A Simple Explanation of Income Tax Growth in Oklahoma

I am making every effort to keep this brief and simple.   I have visited with several people who say something like this:

“When we cut the taxes we had more money to spend the next year.”  I read an article that claimed the same thing.  The author spend an entire paragraph explaining how the amount of income tax collected “exceeded estimates.”  And wasn’t that wonderful?   Actually, that was a red flag.  Because exceeding the “estimates” is not the same as “more more money than the previous year.”   We have a lot of trouble with revenue estimates in Oklahoma.*  Any time we have a “revenue failure” it means the revenue estimate was off by a 5% or more.  Technically, this is any time the revenue fall below 95% of the certified estimate.  (Please do your own research on the certification process.  Let’s just say that it needs work.)  There have been six revenue failures since 2,000.  The total state revenue was at least 5% below the estimate six times.   Is the estimate too high sometimes?  Yes! It has been terribly wrong on both sides. So comparing the amount collected to the “estimate” is not helpful, except for judging the accuracy (which as been terribly wrong at times) of the estimate.  If you find that article that uses exceeding the estimate as an evaluation of how revenue has increased you will see how it was done right away.  I no longer trust anything from that source. They are now just a biased political blog that has given up any pretense of factual journalism.

How are net income tax revenues doing in Oklahoma doing over time when compared to the changes in the Consumer Price Index?    This would compare the  actual increase or decrease in purchasing power allowing for inflation or, during recession in 2009, deflation.

Two things:
It is important to use the “individual income tax net” figure and not the “income tax gross collections” or “Net income tax” figures (both of which also include corporate income tax).  Because we all know about income tax refunds.   The “individual income tax net” figure is the amount the state actually keeps.  The state cannot spend money refunded to taxpayers. And the “individual income tax net” is the figure that accurately shows the impact of the income tax cuts on the state budget.   I haven’t verified it, but there seems to be some number fudging by using “collections” instead of “net”.  Language such as “increased tax collections” is used in pro-tax  cut articles.   Some of the figures used do not match any specific figures in the Oklahoma Tax Commission Annual Report.  It is difficult to determine what the numbers represent.   It’s time to move on with this look at taxes, inflation, and population growth.

According to the fiscal 2003-2004 Annual Report of the Oklahoma Tax Commission (available online) the individual income tax  net collections were $2,378.959,777.57.  2004 is picked because it was two years before the big income tax cuts began in 2006.
From 2004 to 2016 the Consumer Price Index (CPI) cumulative increase was 31.12%.  In 2016, how much tax revenue would be required to match the 2003-4 net income tax revenue in Purchasing power ?       $3,119,292,060.35.

Now, consider the actual Individual Income Tax Net figure for 2015-16:  $2,998,567,582.42.

Please notice that this is lower than the 2003-4 figure adjusted for inflation.   The tax cuts in Oklahoma have produced no real growth in net personal income tax collections when corrected for inflation.  In reality, the shortfall stated in 2016 dollars is  $120,724,477.93.
There may be more on this spreadsheet than you want to know about this:
OK Income tax vs inflation

Several years ago there was a move afoot nationwide, promoted by the Cato Institute, to amend state constitutions to limit budget increases to the rate of inflation plus the rate of population growth.  This was called the Tax Payers Bill of Rights (TABOR for short.)  Colorado passed Tabor and then had to pass another referendum to tweak it.  Suffice it to that that the TABOR limits were causing some problems.  You can read about TABOR in Colorado here. (Scroll down to page 7.)  So limiting growth to the inflation plus population growth is considered a legitimate definition of flat growth in Colorado and indeed by the political organizations that promoted this concept.. It remains to be seen if the Colorado will have to tweak TABOR again.  This initiative did not pass in Oklahoma.  It was not for lack of trying.

But here is the point of this blog: In  Oklahoma, our spending is not keeping up with inflation.   But we are even farther under the rate of inflation plus population growth. According to the TABOR concept,  our budget falls short of being “flat.”  Our current tax structure has resulting in an increasing shortfall over time.    According to the United States Census Bureau, our state population has increased by 11.1%.   Added to the Bureau of Labor Statistics inflation rate of 31.12% you get (finally, some easy math) a 42.22%. If we were living under TABOR our budget would have to be 42% higher to equal the level of spending in in 2004 baseline year used in this report.  (Again, 2004 also is the year the governor’s office is using in a recent constituent letter claiming that we have increased appropriations.)   The 2004 Individual Income Tax Net when adjusted for inflation and the population grown would be  $3,385,735,555.44.  As noted above,  the actual 2016 Individual Income Tax Net was  $2,998,567,582.42.   That is a difference of $387,167,973.02.  That’s close to $400 million we are short of the inflation plus population flat spending growth benchmark.  Note that in many states the spending growth is above TABOR limits.   So we are far under a “conservative” growth curve.

Regardless of how one feels about tax cuts it is time to stop pretending that we are collecting more net income tax revenue after cuts that began in 2006.  We are collecting less income taxes in terms of real dollars.  There is  no assurance it will get better soon.

I have a feeling that there might be a push back against this analysis since this does not fit with pro-income tax cut narrative. In fact a really ugly name-calling type of push back will indicate that they cannot win on the numbers.  They are what they are.  The reason it seems like there is less money is because there is less money.   The cuts in income taxes are not producing growth income tax revenue.

**********************************************
*If there is a list of things impacting quality government that are getting no attention because they are not politically sexy, then the Oklahoma system for estimating tax revenue would need to be at the top of the list.   I have only been able to find one bill in the past fifteen years that addresses this problem.  That bill died in committee.

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