Oklahoma Could Face Showdown Over Ill-Advised Income Tax Cuts

Oklahoma has become yet another regrettable example of what happens when state policy is driven by income tax cuts. Worse, Gov. Mary Fallin and Senate Finance Chairman Mike Mazzei are on a collision course over the fate of a recent income tax cut, raising the specter of a prolonged budget deadlock.

Oklahoma is in the midst of a serious revenue crisis, and it has been since the onset of the Great Recession in 2009.  Just last week, lawmakers learned that the state’s projected $900 million revenue shortfall for fiscal year 2017 has ballooned to at least $1.3 billion due to declining oil prices and ill-advised tax cuts. The budget problem is at such crisis levels that the state can’t simply cut even more services to bring the budget into balance. It must raise revenue.

It’s important to note that Oklahoma lawmakers have slashed income taxes repeatedly since 2004. Today, the income tax brings in $1 billion less annually — more than enough to cover the projected revenue shortfall. The protracted crisis caused by ill-advised tax cuts has meant pain for the state’s children and families. According to a report by the Oklahoma Policy Institute, “acute teacher shortages, college tuition and fee hikes, critically understaffed correctional facilities, longer waiting lists for services, and lower reimbursement rates for medical and social service providers are among the harmful consequences of chronic budget shortfalls.” Lawmakers have already declared a revenue failure and cut allocations to state agencies by 3 percent across the board. Since 2009, some state agencies have seen their support from the state cut by as much as a third. Without action, state agencies could see a further 13.5 percent cut, with education among the hardest hit priorities.

Gov. Mary Fallin has at least recognized that the state’s woes need a revenue solution rather than a “cuts only” approach. Sadly, her proposed tax plan would balance the state’s budget problems on the backs of Oklahomans who can least afford it, rather than ask well-off citizens to pay their fair share.

In fact, leaders in the state allowed a $147 million income tax cut to go into effect last month despite the precarious budget situation. Gov. Fallin declared that reversing these tax cuts is off the table. She says “Giving the middle class and the poor a tax break is a smart thing to do, letting them keep more of their hard-earned money” – despite the fact that the top-rate tax cut would save middle income earners just $35 a year.

Instead, Fallin has borrowed a page from Kansas Gov. Sam Brownback’s playbook — suggesting a solution of budget cuts and regressive tax increases.  The governor would expand the sales tax and increasing the excise tax on cigarettes by $1.50 per pack, two measures that would fall more heavily on low-income Oklahomans. Expanding the sales tax to include services and items delivered electronically, like music downloads, would raise $200 million. The cigarette tax increase would raise $181.6 million. Other than a proposal to eliminate a truly nonsensical income tax deduction, her plan mostly ignores income tax options.  Gov. Fallin would still have to cut appropriations to most agencies by 6 percent. Someone should tell her how this policy is working in Kansas City.

The governor has gotten pushback from her own party for defending income tax cuts during a budget crisis. Sen. Mike Mazzei, who chairs the Senate Finance Committee and is serving his last legislative term due to term limits, appealed to the public for help in stopping the cuts. Last week, the senator told businesspeople in Tulsa that the revenue levels required to trigger the most recent cuts were never met, and that the state simply can’t afford them. “If you really want us to have financial reform…we need you to email your Oklahoma state senator…. We need you to email your Oklahoma state representative and give them the support they need to reform our state financial system,” he implored.

Yet a Senate Finance Committee bill championed by Mazzei would also “suspend the state earned income tax credit, low-income sales-tax relief and the state child-care tax credit,” among others. Suspending these three measures next fiscal year will raise less revenue than suspending the top income tax rate cut over the same period. Coupled with the increases proposed by the governor, these changes would make Oklahoma’s tax system even less fair.

An ITEP analysis of the impact of the proposed EITC, sales tax credit, and child-care related changes found that the lowest income taxpayers in the state would see their taxes go up by close to 1 percent of their incomes paying an average tax hike of more than $100 while upper-income taxpayers would not pay a penny more. 

Oklahoma, like Kansas and other states before it, is a lamentable example of what happens when lawmakers promise constituents that they can slash taxes with abandon without any fallout. After years of doubling down on tax-cutting policies, the state now has to figure out how to raise revenue to stave off deep cuts to necessary services. Unfortunately, like many other states, Oklahoma lawmakers are  asking working families to bear the bulk of the cost of crucial services by primarily looking at regressive taxes that take a greater share of income from low- and middle-income families.

There is a better way. Oklahoma lawmakers should secure the prosperity of all of their residents by reversing some of the revenue-losing income tax cuts enacted in recent years. This would allow the state to fund education, public health and other critical priorities, ultimately leading to economic growth and improvements in workforce quality that truly attract businesses. The regressive solutions proposed by Gov. Fallin and lawmakers are more than a scandal – they’re an outrage.