In Search of a Grand Bargain: Ways to Bridge Budget Gap

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Update, March 1, 2017: This article has been updated to include comments from Secretary of Finance Preston Doerflinger disputing the potential impact of proposals from the Oklahoma Council of Public Affairs and the group’s response. 

As Oklahoma’s 2017 legislative session enters its fourth week, one thing is abundantly clear: Republicans, Democrats and Gov. Mary Fallin are nowhere close to a budget deal.

The Legislature and governor’s office have until the end of May to sign off on a plan that closes an $878 million budget shortfall for the upcoming year.

Their challenge is even more daunting given lawmakers’ goals to give teachers at least a $1,000 raise (costing an extra $52 million) and to shore up education, public safety and human services budgets for the current fiscal year, which ends June 30 (costing $48 million to $118 million).

The stakes are high. A failure to act would lead to draconian budget cuts to corrections, health and safety-net programs that are already reeling from several rounds of budget cuts in recent years.

Politics, and early jockeying for the 2018 gubernatorial race, are already clouding what typically has been a complicated and secretive budget process. To break through the confusion, here is a look at what options are on the table and what proposals are unlikely to see the light of day.

Slim to None

  • Broaden the sales tax base by taxing 164 services (budget impact: $839.7 million).
  • Increase fuel tax and reform transportation funding (budget impact: $219.7 million)

Fallin built her budget – one that includes no agency cuts – on her plan to revamp the state’s tax system.

But even when paired with tax relief proposals – eliminating the corporate income tax and the sales tax on groceries — her plan has garnered much more opposition than support.

In addition to Lt. Gov. Todd Lamb’s resignation from the governor’s cabinet over the tax proposal, at least 27 GOP lawmakers have publicly come out against it. The proposals similarly have faced backlash from Democrats who see them as a regressive tax that will disproportionately hurt the middle and lower classes.  

Although Republican leaders have not completely ruled out the proposals at this stage of the session, they have repeatedly noted that it will be an extremely tough task of getting the three-fourths majority votes in both chambers necessary to pass revenue-raising bills.

Package Deals

  • Increase the cigarette tax (budget impact: $257.8 million).
  • Index the gross production tax on oil and gas ($40 million, possibly higher).
  • Repeal the 2015 tax cut that reduced Oklahoma’s top income tax rate from 5.25 percent to 5 percent ($150 million).

This is where a so-called “grand bargain” could come in.

Despite the Republican dominance in the Legislature, the party lacks the three-fourths vote needed to pass a tax increase in the House. That means they need Democrats to help pass one of the few tax increases that could be palatable to Republicans: raising the cigarette tax.

Democrats are more than aware of this. Minority Floor Leader Scott Inman, D-Del City, has publicly said his caucus is willing to go along with the cigarette tax proposal if they receive something in return.

One of those bargaining chips could be increasing the state’s gross production tax on oil and gas. Inman has proposed a bill that would re-set the tax rate from 2 percent to 7 percent, depending on the price of oil and gas.

State budget officials haven’t weighed in on how much money this could generate. But Inman said it could be in the hundreds of millions, and an estimate from the Oklahoma Policy Institute projects $40 million in the first year and more in subsequent years if prices increase.

Getting enough Republicans to back either of these proposals could be a challenge. But Fallin said her office is willing to consider any revenue-raising plans that can pass both chambers.

One-Time Revenue Options

  • Bonds (About $300 million).
  • Rainy Day Fund (up to $150 million).

Hoping to reverse the trend of relying on one-time funding sources, Fallin offered a proposal that didn’t include any request to use the Rainy Day Fund or bonds to balance the budget. But GOP legislative leaders have suggested they may use the strategy again this year.

“Of course, nobody wants to ideally utilize one-time funding sources for a budget,” said House Speaker Charles McCall, R-Atoka. “But when you are in a contraction cycle, you know, you are going to – and we will.”

There is currently a $240 million balance in the state’s Rainy Day Fund. With simple majority votes in both chambers, lawmakers can access $90 million for the fiscal year 2018 budget. An additional $60 million can be tapped with a two-thirds vote with the governor’s consent or a three-fourths vote without her approval.

McCall said the Rainy Day Fund is a more likely source than bonds, but he said both are on the table. And while lawmakers haven’t publicly discussed how much they’d consider borrowing, the amount could be up to several hundred million dollars.

