Taxes and everything else: The hard work begins

How far tax reduction can actually go in the 2012 session of the Oklahoma Legislature remains an open question.
Strong majorities in the House of Representatives have set the state for income tax reduction, including potential phased-in elimination of the unpopular levy over a 10-year period. On the Senate side of the state Capitol, two “live rounds” have also cleared and will be in the House queue in coming weeks. 

With a annual appropriated budget of more than $6.6 billion (and total spending of over $16 billion), $2 billion (more or less) of income reductions over a 10-year period might seem within reach.

However, roughly $6.1 billion of that annual total is consumed by the state government’s “core services” – identified by the governor and legislative leaders as education, transportation, public safety and health/human services. 

The analysis attempts to distill the mix of spending reductions/efficiencies, and reform of credits/exemptions that stand either in the way, or as a means to expedite, tax reduction of the visionary state income tax phase out.

Republican leaders have stressed their intention to afford comparative insulation of “core services” – but say that does not mean they are exempt from critical analysis and targeted re-allocations or even reductions.

In sum, a “core services” formulation leaves about $500 million that is spent in other areas of government.
However, as many have said, and Senate President Pro Temp Brian Bingman has explained, “The devil’s in the details.” Every existing spending program, even the most modest, has a constituency. The larger programs have both defenders and lobbyists. 
To reach the goal of tax reduction, which seems to have strong majorities in both chambers at this point, the hard part begins now (Monday, March 19). 

Aside from tax cuts per se, questions with which the Legislature will grapple in the coming weeks include efficiencies and/or agency spending cuts; and the long-discussed possible reforms to the state’s regime of tax credits, exemptions and business incentives that allow taxpayers to reduce what they owe to the state. 
A core idea advanced by both Governor Mary Fallin and various legislative proposals is to make the state’s income tax system simpler and fairer, ending (for example) all income taxation on the state’s poorest workers.
Presently, even the lowest-income Oklahomans owe income taxes, unless they access exemptions such as the Earned Income Tax Credit to offset liability (in some cases, entirely). Fallin and other Republicans share the idea of ending low-income taxation, but spending reductions and/or “recapture” of resources will be required to start the income tax lowering process in all plausible scenarios. 

In advocacy for House Bill 3038 by Rep. Leslie Osborn of Tuttle and 30 House allies, and in the governor’s plan (House Bill 3061, sponsored by Speaker Kris Steele of Shawnee and Senate President Pro Temp Brian Bingman), the assumption is that income tax reductions will trigger new economic activity, itself subject to taxation, which will recover much of the “lost” revenue from lower taxation.
H.B. 3038 is mirrored, in large part, by S.B. 1571, by Senator Clark Jolley of Edmond, which is now pending before the House. Another proposal, S.B. 1623 by Mike Mazzei of Tulsa, would not phase out the income tax, but would enact a two-year reduction of one-half percent (from the current 5.25 to a 4.75 rate). 
In broad terms, “dynamic” assumptions about the effects of tax cuts are shared by most economists, but the extent of anticipated growth and what that should mean for policymakers provoke sharply conflicting interpretations.

Opponents have stressed that even in the analysis and vision of Professor Arthur Laffer income taxes would be reduced by $2 billion after a decade, with some $1 billion of that returning to state coffers due to growth.

Osborn’s phase out of taxes over 10 years comes closest to a “pure” plan for Laffer’s fans. It has been revised explicitly to protect state retirees and members of the U.S. military. The governor’s plan has many exceptions and would take 20 to 30 years to reach zero income taxation in Oklahoma.

Whatever else they disagree on, both proponents and opponents of the historic vision for an income tax phase out anticipate that spending reductions and new efficiencies, and/or increased taxes in other areas of government, would be required to advance the process. However, no tax increase proposal, as such, has advanced far at the Capitol this year. 
(To be clear, this analysis sets aside, for now, the issue of sales tax or use tax collection on Internet sales.)

For the most part, this state of affairs leaves spending reductions, efficiencies and/or reforms in tax credits/exemptions as the likeliest means to drive forward a tax phase out or major reduction. 

Identified areas of “waste, inefficiencies, non-core services”
Osborn and her allies have provided a long list of possible areas for reduction. They say as much as several hundred million dollars could be reduced without effecting core services. 

In some cases — such as appropriations through the Department of Agriculture to support the Tulsa State Fair ($65,000 a year), a steer roping championship ($25,000 a year) and a national finals rodeo ($25,000 a year) — the totals might seem modest.
In other cases, however, the money adds up quickly. The long-discussed state employee health insurance reform (along lines that enjoyed a bi-partisan majority in 2010, but which Governor Brad Henry vetoed), the three-year total is a hefty $189 million. Likely more controversial but an example of real money is the proposal from Osborn and other conservative leaders to shift $9 million over three years from the state subsidy for CareerTech centers with strong local revenues. 

