DALLAS — Oklahoma lawmakers and the new governor will face a tight revenue picture again this year when the 53rd Legislature convenes Feb. 7.
No more federal stimulus money, a depleted budget-stabilization fund, and an automatic reduction in the state income tax will challenge budget writers and the administration of Republican Governor-elect Mary Fallin.
Fallin will present her first executive budget for fiscal 2012 in February to the GOP-controlled Legislature. Republicans hold 70 out of 101 seats in the House, and 32 out of 48 in the Senate.
Fallin and other newly elected officials will take office Jan. 10.
Despite an expected increase in revenue, the money available for budget appropriations will be less than in fiscal 2011 when lawmakers used $1 billion in one-time revenues to fill most of a projected $1.2 billion shortfall.
The fiscal 2011 budget included the final $540 million of federal stimulus funds, $225 million from the budget stabilization fund, $180 million from new and enhanced collection efforts, and $150 million from freezing some tax credits for one year.
The rainy-day fund reached its constitutional limit of almost $600 million at the beginning of fiscal 2010. The fund dwindled to $149 million after lawmakers used $233.5 million to cover revenue shortfalls in fiscal 2010 and $225 million in fiscal 2011. Fiscal 2011 revenue is estimated to be $61.1 million more than originally expected, with the surplus going by law into the rainy-day fund.
The state will have $450 million available in various accounts at the end of fiscal 2011 that can be used in the next budget.
Treasurer Scott Meacham, whose term will expire this month, said the preliminary revenue estimate accepted last week by the State Board of Equalization will require budget cuts of $226 million next year from fiscal 2011 appropriations.
The Oklahoma Constitution limits legislative appropriations in a fiscal year to 95% of expected general fund revenues, or $6.1 billion next year in general fund expenditures. Appropriations in fiscal 2011 totaled $6.7 billion.
The board will meet in February to certify the official estimate Fallin will use to prepare her proposed budget.
David Blatt, director of the Oklahoma Policy Institute, said he expects the actual revenue shortfall to be at least $400 million and as much as $600 million.
“I think the $225 million figure is a best-case scenario,” he said last week.
Meacham disagreed with Blatt’s higher shortfall estimate, as did Treasurer-elect Ken Miller.
Regardless of the size of the shortfall, Blatt said, comparing tax collections on a year-to-year basis obscures the size of the revenue drop since the beginning of the recession.
The budget for fiscal 2012 will be $400 million less than in 2011, he said, and almost $800 million less than in fiscal 2009.
“We are in the third year of a prolonged economic downturn, and I don’t see state revenues getting better until fiscal 2013 at the earliest,” Blatt said. “It could be as late as fiscal 2015 before we return to the revenue levels we saw in fiscal 2008, even without considering inflation or population growth.”
Oklahoma state revenue rebounded quickly after the last economic downturn reversed in fiscal 2003, he said, going up in 20 of the next 22 quarters. When the recession began making its mark in mid-2009, revenue fell for five straight quarters, often coming in 30% below the same month in the previous year.
General fund revenues are expected to be $276.1 million, almost 6% higher in fiscal 2012 than in fiscal 2011. However, the increase in revenue will trigger a lowering of the top income-tax rate, which is paid by most taxpayers, to 5.25% of taxable income from the current 5.5%.
The reduction is mandated when total estimated revenue for the next fiscal year is up by at least 4% from the current fiscal year. The reduction will go into effect on Jan. 1, 2012, if the board accepts the current revenue estimate next month as expected.
The reduction in the income tax rate will cut revenue by $61.5 million next year, and $150 million in fiscal 2013, when it is in effect for the full 12 months. Last month’s extension of the federal income tax cuts is expected to lower Oklahoma income tax revenue by $67.8 million in fiscal 2012.
Blatt said the automatic tax cut would hurt the economy more than it helps.
“This is not the time to be implementing a tax cut that was decided on several years ago, in a different revenue and fiscal environment,” he said. “The easy budget cuts have been made, and we are now going to see the elimination or crippling of important programs and maybe even entire agencies.”
Attorney General Drew Edmondson cast the sole dissenting vote against accepting the preliminary revenue estimate. Edmondson, who will leave the revenue board when his term expires next week, called it a symbolic vote against a reduction in revenues.
“This is the wrong time to be cutting taxes again,” he said.
Fallin, House Speaker-elect Kris Steele, R-Shawnee, and Senate President pro tempore-elect Brian Bingman, R-Sapulpa, supported the rate reduction.
The governor said it was “the right thing to do.”
“Cutting the income tax rate will make Oklahoma more competitive on a national stage and is a step in the right direction as we work to make our state a better place to do business,” she said.
Steele said the rate reduction is the fairest and most efficient way to spur growth, and Bingman said the lower rate would make Oklahoma a national role model of economic policy.
“The tax cuts are designed to stimulate economic growth and create private-sector jobs, both of which are a priority,” he said.
Two legislators have introduced bills that would affect the income tax rate. One proposal would halt the projected rate cut, and the other would extend it.
SB 8, from Sen. Jim Wilson, D-Tahlequah, would delay the reduction until revenue rises to fiscal 2008 levels.
SB 70, from Sen. David Holt, R-Oklahoma City, would gradually lower the rate to 4.25% over 10 years. It would be implemented in 2013, one year after the 5.25% top rate goes into effect.
Holt said he would like to eliminate the state income tax entirely. “But I think in the meantime, we need to send the message that even in tough budget times, we are not abandoning that goal,” he said.
“I’m introducing this legislation because I believe we need to send the message that we are not done lowering the income tax rate in Oklahoma,” Holt said.