October 19, 2015

Boren Sales Tax Plan Reflects Shift in Oklahoma Tax Base

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University of Oklahoma President David Boren is proposing a statewide sales tax for education.

University of Oklahoma President David Boren is proposing a statewide sales tax for education.

University of Oklahoma President David Boren’s proposed penny sales tax for education reflects a fundamental shift in the way the state is paying for public schools, higher education and other services.

Economists interviewed by Oklahoma Watch expressed concern about reducing the state’s reliance on income taxes and increasing its dependence on sales taxes to finance essential state functions.

Boren said in an interview that he shared those concerns, but was convinced Oklahoma’s public education system faces such big funding cuts that “the education crisis trumps the tax policy question.”

“Our choice is to either do this or do nothing,” he said.

An Oklahoma Watch data analysis shows that income tax cuts approved by the Legislature over the last 10 years have reduced state revenues by nearly $1 billion a year, roughly the same amount as next year’s predicted budget shortfall.

Boren is leading a ballot initiative campaign to persuade Oklahomans to approve a one-cent sales tax increase that would restore about $600 million a year in funding for public schools and higher education.

His group plans to file its petition language and is expected announce its backers this week. If the group is able to gather enough petition signatures, the penny sales tax would appear on the general election ballot in November 2016.

If voters approved the measure, it would restore the education funds that have been lost over the last decade. Analysts acknowledged that might be the only practical way to address Oklahoma’s educational woes, but was not necessarily good tax policy.

“Oklahoma has a regressive tax system, and the sales tax is a big part of that,” said Carl Davis, research director for the Institute on Taxation and Economic Policy in Washington, a nongovernment research group.

ITEP did an analysis of Oklahoma’s tax system showing that an average low-income family spends about 10 percent of its budget on state and local taxes, compared with about 4 percent for high-income families.

Davis said Oklahoma is one of several conservative states, including neighboring Kansas, which have been shifting from income taxes toward sales taxes to finance core state services such as education, transportation, health and public safety.

“It’s a trend that’s been going on for a number of years, mainly on the theory that relying more on consumption taxes is better for state economies. Whether that’s actually true or not is highly doubtful,” Davis said.

“What we do know [is that] when you move more toward consumption taxes… it does increase the unfairness of state tax codes.”

 

 

Oklahoma’s top personal income tax rate has been raised and lowered many times since the Legislature created the tax 100 years ago. The highest it ever got was 17 percent for some taxpayers from 1979 through 1988, according to Oklahoma Tax Commission records.

Over the past decade, the Legislature has voted four times to reduce the top rate, from 6.65 percent in 2005 to 5.0 percent today. Some of the reductions were phased in over several years and subject to revenue growth triggers.

Tax Commission data shows that income tax reductions approved over the last decade have reduced annual state revenue collections by more than $900 million a year. If the state had enough revenue growth to trigger a final approved cut in 2018, it would cause an additional loss of $100 million or so.

At this point, with state revenues plunging because of lower oil prices, that scenario appears doubtful. The Oklahoma Equalization Board won’t estimate next year’s budget shortfall until mid-December, but preliminary speculation suggests it could be as much as $1 billion.

The Boren plan would add another penny to the state sales tax, currently 4.5 cents. (Cities and counties impose additional sales taxes.) The 1-cent increase would raise about $600 million a year for public schools and higher education.

“We are facing, I think, really the dismantlement of public education in Oklahoma. I don’t think that’s an alarmist statement,” Boren said.

“We could put to productive use a billion new dollars. Instead, we face a $1 billion shortfall in the legislature. It’s very likely that there will be even more significant cuts in education this year. If we’re 49th now, it’s very likely we’ll go to 51st after this year, trying to close the budget gap. We’ll be at the bottom of the elevator shaft.”

Boren, a Democrat, said his group chose the sales tax because initial polling showed that trying to raise education funds by increasing the income tax would be difficult and divisive. But when pollsters queried voters about a sales tax for education, initial support was nearly 70 percent among Republicans and Democrats.

“This is not where we started out,” Boren said, referring to the sales tax. “It was the last option standing. It was the lesser of evils. The biggest evil, I think, was to do nothing.”

Boren said it would be pointless to choose a different funding vehicle if it appeared certain it would be rejected. “There’s no use even trying to do something unless it’s bipartisan and has a chance of passage,” he said.

Boren said the petition would contain language designed to set a baseline level of legislative appropriations. That would prevent lawmakers from simply reducing their future education outlays to offset the sales tax revenue coming in, he said.

