lawmakers will have little additional money to spend in this year’s legislative session—an increase of just one-tenth of 1 percent.
But economic reports released since then suggest that projection may prove to be the best-case scenario, as experts increasingly expect Oklahoma’s economy to contract in the first half of 2020. Those reports have undermined criticisms previously levied against Gov. Kevin Stitt’s successful effort to increase state savings.
A recent report by the Federal Reserve Bank of Philadelphia shows Oklahoma is one of only nine states expected to experience an economic slowdown in the next six months. That conclusion was further bolstered by the subsequent release of the Oklahoma state government’s gross tax receipts, which totaled less in the fourth quarter of 2019 than in the comparable quarter of 2018.
The Federal Reserve report of the leading indexes for the 50 states for November 2019 provides a six-month forecast of state coincident indexes. The Federal Reserve predicted Oklahoma’s economy will contract between 0.2 percent and 1.5 percent over six months.
In contrast, neighboring Texas is expected to achieve growth of 1.5 percent to 4.5 percent.
A few days after the release of the Federal Reserve report, State Treasurer Randy McDaniel announced that gross receipts to the Oklahoma treasury increased overall for the calendar year 2019, but that growth was on a steady downward trend throughout the year.
Growth in collections during the first two quarters of 2019 reflected expansion of almost 10 percent. By the third quarter, growth fell to 4.2 percent. In the fourth quarter, receipts contracted by 0.5 percent compared to the fourth quarter of 2018.
“Recent economic trends appear to be primarily related to low oil and gas prices,” McDaniel said. “We are seeing both a direct and spillover effect on some tax collections due to suppressed energy prices.”
McDaniel noted that tax collections on oil and gas production have been significantly below the prior year for four consecutive months. Sales tax receipts have shown contraction for six of the past seven months. In December, use tax collections on out-of-state purchases dropped below those of the prior year for the first time in more than three years.
McDaniel noted that drilling activity in Oklahoma has plunged by more than 60 percent in the past year. Natural gas prices are down by almost 30 percent and oil prices are off by almost 25 percent since this time last year.
The Oklahoma Business Conditions Index for December stood at 48.4, but any number less than 50 is considered below growth-neutral. The index has been below 50 four times in the past five months, indicating expected economic slowing through the middle of 2020.
While McDaniel pointed to lower energy prices as the main contributor to Oklahoma’s economic slowdown, most other energy states are not expected to face comparable contractions according to the Federal Reserve report.
Along with Oklahoma, the nation’s top oil-producing states include Texas, Alaska, California, North Dakota, and New Mexico.
The Federal Reserve does not predict economic slowdowns in any of those states in the next six months.
At the same time, the latest count from energy technology company Baker Hughes showed Oklahoma had 51 rigs drilling for gas/oil as of the Jan. 3 report. That was down from an average of 122 rigs in March 2018, the month that Oklahoma lawmakers passed the last in a series of tax increases on energy production in the state.
The contraction in Oklahoma’s rig count since that time is greater in percentage terms than the reduction seen in Texas, Alaska, California, North Dakota, and New Mexico. In fact, New Mexico’s rig count today is now higher than the average count in March 2018.
Due to a bust in oil prices, Oklahoma’s economy contracted at an average rate of -2.7 percent year-on-year for the five consecutive quarters between the fourth quarter of 2015 and the second quarter of 2017.
In part to prepare for future downturns, Gov. Kevin Stitt championed setting an additional $200 million into state savings during the 2019 session. Thanks in part to that successful effort, state government today has more than $1 billion in savings for the first time ever.
In response, Moody’s Investors Service has given the state of Oklahoma a “positive” outlook that “reflects our expectation that strong fiscal management and a commitment to increasing reserves will continue, in line with the state’s goal of strengthening its preparedness for the next cyclical economic downturn.”
Mike Mazzei, who serves as Stitt’s secretary of budget, has said the governor’s budget plan for the 2020 session will focus more on efficiency than increased spending.
“One of the important goals for this year is to keep a lid on recurring expenses,” Mazzei said.
However, Stitt’s focus on increased savings drew criticism from some lawmakers and organizations during the 2019 legislative session.
Oklahoma Education Association president Alicia Priest said it was “discouraging that the budget puts $200 million into savings when we could have made a bigger investment in our schools, our students, and our future.”
The executive director of the Oklahoma Policy Institute said it was “misguided” to increase savings rather than use the money to boost state spending.
During debate, Sen. Allison Ikley-Freeman, D-Tulsa, said, “People are dying in the state of Oklahoma, and we’re putting money in savings for another day, for ‘just in case.’”
Also in that debate, Sen. J.J. Dossett, D-Owasso, dismissed the need for greater savings.
“I don’t believe we’ll have another economic downturn over the next few years,” Dossett said. “It’s just too early to start creating new savings accounts and putting money in new savings accounts.”