Policies and principles: A clash of visions

By Patrick B. McGuigan

Published: 15-Apr-2010

As the current legislative session began, analysts for the Oklahoma Policy Institute and the Oklahoma Council of Public Affairs were on the same page a few times concerning the wisdom of tax credits and other business incentive programs.

OCPA’s Brandon Dutcher has pointed to OPI’s critiques of motion picture film incentives as an area of agreement. OPI’s David Blatt has said conservative state Rep. David Dank has made valid points in his assaults on various business tax credits. 

As the Legislature enters its final weeks, communications from the two groups have demonstrated more characteristic differences. In this longer-than-usual report, CapitolBeatOK presents in distilled form the depth and nuance of policy-oriented analysis from each of these “think tanks” committed to a better future for Oklahoma.

Blatt, director of the Tulsa-based OPI, recently commented on OPI’s “Oklahoma Policy blog,” “the most reasonable options for revenue enhancements that would bridge part of the budget gap to avert cuts that could have a devastating impact on our schools, social safety net, public safety and infrastructure.”

One posting considered the state revenue shortfall and argued that “closing the budget gap through an exclusive reliance on deeper cuts is a choice, not an inevitability.” Blatt believes “We’ve been able to avoid the apocalypse up until now. If we’re going to avoid a sort of catastrophe, we need additional revenue to close that gap.”

As he observed, “Assuming the state uses an additional 3/8ths of the Rainy Day Fund and the remaining available federal stimulus dollars, that still leaves a gap approaching $800 – $850 million, according to our calculations. This gap is equivalent to 12 percent deeper cuts across all agencies of state government above the cuts already enacted the past two years.”

Blatt contends, “Due to State Question 640 and the state’s political climate, outright tax increases may well be off the table. However, there are other revenue options out there.  The Governor’s budget proposed over $700 million in revenue enhancements ranging from stepped-up tax collections and the elimination and suspension of tax credits to bond issues, revolving fund transfers, and fee increases.”

Blatt and OPI have also looked at what he characterizes as a “$118 million tax loophole that allows the deduction from federal income tax returns for state income taxes to be carried over to state returns – but only for those who itemize their deductions.”

Blatt wrote: “Oklahoma is one of just six states – the others are Arizona, Hawaii, Louisiana, Rhode Island and Vermont – that allow the deduction of state income tax on state tax returns.  Most states that allow taxpayers to carry over federal itemized deductions on their state return require taxpayers to simply add back the state income taxes deducted at the federal level.  And the few states that don’t already follow this sensible practice are catching on: New Mexico recently enacted legislation to end the deduction, while Vermont has capped the deduction at $5,000.”

He argued: “Eliminating the deduction for state income taxes would bring in $118 million in additional revenue to the state, according to an analysis conducted by the Institute for Taxation and Economic Policy. Three out of four Oklahoma households – those who claim the standard deduction – would be unaffected by this tax change. Just 4 percent of the additional state revenue from this change to the tax code would come from the 60 percent of taxpayers with income below $49,100, while 58 percent of the additional revenues would be borne by the wealthiest 5 percent of taxpayers, those with incomes above $163,000 in 2011.”

OPI believes, “The circular process that allows state income taxes to be claimed as a deduction against state income taxes makes little sense and benefits only the minority of mostly wealthier Oklahomans who itemize their deductions. Doing away with this loophole would mark an important step towards a more equitable tax system, but more importantly, would improve our chances of navigating through these perilous fiscal straits without causing severe and irreparable harm to vital public services.”

In another blog posting, OPI argued that “the rebate given to vendors for collecting sales tax – set so long ago that it doesn’t reflect today’s far lower compliance costs – should be reduced.”

OPI contended: “Reducing the vendor discount would go only a short part of the distance in bridging the budget gap, but it is sensible policy that would align our tax system with modern technological realities. It should be considered and enacted by this year’s Legislature.”

