“I am proposing a series of bold reforms to stabilize our state regarding both recurring revenue and repairing the structural deficit of the budget,” Oklahoma Gov. Mary Fallin told lawmakers in her state-of-the-state address Feb. 6.

DALLAS – Facing a nearly $900 million revenue shortfall, Oklahoma Gov. Mary Fallin is seeking structural budget reform in a plan that calls for $350 million of bonds for infrastructure and prison expansion, a fuel-tax hike for roads, a raise for teachers and elimination of taxes on corporate income and groceries.

Calling for "bold reforms to stabilize our state regarding both recurring revenue and repairing the structural deficit of the budget," Fallin told lawmakers in her State of the State address Monday that "this proposal represents a modernization of Oklahoma tax laws that will ensure new growth in years to come so that we may have the flexibility to prioritize spending as new needs emerge."

The State Board of Equalization projects $6.038 billion in available revenue for Fiscal Year 2018 appropriations, which is $739.3 million, or 12.2%, less than the appropriated amount for FY-2017, Fallin noted in her written budget proposal.

"The state is experiencing recurring revenue shortfalls as a result of the structural revenue deficit and the reliance on the use of one-time funds to balance the FY-2017 budget," Fallin noted. "Mandatory increases, such as the decreased federal matching rate for Medicaid programs, also contribute to the widening the gap."

Avoiding one-time budget gimmicks, Fallin's budget is balanced at $7.79 billion.

Adjusted for inflation, the budget is still over $100 million less than the FY-2009 appropriated budget, she said in the written proposal.

"Further, the FY-2018 appropriated amount now includes $790 million of transportation funding, which has not been included in appropriation totals in previous years," she added.

The plan calls for $1.5 billion in recurring revenue sources, including a boost in gasoline and diesel excise taxes, by 7 cents and 10 cents respectively, to 24 cents per gallon.

"Oklahoma currently ranks 49th in the country for gasoline tax and 48th for diesel tax, and lowest in the region for motor fuel tax rates," she said. "This increase keeps Oklahoma's motor fuel tax rates well below the national average of over $0.29 per gallon, while appropriately utilizing road and bridge related revenue for roads and bridge related maintenance."

Raising the fuel tax violates a red-state taboo that neighboring Texas has not entertained.

Fallin proposes raising $1.4 million annually through an annual $100 fee for high speed electric vehicles and a $50 fee for hybrid electric vehicles. Both fees would be dedicated to the Oklahoma Department of Transportation's eight-year plan.

Another revenue proposal would raise $257.8 million through a $1.03-per pack cigarette tax increase.

The budget includes $10.5 million to cover debt service for the first year of the proposed $350 million of bonds. The bonds would finance a variety of projects, including $186 million for prison expansion.

"My budget includes new money for corrections and treatment, which includes a $50 million bond issue to build wings on a men's and a women's prison for substance abuse offenders and rehabilitation," Fallin told lawmakers.

Eliminating a sales tax on groceries would cost the state $234.7 million, the budget estimates, but provide savings for a family of four of between $350 to $676 per year.

Eliminating the corporate income tax would cost the state $140 million in revenue but boost economic development, according to the budget proposal.

Fallin proposes $60 million to raise teacher pay by $1,000 per year, $35 million for health insurance increases, and $30 million for additional classroom resources.

"The pay raise may need to be phased in and it may be targeted, but it must be done," the governor said.

Fallin's plan to eliminate one-time budget measures addresses concerns often mentioned by credit rating analysts. Moody's Investors Service, S&P Global Ratings and Fitch Ratings all have negative outlooks on the state, which is rated Aa2 by Moody's and AA-plus by S&P and Fitch.

"There is no question the dramatic downturn in our energy sector and an increased loss of sales tax revenue from online shopping the last couple of years have affected our state – both in our private and public sectors," Fallin said.

The governor also talked about the coming changes in health care, with Congress deliberating on how to eliminate the Affordable Care Act, which provides health insurance for millions of Americans.

"We hope to reduce regulations to create cheaper insurance plans, encourage investment in private health accounts so people can direct their own health care

purchases and utilize successful local programs, like Insure Oklahoma, to provide health insurance that works for Oklahomans," she said.

State Treasurer Ken Miller called Fallin's recommendations "the boldest policy proposals the state has seen in decades."

"The road map she has outlined to modernize our tax code, sufficiently fund core services, and correct the structural budget imbalance shows true statesmanship and a willingness to put doing what's right ahead of politics as usual," Miller said.

Oklahoma Policy Institute Executive Director David Blatt praised Fallin's call to "fix Oklahoma's structural budget deficits and reverse years of funding cuts that are damaging the health and prosperity of our entire state. "

"The Legislature must heed the governor's calls to reduce incarceration, fund a teacher pay raise, and restore the 5-day school week," Blatt said.

"Governor Fallin's tax reform proposals, which include ending the corporate income tax and the sales tax on groceries while expanding the sales tax base in other ways, has potential to reduce revenue volatility and end one of the most regressive aspects of our tax system," Blatt added.

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