When the Oklahoma Tax Commission published its estimate of revenue for fiscal 2016 everyone knew there was some financial slight of hand. Several sources of one-time revenue were included. And some unbelievable estimates were made. You can find more about it here.
When the Oklahoma Equalization Board certified state revenue for 2016 they projected an average price of $59.97 per barrel of oil and $3.96 per mcf of natural gas. In December 2015 the price of oil was $37.21 per barrel and natural gas was $3.86 per mcf.
This isn’t a pretty graphic, but here are some figures from the U.S. Energy Information Administration web site.
From the same site about natural gas:
The citygate price is from a point or measuring station at which a distributing gas utility receives gas from a natural gas pipeline company or transmission system.
I don’t remember any analyst predicting the price of oil or natural gas was going to go up in 2016 by the end of 2015. In December 2015, when the Equalization Board made their estimate, the Oklahoma budget was already in failure mode. State agencies had been warned to expect less money.
This revenue projection was, to the untrained observer, based on some wildly optimistic numbers. No one was suggesting that the Saudi’s were going to lower their production of oil. It was common knowledge that the Saudi’s had opened the tap wide in order to drive the price of oil down. This worked. This was done, in turn, to do economic damage to American oil production. It costs a lot more to produces a barrel of oil with fracking and horizontal drilling than it does to stick a soda straw in the sand and watch the oil come out. (It is a little harder than that to drill in Saudi Arabia.. but it is still a piece of cake, by drilling standards.) Over time it would be impossible to keep producing oil in the USA that cost more to lift than could be made by selling it. But no one expects this trade war to be over soon.
The resulting flawed estimate, in turn, was used to show that there was enough revenue to trigger the next Oklahoma income tax cut. The article linked above is a great survey of the situation. It also explains how the law is supposed to work.
This process seems very fishy to me. Even with the (also fishy) use of one time funds, the revenue would have still been far lower if the Equalization Board had used the current prices for oil and natural gas or a price which reflected an expected decrease in oil prices.
Is there any way to appeal the Equalization board decision? Or can they just make up the numbers they use every time they want to trigger the next tax cut? Surely it comes close to a reason to fire someone responsible.
I have been doing some additional research and I now have a global answer for why our revenue estimates are so bad. Here it is: The process our state uses to estimate revenue sucks.
In more academic terms, there are budgeting best practices. For the most part, Oklahoma does not use these practices. The process we do use is rarely (almost never on on target and is sometimes off by double digits. On the average, it is fine. But from year to year it is not unusual for it to be off five to ten percent, sometimes high, sometimes low. I found an excellent graphic that explains this but the attribution is unacceptable. So, though I believe it is most likely accurate, I will not share it here.
You can find a report on Oklahoma’s budgeting process and a ranking by best practices here. You will note that we are ranked 50th out of 50 states. But we are actually not dead last. We are tied with South Dakota.
If you want to be a real policy wonk you can read the full report:
HB 2796 – from 2010 – would have helped move our state in the right direction. Obviously, this bill did not make into law. In fact, it was referred to committee and the session ended without a vote. Perhaps there were other pressing priorities. At the minimum, there should be a way to amend the mid-year forecast when it is obviously going to be wrong. Otherwise it is like jumping off the cliff and hoping things will work out. It would also be wise to use a process based on more than one estimate of revenue. Three is standard. The state of Oklahoma uses an estimate based, as I read it, on a process developed by an economist at Oklahoma State University. The fault is not in this method of estimating revenue. It is in only using one estimate.
The tax cut trigger is firmly planted on shifting sands. It makes no sense to base a tax cut trigger on an estimate of revenue rather than, say, the amount of revenue actually collected.
Thus triggering a tax cut based on revenue estimates and not on actual revenue is a flawed practice based on a flawed practice. When it does not work it is not the fault of the oil business or any other business. It is the result of poor governmental policy.
In Oklahoma the procedure for estimating revenue is seriously flawed, seemingly one of the worst in the USA. In Oklahoma we take the result of this flawed practice and use it to make taxing decisions.
And those wanting the tax cut seem to be to serious about including one time revenue in the projection used to trigger the tax cut. In an earlier tax cut the revenue from Obama’s stimulus program was actually defined as “revenue” in order to show a revenue increase when in-state tax collections were actually down.
What could go wrong with all of that?
The surprise would be if it went right.