Teacher Pay Plan Comes with Risk of Eroding Funding Streams

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Lawmakers debating a giant revenue package to pay for teacher raises face an old dilemma: They want a mixture of higher taxes, but also want those tax collections to be there in the long term.

The House advanced a plan Monday to raise more than $500 million to pay for the raises and potentially avert a teacher walkout. But the three main revenue sources targeted for tax increases – oil and gas production, motor fuel and tobacco products – have become, or are at risk of becoming, a less dependable state funding source.

An Oklahoma Watch review of a decade of tax collections for these sources found they have been on a downward trend as measured in real buying power – that is, adjusted for inflation.

The tax increases are critical to the House’s plan to give teachers an average $6,000 next school year. That proposal includes raising cigarette taxes by $1 per pack, gasoline taxes by 3 cents and diesel taxes by 6 cents, and gross oil-and-gas production taxes from a 2 percent to a 5 percent rate for the for the first 36 months of a well’s life.

The plan could be voted on by the Senate as early as Wednesday.

If it does pass and is signed into law, and the state meets revenue estimates for the coming year or years to cover a teacher pay hike, the risk is that the cost of the plan will eventually exceed how much the state collects.

Lawmakers say that’s a danger they are willing to face in exchange for addressing the immediate problem. On the other hand, it would also mean the state must eventually find additional revenue or make budget cuts.

Volatile Tax Sources

The largest source of the tax increases approved by the House is the most volatile revenue stream.

Raising the gross production rate to 5 percent is projected to bring in $204.5 million annually, according to a House analysis.

Drilling activity can be hard to predict over the long run, as it is subject to fluctuations in national and international markets.

That was evident in recent years, when the gross production tax collections have been as high as $1.2 billion in 2008 and as low as $355 million in 2016.

Rep. John Bennett, R-Sallisaw, who was among 11 lawmakers voting against the revenue package in House Bill 1010, raised the concern that Oklahoma will see another bust in the near future.

“If we don’t get this revenue in, how do we pay for the teacher pay raise then?” he asked.

House Budget Chairman Rep. Kevin Wallace, R-Wellston, acknowledged that Oklahoma can be “made or broke” by oil and gas prices and that the proposal makes the state even more dependent on the industry. But that has always been a risk here, he said.

“I can tell you that if as Legislature we have committed to the pay raise, they will have the pay raise,“ he said. “And just like in the last downturn of the economy, in which we are coming out of a three-year recession, obviously there will be cuts if we do not meet the demands of the budget.”

Streams That Could Dry Up

The two other major revenue sources have been more stable over the past decade.

Gasoline and diesel tax collections have ranged anywhere from $407 million to $440 million a year without adjusting for inflation. Cigarette and tobacco tax revenues have bounced up and down, ranging from $201 million to $240 million.

Adjusted for inflation, though, both collections have experienced a slight downward trend.

If the higher taxes cause many people to smoke less, or drive less or buy more fuel-efficient vehicles, the trend could accelerate.

Lawmakers have repeatedly said the tobacco tax increases have a dual purpose: Generate money in the short term, and reduce smoking and tobacco-related illnesses in the long term. Residents and the state ultimately could save on medical costs, although tax collections would decline.

The shift to more fuel-efficient vehicles, including electric cars, also poses a threat to collections from gas and diesel revenues. It is an issue in many states, which seek alternative ways to fund road and transportation projects.

Last year, Bloomberg New Energy Finance predicted electric vehicles will make up 54 percent of new car sales by 2040. That would affect not only Oklahoma’s motor fuel tax revenue, but potentially revenue from oil and gas taxes.

“Fossil fuel demand will be displaced by the growing fleet of EVs,” the group reported. “We project 34 percent of cars on the road will be EVs by 2040 – 530 million EVs in total – which will displace up to 8 million barrels of transportation fuel per day.”

In the meantime, teachers and state employees are threatening a walkout, and many Oklahoma agencies are waving red flags about their financial ability to deliver adequate core state services