Fallin and the Legislature agreed last year to borrow $200 million in transportation bonds.

She had requested to borrow $500 million in transportation bonds last year. That amount was too steep for lawmakers at that time, but this year they could consider revisiting the $300 million they didn’t borrow then.

Fallin’s Other Proposals

  • Non-appropriated agency revenue sharing ($45 million).
  • Wind production tax, zero-emission credit sunset ($36.6 million).
  • Electric vehicle road fees ($1.4 million).
  • Repeal motor fuel “eligible purchaser” discount ($5.8 million).
  • Increase the reinstatement fee for a suspended corporation ($736,000).
  • Increase the excise tax rate for commercial trucks and truck-tractors ($1.7 million).

Outside of the tax increases, the governor’s budget plan includes about $91 million in other revenue-raising options.

The highest-profile of these is her plan to accelerate the sunset of the tax credit for zero-emission industries and begin taxing wind at $.005 per kilowatt-hour produced.

The governor’s office also expects to generate $45 million a year by requiring more non-appropriated agencies to send back a portion of their revenues to the state’s general fund.

Proposals Suggested by Others

  • Assess a high-income surcharge on incomes over $200,000 ($204 million).
  • End the capital gains exemption ($105 million).
  • Adopt combined corporate reporting ($20 million to $60 million).
  • Expand smaller-scale sales tax base ($112 million).
  • Defer increases to highway/bridge maintenance fund ($59.7 million).
  • Audit Medicaid enrollment (OCPA projection: $85.6 million; OMES projection: $0).
  • Audit HealthChoice enrollment (OCPA projection: $6 million; OMES projection: $0).
  • Reform HealthChoice Select providers (OCPA projection: $65 million; OMES projection: $0).
  • Enact three-year moratorium on agency advertising, memberships, sponsorships and transportation project art (OCPA projection:$ 39 million).
  • Consolidate administration in higher education (OCPA projection:$ 32.8 million; OMES projection: $0-$32 million).
  • Repeal sales tax exemption for NBA, NHL tickets (OCPA projection: $2.2 million; OMES projection: $1.9 million).
  • Repeal sales tax exemption for admission to other professional sports (OCPA projection: $492,000; OMES projection: $478,076).
  • Cap zero-emission tax credit liability payouts at $15 million (OCPA projection: $50 million; OMES projection: $0).
  • Cap ad valorem reimbursement for wind at $15 million (OCPA projection: $15 million; OMES projection: $5.2).
  • Repeal sales tax exemption on wind turbine sales (OCPA projection: $50 million; OMES projection: $0).
  • Repeal subsidy for films made in Oklahoma (OCPA projection: $5 million; OMES projection: $5).
  • Reform tobacco settlement (OCPA projection: $57 million; OMES projection: $0).

Proposals to assess a high-income surcharge, end the capital gains exemption, adopt combined corporate reporting, defer highway/bridge maintenance and look at a smaller-scale sales tax expansion (such as what the governor proposed last year) are among a series of recommendations by the Oklahoma Policy Institute.

The rest are part of a 13-idea package from the Oklahoma Council of Public Affairs.

Those suggestions totaled $413 million in savings, according to the OCPA projections. But state officials dispute that number.

In a letter to legislators in response to the proposals, Secretary of Finance Preston Doerflinger said “the majority of those savings go in the category of cost avoidance, not revenue creation.” He said the budget shortfall would be shortened by only $45.5 million for fiscal year 2018 if all 13 proposals were passed.

He pointed out that several of estimates would be difficult to calculate while others wouldn’t take effect until subsequent years, or not at all.

OCPA President Jonathan Small said Wednesday that Doerflinger is only pointing out the proposals don’t increase revenue. Although he didn’t specifically point out how the proposals would effect the certified revenue numbers the state uses to determine a balance budget, he argued the cost-cutting proposals are still legitimate.

“(Doerflinger’s) real objection seems to be that OCPA does not recommend higher taxes in order to increase revenue for government,” Small said in a statement.

Despite the disagreement, many of the proposals from the two think tanks haven’t generated much public conversation among lawmakers. But given the early stage of the session, it’s still possible they could come into play during debates to come.