OK Policy’s David Blatt: For hard times, delay tax rate cut, consider other steps

by Patrick B. McGuigan

Published: 28-Dec-2010

David Blatt of the Oklahoma Policy Institute, in online postings following last week’s meeting of the Oklahoma Board of Equalization, is encouraging what could be deemed a brand of austerity in analyzing the state’s emerging revenue and budget pictures.

Last week, in an email note to recipients of his online updates, Blatt reasoned: “State revenue collections will continue to recover from their precipitous drop during the economic downturn, but the recovery will remain slow and incomplete. Next year’s General Revenue Fund collections are projected to be up $500 million, or 10.9 percent, from the low point of [Fiscal year 2010] but remain some $850 million, or 14 percent, below the pre-downturn peak of FY ’08.”

He said slow revenue growth reflects, in part, “cautious assumptions about the strength of the economic recovery over the coming months, but also the impact of policy decisions regarding tax cuts and spending obligations made by previous Legislatures.” Further, in Blatt’s view, “The real size of the looming budget shortfall is already a matter of some dispute, but many agencies will be hard-pressed to absorb any additional cuts.”

Blatt continued, “We are in the midst of an extended situation where state revenue collections, under current policies, are inadequate to meet the cost of adequately funding state services. We must continue to give serious consideration to a full range of options to bring the budget into alignment.”

The BOE meeting last week provided a preliminary revenue certification which thus became the basis for an executive budget that incoming Governor Mary Fallin will present at the start of the 2011 session of the Legislature. The BOE will meet again in mid-February, with an entirely new cast of characters (including Fallin, as chairmn), to approve final estimates that will become binding on the Legislature.

According to the Fiscal Year 2012 estimates developed by the staff of the Tax Commission and the Office of State Finance and approved by the Board, FY 2012 General Revenue (GR) revenue projections are $5.103 billion. Blatt comments: “Next year’s collections will remain considerably below levels of six years ago, even as the cost of providing services rises due to inflation, population growth, and increased caseloads.”

Blatt continued on his blog, “Next year’s estimated GR is a mere $53 million, or 1.1 percent, above projected collections for the current fiscal year. The slow growth rate reflects, in part, conservative assumptions about the strength of the economic recovery over the coming months, but also the impact of policy decisions made by previous Legislatures.

“In particular, [Fiscal Year 2012] revenue growth is expected to be sufficient to trigger a cut in the top income tax rate from 5.5 percent to 5.25 percent effective January 1, 2012. This tax cut is expected to have a revenue impact of $61.5 million in FY ’12 and a total impact of $120 – $150 million when fully phased in by [Fiscal Year 2013].  Also, the statutory allocation to the ROADS Fund for transportation projects will increase by $37.5 million in FY ’12, while the allocation for OHLAP college scholarships will increase by $6.5 million. The FY ’12 projections also reflect a loss of $67.5 million in GR as a result of federal tax changes recently adopted by Congress.”

The higher-than-anticipated revenue projections for the upcoming fiscal year have, in some respects, masked the continuing spending challenges for the state. Blatt commented, concerning 2012 expenditure authority, “The initial Expenditure Authority of $6.104 billion for FY ’12 is some $600 million less than the actual FY ’11 budget of $6.7 billion, which included substantial amounts of revenue from the Rainy Day Fund and federal stimulus dollars.”

As Blatt observes, the state Treasurer is projecting a financing “shortfall” of about $226 million that includes $105 million in “leftover federal stimulus money in the form of an enhanced Medicaid matching rate and some $250 million in ‘5 percent money’ – the money that is expected to accumulate at the end of this year if, as expected, GR collections hit 100 percent of the certified estimate.” Actually spending the 5 percent money, or not, is “one of the big choices facing the Legislature and Governor in crafting next year’s budget.”

Blatt made the case that some state agencies, including the Corrections Department and the Health Care Authority, “will require significant funding increases just to maintain basic operations. Many agencies need additional funding to restore cuts to core services and to address the cumulative impact of several years of rising costs.”

The OK Policy review of fiscal challenges was in keeping with recent analyses from Blatt and his colleague, Paul Shinn.

In last week’s blog posting, Blatt concluded, “We must continue to give serious consideration to a full range of options to bring the budget into alignment, including making smarter expenditure decisions and accepting such sensible revenue options as suspending tax cuts at least until the tax collections have recovered to pre-downturn levels, doing away with unnecessary and inefficient tax breaks, implementing a hospital provider assessment, and broadening the sales tax base. Otherwise, the extreme underfunding of state services, which threatens to leave us even further from our goals of a prosperous, healthy and secure state, will only get worse.”

For further study, all of OK Policy resources focused on state budget planning can be accessed at http://okpolicy.org/current-budget-information.