We Have a Revenue Problem in Oklahoma

Whenever you make a political statement it is important to consider how it comes across. Parking millions of dollars worth of oil field equipment on the capitol grounds may not have been the best way to convince the public that there are financial problems in the oil patch. There are. We all know that. But there are financial problems with our state government. Part of this problem has to do with how we deal with oil and gas production.   Energy companies need to know that parking shiny new expensive equipment in full public view only reminds other state agencies and schools of the sorry state of rolling stock they cannot afford to replace, not to mention the jobs eliminated to balance the state budget. (Schools can pass transportation bond issues.  This is necessary these days, but borrowing money with long term bonds is not the best fiscal option.) We won’t mention blocking parking places for citizens who would like to visit the capitol building and grounds.  This display of capital investments just may have sent the wrong message to Oklahoma citizens.

But we do not have a revenue problem.  We have a spending problem.  Right?   A case could be made for this in some states.   Some states have much higher taxes than Oklahoma and still run a deficit.   But we have gotten in trouble time and time again in this state by attempting to implement solutions to problems that exist in other states.  this could serve as fodder for an entire blog post.  Some other time, perhaps. Our problem is that our revenue system is failing.

How did we get here? We lowered income taxes. Then we lowered the GPT. Then we gave large tax credits, also to gas and oil production.

Lets assume this did stimulate oil and gas employment as well as production.

Where is the benefit to the citizens of Oklahoma? There is no equivalent increase in GPT tax revenue associated with increased production because the GPT on new production was reduced by 85% for three years.  So for three years the GPT is 1%.  Then it was raised about 14% to  2% for all wells. Still 71% or so below the original 7% tax. Many of us are just learning that horizontal wells play out much faster than deep vertical wells.  After three years the production is trending rapidly downward. The older technology vertical wells produce less per day but are more consistent over a long period sometimes several decades.  But it increased employment and production and a rising tide lifts all boats, right? It should in a normal world.
But wait. There’s more. We gave away huge tax credits to energy businesses. Tax credits are not to be confused with tax deductions. Tax credits refund taxes. Some of the tax credits can be sold. It does happen. (Selling of business tax credits smacks of corruption.  DYOR*) And that means that the tax credit dollars do not all go back into the state economy.  The giveaway  for gas and oil averaged $86 million from 2004 to 2012 rounded down to the nearest million. So there was no boon to the state in corporate taxes from the increased drilling. Lowering corporate taxes in this way also reduces the HB1017 fund.

But hey, how about all those jobs? All those newly employed people were making lots of money. (Oil field work pays great for those who are up for it.) And there are jobs in management and petroleum engineering. Think of all the income tax from all those incomes! So, of course, we reduced the income tax. The highest marginal bracket (there are only two) is 5%. In 2004 it was 6.25% percent. So that is a cut of 1.65%. That is easy enough math. 1.65/6.25 gives a tax cut of 24.82%. Nearly 25%. That’s 1/4. That is a huge tax cut.  So all those new jobs are not producing a huge increase in tax revenue.  Please refer to a previous post on this blog for a discussion of  net income tax collections in Oklahoma.

This is not to say that the increase in oil production has been worthless to the state.   The jobs are real as are the incomes.   But the various tax cuts and tax credits have kept the growth in the oil sector from lifting the rest of the boats.  There are a few more quick things that add to this perfect revenue storm.  The internet is siphoning off sales tax collections.   Property tax evaluations are dysfunctional in many Oklahoma counties.  Some of these counties have passed high county sales taxes to provide additional revenue.  This helps some but impairs school bonding capacity.  Two major sources of local and state tax revenue are not working as they should here.   With the added consideration that we seem to be doing a consistently poor job of estimating revenue in Oklahoma.   Our last state budget was a disaster made worse by a revenue estimate that was grossly low. All of this needs to be addressed.

It is time to end the bickering and pass a sensible budget that will adequately fund our state government.   It is time to get real about what is really happening and fix it. Depositing a few dollars in the state rainy-day fund  would be nice as well.z

*For those of you who are checking the note:   DYOR is my anagram for Do Your Own Research.  This has to do with issues I hope you want to know about.  I don’t always have time to flesh them out in the blog.

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