Mickey Hepner, an economist and dean of the University of Central Oklahoma College of Business in Edmond, said he probably would sign Boren’s petition, but wished Oklahoma had chosen a different path.

“We’re already a high-sales-tax state. Our sales taxes are already above the national average. Our income taxes are below the national average, particularly after we’ve cut them over the last decade,” Hepner said.

Hepner said the Oklahoma Legislature seemed to be following a trend of reducing income taxes in hopes that doing so would stimulate economic growth. He said there was “negligible” evidence that such growth actually had occurred, because the stimulative effect of reductions in income taxes was offset by the contractionary effect of fewer expenditures by schoolteachers and other recipients of state revenue in a balanced-budget environment.

“We should have known that cutting income taxes over the last decade would make it much more difficult to fund core government services like education,” Hepner said. “So the teacher shortage crisis that we’re in now was avoidable, had we not been focused so much on tax cuts.”

It’s unclear how the sales tax plan will be received by various interest groups, including cities and counties, social-service advocates and policy organizations.

In a written statement, Jonathan Small, executive vice president for the Oklahoma Council of Public Affairs, a conservative think tank, said Oklahoma could increase teacher pay without imposing tax increases. The state could cut non-core government spending and use the savings to pay for the salary hikes, he said.

“Also, given our state’s direct competition with Texas, we must eliminate the personal income tax for teachers — just like we do for aerospace engineers in Oklahoma,” Small said. (The state allows aerospace engineers to claim an annual personal income-tax credit of up to $5,000 for five years.)

Larkin Warner, a retired Oklahoma State University economist who has advised the state on tax policy, said all states tend to rely on three major sources of income to support essential services such as education: income taxes, property taxes and sales taxes.

Because Oklahoma is an agricultural state, it has had a historical aversion to property taxes, Warner said. Consequently, the state has one of the lowest average property tax rates in the nation.

Now, Warner said, the state seemed to have decided that it doesn’t like income taxes either, placing most of the burden of financing government on the sales tax.

“We just merrily go along cutting the income tax,” Warner said. “We hate the property tax worse than poison. We’ve already ridden the sales tax to where it’s way too high… We’re kind of in a pickle, and there’s no solution if we’re committed to getting rid of the income tax, which appears to be the case.”

 

  • Blake

    I would say our state government has been acting against the people’s best interest. According to the experts in this article, our representatives have winnowed our essential services down to the second worst in the country. I would say that is against the majority’s best interest. In this case, we should exercise our right to protest and Revolution that our federal constitution makes clear as the duty, the responsibility, of a democratic people. By observing our state government’s actions over the past 40 years, it is clear they care not for education, neither K-12 nor higher education. Instead of funding education and communities state wide, they take that money and expand the prison system. This makes it clear to me that our representatives are acting against our best interest. They provide massive tax breaks to large Fortune 500 companies that do business here and tax the working and middle class through sales tax. How much is enough Oklahoma? When are we going to come together to fight these iniquities? Nay, these oppressive measures? Maybe, just maybe, we should take note of Thomas Paine? Maybe we should start to live up to our claimed democratic greatness? Vote with your feet, vote with your time, vote with your voice, vote with your pickets, vote en mass at the governors mansion, vote en mass at the state legislature. They clearly are not going listen through the vote. What does the lack of teachers in this state tell our children? What does it say about who we are as Oklahomans that we shirk our responsibilities to the future, our children, by denying them a quality education? I ask again, what values do these behaviors on the part of our representatives impart to our children, and others across the country? That it is okay to disrespect teachers and education because they are not really that important? That tax cuts and tax breaks to the wealthy are more important? That it is okay to emergency certify people off the street, mere amateurs, to educate our children? I am disgusted with our state representatives and their dilatory and indolent attitude toward our future. I applaud David Boren for at least trying to salvage this wreck we call education in Oklahoma. If I had a platform I would let our representatives have an earful thrice daily. If we will not do our duty as set out in our constitution, then I suggest we pool resources and put an education lobby in the state Capitol. Perhaps throwing money at campaign funds will provide us with the financial backing we need to have successful education programs, to invest in the people that will inevitably be shaping our future, to wipe our stain from the bottom of the barrel.