The Oklahoma Council of Public Affairs took a different point of view about the state’s financial situation, and several particular fiscal policy issues, in an April 5 communication to legislators that said solons now face “a time for choosing” – and that the choice was simple: “Oklahomans want smaller government. Fiscal reality requires it. So what’s the problem?”

OCPA chided Governor Brad Henry for proposing $725 million in revenue enhancements, and for declaring, “If we don’t do some things, and we rely totally on cuts to agencies, we will devastate state government.”

In the early April memo, OCPA pointed back to CapitolBeatOK’s interview with Senate Majority Leader Todd Lamb, who said the state was “looking at being able to spend about what government actually cost in its entirety in 2005. That’s not ancient history.”

OCPA contended, “It is difficult to believe that 2005-level spending would ‘devastate’ state government. Indeed, would that not imply that the government was in a state of devastation earlier in the Henry administration? If so, one wonders how that escaped widespread notice.”

The memorandum argued “government spending has long been outpacing reasonable benchmarks, including Oklahomans’ shriveling ability to pay for all this government.” As a practical matter, “in the near term Oklahoma is going to have a smaller government with fewer services. Fortunately for policymakers, achieving this result will not require Churchillian courage. Because a smaller government with fewer services is precisely what Oklahoma voters want — and by a margin of better than two to one.”

The OCPA communication then pointed to a late February/early March SoonerPoll commissioned by the group which found that Oklahomans chose “a smaller government with fewer services” over “a larger government with many services” by 61% to 28%. In the event of a budget crunch, the poll found, those polled would support (67% to 26%) reducing the number of state government employees by 10%.  Given a choice between raising taxes and fees or cutting spending, the latter option had 77% support while the former had only 10% in the opinion survey.

OCPA argued “State government is too big. Voters want it to be smaller. Reality requires that it be smaller. So what, exactly, is the hang-up?”

The memo then pointed to CapitolBeatOK’s interview with state Treasurer Scott Meacham, in which the state’s chief financial officer observed that “in good times, I do think that it’s true that government is subject to ‘mission creep.’ … When the revenue is flowing maybe there’s a trend to drift into areas that are outside of the core mission or missions of government. What happens when things are going well is that things that are ‘nice to do’ become new programs, but in hard times or tight times, it’s time to look at maybe pruning the tree of government.” 

The April 5 OCPA memo argued for “right-sizing” of government rather than revenue enhancement: “A government with too many employees needs to be pruned. A government that owns golf courses and insurance companies and print shops and hundreds of thousands of acres is not focusing on its core mission. And until government has been right-sized, it has no business taking more money from its citizens.

“While it may be prudent to consider refinancing bond issues or taking a closer look at some tax credits, it is unthinkable — especially in an economic downturn — to take more money from Oklahoma families. Despite our state constitution’s guarantee that all Oklahomans have the ‘inherent right’ to ‘the enjoyment of the gains of their own industry,’ the average Oklahoman has worked all 95 days of 2010 and still has not enjoyed those gains.”

April 6, the day after the memo was circulated, was “Tax Freedom Day” in Oklahoma.

The OCPA circular concluded “It is unwarranted to collect sales tax on Internet purchases, for example, or on software downloaded to a computer. Whether or not this is dubbed a ‘new’ tax, working Oklahomans would see a higher portion of their family budgets taken away.

“This would be especially unfair to rural Oklahomans, who often live very far from physical stores. For these Oklahomans, online commerce has provided a major boost to their standard of living. Online stores have created many new opportunities to learn and enjoy the comforts of our modern economy while still enjoying the country lifestyle. To raise new taxes on such a large portion of the state during a recession would be unwise. Instead, policymakers should free up working families’ budgets and allow them to purchase more of the goods they desire as well as to save more money, which in turn allows for profitable investment by the private sector.”

The full text of the OCPA memorandum is available at: http://www.ocpathink.org/blog/?module=blog&id=1779&parent=227

NOTE: Patrick B. McGuigan runs CapitolBeatOK under contract with the Oklahoma Council of Public Affairs, providing incisive and accurate reporting on state government. He visits the Oklahoma Policy Institute’s website frequently.