Study Finds a Decade of Income Tax Cuts Deprived State of $1B This Year

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State Capitol - Jan 2014 - 2

Income tax cuts approved by governors and legislators of both parties over the past decade reduced this year’s state revenue collections by more than $1 billion, according to an independent data analysis.

The calculation by the Institute on Taxation and Economic Policy in Washington suggests that past income tax cuts contributed significantly to the state’s current budget shortfall. State officials have tended to place most of the blame on falling oil prices.

An accompanying study by the Oklahoma Policy Institute shows that most of the tax cut toll is attributable to reductions enacted when Democrats controlled the Oklahoma Senate and occupied the governor’s mansion.

“This has been a bipartisan mistake,” said Gene Perry, policy director for the Oklahoma Policy Institute, which commissioned the ITEP analysis. “We hope that there will now be a bipartisan effort to fix it.”

Oklahoma Policy Institute is an independent research group based in Tulsa. It has opposed past tax cuts and supported restoration of reduced funding for essential government services such as education, health and corrections.

Its interpretation of the ITEP analysis was challenged by the Oklahoma Council for Public Affairs, which has supported past tax cuts and government spending reductions.

“The tax cuts that were passed by Democrats and Republicans made complete sense,” said OCPA President Jonathan Small. “Oklahoma’s problem is that our economy is not diversified enough for the kind of government spending that politicians have historically done in Oklahoma.”

The ITEP analysis estimated the current annual impact of past reductions in Oklahoma’s top income tax rate. It said those cuts clipped fiscal year 2016 income tax collections by $1.022 billion.

Oklahoma Watch reached a similar conclusion in an informal data analysis done in October.

State lawmakers will face an estimated $901 million budget hole when they launch their 2016 session on Feb. 1. State officials will revise the budget gap estimate in mid-February. Some officials are speculating privately that the new figure will be bigger.

The impact of past tax cuts and the size of the current budget gap are not directly comparable. Not all income tax collections wind up in the appropriated budget. The ITEP revenue collection estimate did not attempt to take into account the positive effects that past tax cuts might have had on the economy and other revenue sources, such as the sales tax.

Moreover, plunging energy prices presumably would have created a current-year budget shortfall even if the income tax had not been reduced, analysts said. But the impact on schools and other state services might have been less severe.

The state’s education budget was cut by more than $47 million after the governor’s office announced a revenue failure, and the state projects an additional $19 million cut because of a falloff in revenue to a special fund dedicated to education.

“We’re not saying we wouldn’t be having a budget shortfall this year,” Perry said in an interview. “When energy prices have gone down as much as they have, we certainly would. It would just be a shortfall from a much higher starting point, and a shortfall that would not be happening on top of years of cuts and flat spending.”

The ITEP revenue estimate covers two distinct periods in recent Oklahoma political history.

From 2004 through 2007, lawmakers enacted several bills that reduced the state’s top income tax rate from 6.65 percent to 5.25 percent. At the time, Republicans had taken control of the House, and Democrats held a slim majority in the Senate.

The tax cuts were signed into law by former Gov. Brad Henry, a Democrat. They account for most of the cumulative tax-rate reduction.

By 2014, both the Senate and House were under GOP control. Gov. Mary Fallin, a Republican, won legislative approval of another round of income tax cuts.

On Jan. 1 of this year, the top rate dropped to 5 percent. It is scheduled to fall to 4.85 percent in 2018 if future revenue is deemed sufficient.

Oklahoma Policy Institute urged lawmakers to consider repealing the 2014 tax cut legislation.

“The tax cut was never intended to take effect in these circumstances,” OK Policy Executive Director David Blatt said in an interview. “We ended up in precisely the situation we were supposed to avoid, seeing the tax rate cut while revenues are dropping by hundreds of millions of dollars.”

Blatt acknowledged that rescinding previous tax cuts would be politically difficult. Under a constitutional amendment approved by Oklahoma voters in 1992, a tax cut repeal would require the support of 75 percent of lawmakers in both houses, unless it were referred to voters in the form of a state question.

Former state Senate President Pro Tempore Cal Hobson agreed that the tax-cut legacy of the past decade was a bipartisan phenomenon. Hobson, a Lexington Democrat, led the Senate from 2003 through early 2005.

“It’s irresistible. You get a tax reduction bill out there, and we don’t think past the end of our noses,” Hobson said. “Now we’re all going to pay the piper.”

Hobson said he thinks tax-cut fervor is as strong as it’s ever been at the Capitol, but predicted lawmakers might show more moderation as the impact of budget cuts becomes vivid.

“Even the strongest zealots should be getting some pushback from the schools and health care advocates,” he said. “If this doesn’t knock some sense into them, I don’t know what would.”

Small, of the Oklahoma Council for Public Affairs, said he was working as a budget analyst in Brad Henry’s Office of State Finance when the first big tax cut bills were negotiated in 2004 and 2005.

He said he considered the ITEP analysis misleading because it focused on just one revenue stream and disregarded other changes in state tax laws and revenue collections over the past decade.

“I can’t believe that people are pouring salt in the wounds of Oklahomans … by suggesting that they shouldn’t have the tax relief they got, because of a massive change in the energy industry,” Small said.

  • “The tax cuts … made complete sense,” said OCPA President Jonathan Small. When teachers are being laid off, schools are closing, children going hungry and the homeless are out in the cold, I’m sure that quote will bring them solace.

  • Glenda

    But wait minute…the benefit of following the supply-side theory is going to kick in and rescue us all…right? Where is that promised economic growth anyway?

  • Laughing Hombre

    Cuts in state income tax almost always benifit those at the top of the economic food chain. Increased sales tax almost always punishes those on the poorer side of the economic dood chain. Interesting how we are shifting our tax burden in OK. We do everything we can to hurt the poor and the children and the vulnerable outcasts, and then complain about it later… what a compassionate Christian society we have created here in OK.