Capitol Beat OK

Board to certify revenue growth, scheduled income tax rate cut

By Patrick B. McGuigan

Published: 20-Dec-2010

A scheduled reduction in state income tax rates now seems likely, as tax receipts have boosted state government’s General Revenue income about 5.65 percent more than projected. A private sector economist today told CapitolBeatOK the anticipated income tax cut could give the state economy a “shot in the arm.”

As the Great Recession seems ready to fade, Oklahoma government still faces likely budget cuts of about 3.37 percent, state Treasurer Scott Meacham said on Monday (December 20).

Saying his fingers were “covered with black ink” this year, in contrast to last year, “when they were covered with red ink,” Meacham briefed reporters in advance of the Tuesday (December 21) meeting of the state Board of Equalization (BOE).

In discussions with reporters, Meacham said there was “more than enough” revenue growth to “flip the trigger” for a one-quarter percent reduction in state income tax rates. At the briefing, Meacham said a budget trim of about $226 million is needed, although an estimated $276.1 million more than previously projected will enter state coffers in time to prepare for the annual budget cycle.

Meacham said the budget tightness is “caused by a number of reasons. Among the causes are loss of federal stimulus funds, an empty Rainy Day Fund, an expected state income tax reduction and the recent extension of the Bush tax cuts.”

Concerning the anticipated state income tax reduction, Meacham and a leading national economist both said current economic growth, although modest, hints at the wisdom of keeping the income tax cut “trigger” in place.

Meacham said, “The trigger will be flipped. There is more than enough growth to flip the trigger. The income tax cut is the result of compromise that was fashioned in 2006. It will trim the income tax from 5.5 percent to 5.25 percent. That is driven by tax growth of 4% plus the value of the standard deduction.”

Meacham explained: “There is significantly more than what is needed to retain the trigger and not to postpone it.” Asked for his own recommendation, Meacham responded, “I encourage the Legislature to be patient. As things now look, if you can manage things OK and avoid cuts in the things Oklahomans think that government should do, then let the income tax rate trigger go into effect. If that does not seem possible, then the Legislature and the governor can during the session take a close look at all of it.”

Meacham added he was now confident present growth will continue to boost government revenues. The departing state treasurer noted the top income tax rate in Oklahoma is reached at relatively modest earning levels, i.e. $20,000 for a married couple filing jointly.

Economist Scott Moody, an OCPA research fellow, reflected on the latest revenue news and the potential rate cut, saying: “Under current law, most small businesses pay their taxes through the individual income tax as sole proprietorships, LLCs, and S corporations. Therefore, reducing Oklahoma’s top individual income tax rate would be a timely shot in the arm for Oklahoma’s small business community, especially as they struggle to recover from the ‘Great Recession.’”

In Tuesday’s meeting, the BOE will gather, Meacham reported, “to approve the preliminary estimate of what the Legislature will have to spend for FY 2012.” After that meeting, “I anticipate tax revenue will actually continue to grow. The numbers should rise from December to February.” While preliminary budgets will be prepared based on this week’s numbers, the February revenue projection will become the firm basis for the budget process that must be completed before the Legislature adjourns in May. 

The recently renewed “Bush tax cuts” at the federal level will have a state tax effect, reducing revenues by several million, Meacham said. He told reporters, “The revenue coming in at this points looks about 2.7% ahead of the projection for this year. The Tax Commission is now quite confident its projections for available revenue will be met, and will lead to a RDF [Rainy Day Fund] deposit. … I believe all of these numbers will actually improve somewhat.

Despite the generally hopeful tone of Meacham’s analysis, he says, “There won’t be dramatic recovery until/unless there is recovery in gross production taxes. Of course with the [natural gas] prices lower than might be hoped, that day is not yet here.” Despite the need for new cuts aimed at the Fiscal Year 2012 budget cutline, Meacham said, “I don’t anticipate a need for any more FY 2011 budget cuts.”

Bottom line, “We’re still below pre-recession levels in terms of spending. Some people have said it’s like we’re looking at a 2005 or 2006 budget, and that is about right. The reason things are not as glum as some expected is that the Tax Commission was, as they always are, conservative in projections. So, as things have improved somewhat in the economy, there is more government tax revenue than some expected.”

Meacham said, “The economy looks to be growing about 2 to 3 percent, not five percent, but the projections were so low that the actual money comes in higher than that 2-3 percent range. As for the constitutional reserve [better known as the Rainy Day Fund], we won’t know for sure until June 30 but a deposit is very possible.”

Tomorrow’s meeting represents the end of an era in state politics, in partisan terms. A panel consisting entirely of Democrats will meet to certify the revenue numbers. When the board gathers in February, the group will be entirely Republican. Of the incoming BOE members, only Governor-elect Mary Fallin has prior experience on the panel, having served during her years as lieutenant governor.

Meacham said Treasurer-elect Ken Miller will attend tomorrow’s meeting. Last Friday, Meacham provided Miller and other incoming BOE members a briefing packet on the revenue projections.

In a discussion of the challenges of revenue estimation, Meacham reflected, “Estimates are always going to be wrong. Estimates can never find, in advance, the inflection points, i.e. dramatic times of change in government revenues that result from broad changes in the economy. Modeling might be made better and statistically more accurate, but it will always be an estimate. There is a limit to how far you can go with that. Generally it is not possible to be ‘accurate’ with an estimate.”

Meacham joshed good naturedly with the state Capitol press corps about going from being a banker to a politician and, in mid-January, to working lawyer. He said, “I’m not sure that is an improvement.”

The widely-discussed trigger could nip income tax rates on January 1, 2012, subject to final BOE action in February.

Last year, state officials utilized roughly $592 million federal stimulus money to balance the budget, but those resources will not be part of the next budget cycle.

The office of State Finance and the Tax Commission project $5.1 billion in GR (general revenue) collections for the next fiscal year. Under state law, 95% of the total collections will be available for appropriations. The grand total in proposed expenditure authority for FY 2012 will be $6.105 billion.