In Higher Education, targeted reductions proposed by the allied Republicans backing Osborn’s bill include elimination of the Peer Factor Multiplier, ending administration and instructional duplication, and shifting faculty workloads, for a total of $216 million in each of three fiscal years (2013, 2014 and 2015, for $648 million. 

Speaker-designate T.W. Shannon has advocated selling unused government assets; the plan drawn from Oklahoma Council of Public Affairs’ fiscal policy analyst Jonathan Small gives some details.

The OCPA numbers-cruncher advocates several asset sales, including mutualization or privatization of CompSource, the public-private hybrid that competes in the workers compensation insurance market, and outright sale of the Grand River Dam Authority. 

The CompSource shift is listed as worth $50 million over two years, although that figure might be low. 
The Grand River Dam Authority’s potential sale price is booked at $300 million (in Fiscal Year 2014). 
Tax Credits, Exemptions and Lobbyists: Oh My!
The House late last week advanced both constitutional and statutory measures designed to put into place new standards or guidelines for future provision of tax credits, business incentives and other carve outs, also known to some analysts as “tax expenditures.” 

House Joint Resolution 1089 would allow voters to decide in November whether to put into the state constitution explicit criteria for future provision of tax credits and exemptions. Drawn from the work of the Task Force on State Tax Credits led by state Rep. David Dank of Oklahoma City, H.J.R. 1089 is sponsored by Speaker Steele. 

Missing from the list of criteria is a proposal to end transferable tax credits, that is, provisions in law that allow recipients of certain credits to either use those at full value or sell them (often at discounted rates) to lower tax liability.

A powerful coalition of lobbyists and current recipients made transferability the first clear victim of organized “push back” against the income tax reduction/phase out proposals. 

However, transferability has survived thanks to a measure by Republican state Rep. Dennis Johnson of Duncan. While still clearly “at risk,” the idea remains viable for this year, the Speaker insisted in floor discussions and his weekly meeting with Capitol reporters.

In debate on H.J.R. 1089, Dank observed that transferability was the issue that, in the end, most deeply divided the task force. Republican state Rep. Mike Reynolds of Oklahoma City, who attended most of the task force meetings (although not a member) said he had concluded that “disdain for transferable tax credits” was the most consistent message of the group’s deliberations. 
Steele said he shared the objective to end transferability, but that both task force members and a legislative majority had concluded ending the provision “shouldn’t be part of this criteria.”

Rep. Johnson pointed out, before the debate on his own measure, that “people on both sides of the transferability issue support some sort of reform.”

In dialogue with Rep. Cory Williams of Stillwater, a Democrat, Steele concurred that the gist statement (the “simple language that distills an amendment’s meaning for voters) should be revised. As a result, the House amended H.J.R. 1089 in the latter states of debate. After debate, with Reynolds in opposition, Williams moved to suspend House rules to allow consideration of his “untimely amendment” to the gist statement. 

The amendment prevailed 46-5, with a total of 48 Representatives either absent or, as deliberate absence is deemed, “walking the vote.” Voting no were Reps. Reynolds, David Derby of Owasso, Mike Ritze of Broken Arrow and Paul Wesselhoft of Oklahoma City, all Republicans, and Democratic Rep. Brian Renegar of McAlester. 

Rep. Williams’ proposal to allow suspension of the rules prevailed 68-11, with 20 members excused. Then, on third reading, the constitutional proposal advanced to the Senate on a vote of 77-10, with 12 members excused. 
Legislators then passed a statutory version of the tax credit criteria, House Bill 2978 sponsored by Rep. Dank. Dank carried through on Dank’s vision to ban passage of tax credits late in legislative sessions, and to make future credits subject to rolling sunset provisions and audits by the state Auditor and Inspector (now Gary Jones, a Republican). 

Rep. Williams questioned the enhanced powers for the auditor’s office. Further, Williams and others observed that some companies do not want their books reviewed by government officials, but Dank repeated his long-held contention that “if it’s taxpayers’ money, then taxpayers should have some idea of what it’s being spent on.”

Dank stressed, in dialogue with state Rep. Joe Dorman,a Rush Springs Democrat, that the statutory no measure had no direct effect on the existing firefighter tax credit, but was limited to “economic development” incentives. 

In an exchange with Democratic Rep. Chuck Hoskin of Vinita, Dank said cost for additional audits had not yet been budgeted.
Only Reps. Reynolds and Ritze opposed Dank’s statutory measure, as it passed 90-2.