    • Justin

      The problem Blake is that Oklahomans have been really apathetic to these problems. You speak of rising up in a revolution because “they are clearly not going to listen to our vote”, but isn’t the opposite true. So many of current politicians ran almost unopposed on these topics and won with record low voter turnouts. During last November’s election only about 29% of voting eligible Oklahomans voted, the worst rate on record. http://oklahomawatch.org/2014/11/04/oklahoma-sees-the-lowest-voter-turnout-for-governor-since-2002/
      I don’t disagree with you that this is a very serious problem that has to be addressed, but before revolution maybe we should try voter education and turnout. Most of all what we need are better candidates. I don’t know what happened to the democratic party in this state, but it feels like every election my choices are between a slash-and-burn government republican, and a vastly unqualified democrat that isn’t really running and just filled out a form to have their name on the ballot.

    • Anna

      I’m a new resident to Oklahoma. I moved here from Ohio last August. I find Oklahoma to be very interesting. I have lived in four other states (Ohio, Florida, Virginia and Michigan) so I feel comfortable in making a comparison between Oklahoma and other states. The one thing that is most striking to me about Oklahoma is how complacent people seem to be when it comes to policy and politics. What’s more striking, is how genuinely cordial people seem to be – people here seem really nice. But the public policies are not so nice for poor, working poor and what might be considered the middle class (if such group even exist anymore). These are the people who shoulder the burden of the State’s budget (cuts), while the wealthy get all the tax benefits. I do not think that is right, and its wrongness should be met with consequences for those who impose and help sustain the wrongness of such hurtful policies that impact the vast majority of the State’s population. There is a saying that goes: “Evil persists when good people do nothing.” By this statement, I am “dog whistling” to the good people. In any event, Oklahomans are going to soon be faced with a new dilemma that many States (especially Oklahoma) will experience over the next few months (yes, that soon). That is, the massive release of thousands of inmates from the State’s prison system. That’s right, it seems that the boondoggle that has been the prison industrial complex has chickens that are about to come home to roost, so to speak. Why? Here’s a vastly oversimplification of the reasoning: in part it has to do with over-criminalization of charges, “three strikes” legislation, and mandatory sentencing guidelines. This trifecta has helped the US earn the dubious designation as the “incarceration capitol” of the western world. The States have had to foot the bill housing, feeding and clothing prisoners in their prisons. Unfortunately, this massive expense – estimated roughly at $60/day per inmate – has created quite a fiscal burden on State budgets and at the expense of education and other important human services. Thus, releasing inmates from prison (by the droves) will save the State a lot of many. Here’s an example of the kind of savings the State can realize from reducing its prison inmate population: Let’s say the State releases 10,000 inmates over the course of the next two years. If you calculate the daily inmate cost of $60 per day x 365 days per year @ 10,000 inmates, the State will save over 2 billion dollars! Here’s the thing, though…how will the State deal with all those inmates who will be released? Thank God for TEEM (The Employment and Education Ministry)!

  • Justin

    I am so happy to see this article, it totally hit the nail on the head. This situation with tax cuts has been looming for state government for some time. I applaud Oklahoma Watch for writing this article that all Oklahomans need to read.

  • Howard

    If our state leaders insist on funding education services from an increase in the sales tax, the amount of increase may need to be boosted more than a penny, but–to make it less regressive–expenses that are most important to low and middle income people should exempt from the sales tax. This would include such things as groceries, pharmaceuticals, diapers, and second-hand clothing. And, perhaps the sales tax exemption that is currently provided to services should have their exemptions removed too–although services that relate to medical and educational purposes should remain exempt.

    With gasoline costs very low, this is also the perfect time to raise the gasoline tax by a nickel or so to fund our roads and bridges which are in need of repair and upgrading. Oklahoma has one of the very lowest state gasoline taxes in the nation.

  • Sharon

    This may not be the best plan but after watching this Governor and Legislature cut taxes in the face of oil price drops along with being 49th in funding public schools and universities, I am 100% behind the 1% tax to get schools started back on having more money to run the schools. Agree with Justin on the Democrats — hoping this new Chair brings energy because energy and get out the vote has been lacking.

    At least in my district we elected a Democrat woman to the House and defeated one of the worst reps I have ever had including other states where we have lived. Styles, the conscientious objector should never have been elected to begin with IMHO. Helped lead me out of the Party of Tax Cuts versus sensible government.

    How much money is wasted by this GOP run State Government by passing bills they know will not pass Constutional challenge or our AG hiring so many lawyers to fight ACA and other issues because they don’t like the President and think OK should be king of all that happens? How many dollars have been wasted by electing the hard right to office in OK because Dems sat back and did little or nothing?

