Filling the Hole: Options for a balanced approach to the state budget shortfall

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by March 25th, 2014 Posted in ,

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The Board of Equalization has certified that legislators will have $188 million less for next year’s budget compared to this year.  In her FY 2015 Executive Budget, Governor Fallin proposed an overall cut of 1.9 percent across all of state government and cuts of 5 percent to most agency budgets. In a new issue brief, OK Policy argues that responding to budget shortfalls by imposing deeper budget cuts is not an inevitable outcome.

The prospect of a new round of budget cuts is of grave concern for two main reasons:

  • The state has never fully recovered from the prolonged budget crisis that accompanied the recession of 2009-10.  Years of budget cuts and mostly flat funding continue to be felt  in the form  of larger class sizes, understaffed prisons, increasingly uncompetitive salaries, and  long waiting lists for critical services;
  • Many agencies require substantial funding increases next year simply to maintain services at current levels.

Our state agencies, schools and colleges cannot absorb budget cuts simply by tightening their belts. Further cuts would inflict serious harm to the public institutions on which our health, safety, and economic well-being depend.

Policymakers have the choice of adopting a balanced approach to filling the budget hole that includes new revenues.  Among the feasible options to bolster state revenues are the following:

  • horizontal-costCurb the tax break for horizontal oil and gas production: Oklahoma taxes production from horizontal wells at just 1 percent for 48 months, compared to 7 percent for traditional production. As an ever-increasing share of oil and gas production shifts to horizontal drilling, the cost of the tax break has reached $250 million. Policymakers should eliminate the tax break for horizontal drilling and establish a 7 percent rate for all production. (Click here for more on this issue)
  •  Eliminate the “double deduction” of state income taxes: Oklahoma is one of only six states that allows taxpayers who claim itemized deductions to deduct state income tax on state tax returns. This deduction is an unintentional  fluke of the law that serves no policy purpose.  By eliminating this “double deduction” of state income tax, the state would gain an estimated $101 million in additional revenue.  (Click here for more on this issue)
  • Adopt combined corporate reporting: Some multi-state corporations shift income between parent and subsidiary companies as a way to minimize their state tax liability. More than half of all state with a corporate income tax have adopted a reform known as combined corporate reporting as a way to put an end to this tax avoidance strategy and ensure that multi-state corporations pay their fair share of taxes, just like local businesses.  (Click here for more on this issue)
  • Enhance tax collection from online sales: States are hampered in their ability to require some retailers to collect and remit taxes owed on online sales.  With the growth of e-Commerce, this situation puts local Main Street retailers at a competitive disadvantage and leads to substantial lost revenue for state and local governments.  While waiting on federal action, Oklahoma could follow the lead of ten states that have adopted so-called “Amazon laws” to help boost tax collections from more online businesses based outside of Oklahoma. (Click here for more on this issue)
  • RDFTap the Rainy Day Fund: Oklahoma’s Rainy Day Fund currently has a $537 million balance. Up to $162.1 million of that amount may be appropriated to help balance the budget and avert cuts that could cause serious damage to the state economy and to Oklahoma families and businesses. (Click here for more on this issue)
  • Maintain Transportation Funding at Current Levels: Allocations to the ROADS fund for maintenance and upgrades of roads and bridges is slated for an automatic increase of $56.7 million next year.  While investments in transportation are unquestionably important, it doesn’t make sense to allow this increase while slashing support for other vital services, such as schools, health care, and public safety.  (Click here for more on this issue)
  • Accept Federal Funds to Expand Health Coverage: Between now and 2016, the federal government will assume 100 percent of the cost of providing health insurance to adults with incomes below 138 percent of the poverty level who are not currently eligible for Medicaid.  Expanding coverage would create savings for the state budget by shifting payment of services that are currently paid for with state funds to the federal government.  (Click here for more on this issue)

Lawmakers have a responsibility to consider all of the options to protect the services Oklahoma needs to be a prosperous and healthy state and to put our fiscal house back into order. Even if some combination of the proposals laid out in this brief are adopted, Oklahoma will still face challenging budget circumstances next year and beyond. However, the proposals outlined here show that we do have options to avoid cutting deeper into important services. Oklahoma’s $188 million budget shortfall is not inevitable; it is a choice that we can and should avoid.  

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