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Harmful Tax Cuts Helped Fuel Oklahoma’s Budget Woes

March 7, 2017 at 2:00 PM

The bond rating agency Standard & Poor’s has lowered Oklahoma’s bond rating due to two years of budget shortfalls and the state’s use of one-time funds to address them. Some of the budget stress is due to volatile energy sector revenues, but ill-advised tax cuts pose at least as big a problem.

Oklahoma depends heavily on the oil and gas industry, which has suffered from falling prices in recent years. Production taxes on oil and gas are projected to be 68 percent lower in fiscal year 2017 than five years ago. Falling energy prices also affect income and sales tax collections, as the industry is employing fewer people who, in turn, are earning less money and also spending less.

Years of short-sighted income tax cuts, however, also fueled the current crisis. (See chart.) State lawmakers have cut the top income tax rate from 6.65 percent to 5.0 percent, costing the state over $1 billion a year. And oil and gas industry tax breaks that state policymakers adopted since the mid-2000s cost the state $450 million in 2017.

Painful budget cuts have followed. For example, the state has sliced its per-student support for higher education by nearly 24 percent since 2008, after accounting for inflation.

Oklahoma cut taxes despite two ill-conceived tax triggers designed to condition the income tax rate cuts on sufficient revenue growth. As in most cases, these triggers provided only the illusion of fiscal responsibility because they were based on inadequate information about state revenues and didn’t account for state needs. The triggered cuts worsened the state’s already widening gap between incoming revenues and funding needs.

Large tax cuts for wealthy people and profitable corporations and business tax incentives reduce state funds for investing in communities, often for little or no payoff. The energy-price plunge in Oklahoma and other states like Louisiana and West Virginia would be a much less serious problem had lawmakers not deeply cut taxes or allocated large tax breaks in recent years.