    Time to roll up our sleeves and turn that around — OK cannot afford more of what we have seen out of the Republican Party since they took complete control of State Government — time for the Bill Gothard Character First supporters to be shown the door starting witn the Governor. This former lifetime GOP woke up to the havoc the Republicans have created so a lot more are ready if the Dems can just get some good candidates like we have in the House from Norman. Emily Virgin is one of my favorites and was when I was still GOP — Claudia Griffin, my new rep from this district is a breath of fresh air so it can be done with the right candidates who believe in public education and infrastructure.

    • Justin

      You make some great points Sharon. I think too many Oklahomans believe that it is not worth voting because the Republicans always win in Oklahoma, but really their margins have not been that strong lately.
      In the 2014 Gubernatorial Election, Mary Fallin only won 55.8% of the vote amongst a challenger that was still largely unknown to many Oklahomans going into the election. She only received 460,298 votes in that election to beat Joe Dorman’s 338,239. So her margin was only 122,059 people, about 3.1% of the population and roughly the size of Norman.
      With our state government melting like a candle, I hope voters remember that spending 30 minutes on election day could make a huge difference.

  • Gaf

    In my experience, my state legislators do not seem all that interested in my opinions. It’s clear to me they are guided from the top, and don’t really seem open to anything contrary to their leadership. Blake is right, they are not acting in the interest of the people. They are acting in the interest of their party leadership. They want to dismantle government, and they are succeeding.

  • I would be interested in seeing a copy of the proposal. Does it have an iron-clad protection from the Legislature reducing its contribution to public education? That is what happened to the lottery money. I want to make sure it’s off-limits.

    I have also seen a report that this will fund ‘incentive pay’ for teachers. Details, please. Is it truly incentive pay, or is it merit pay based on student test scores?

    I need to know more.

  • sherman lewis

    I applaud President Boren for his courage in taking the lead to find a solution to the
    education challenge we have here in Oklahoma. All of our elected officials are standing
    by while our children go to schools that may not have adequately trained teachers in the classrooms. Aren’t they suppose to be the leaders for the people and make decisions that are best for the state and all the people and not just a few. How can we have economic development in the state or attract major companies if we fail to educate our children. Thank you president Boren for your leadership. Where do I sign?

  • Tony

    Wait, wait, wait. I seem to recall a number of years ago that we were promised that our education woes would be taken care of if we would just pass Indian gaming. Oklahoma would become a destination state and all this money from outside the state would start pouring in. All these good paying jobs would be created.

    Then we passed the Lottery, so that all the Oklahoma money would not go out of state. And this one was tied to Education directly.

    As a CPA, I see the changes to the state income tax structure every year. I believe some of the discussion when they began reducing the top rate was because it was being covered by these other tax collections. It was easy to see before the state questions were voted on that the revenue predictions were grossly overstated, but somehow this was overlooked because it was “for the kids”. How could anyone vote against “helping the kids”? I remember the outcry by the populists of anyone who talked against the actual merits of these state questions and whether they could do what was promised. It only mattered that it was “for the kids”. I have seen some of my clients go through the addiction of gambling, cashing out their retirement plans, maxing the refinance of their home mortgages and divorces.

    The majority of the population that participates are those in the lower income tax brackets and elderly on fixed income. Those in the higher brackets got a tax reduction and generally do not gamble as much. I am one of the latter, so I am talking about raising my own tax burden. And my sister is one of those engineers that get the state credit and pays no state taxes. And more credits are added every year, which seem to mainly only be available to those in the higher tax brackets.

    And just how could they have written legislation to reduce the top rate when certain revenue levels are achieved, if this means there is less overall revenue after the reduction. Talk about incompetence. Yes, I do understand the roller coaster ride the economy has gone through since 2000, but as the chart show, the top rate has continued to come down during this period.

    And the good paying jobs? From what I see, most are under $20k/yr. A good portion are part time only, which may exclude them from health insurance coverage. Granted, most have membership cards and can use the facilities provided by the tribes, but these generally seem to be lacking.

    I agree with one of the earlier posters, that voting has been lacking in Oklahoma. The population needs to become significantly more active and demand our elected officials to make the tough decisions, instead of working mostly for their high income supporters.

  • Jim

    I wonder whether they polled an idea like create a new income tax bracket for people making $100,000 or more and tax the amount above $100,000 at a new rate of 7%?