Oklahoma's tax hikes positive for Aa2 credit, Moody's says

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DALLAS – Oklahoma’s passage of new revenue-generating measures represents a positive credit factor as Moody’s Investors Service considers whether to lift its negative outlook on the state’s Aa2 credit, analysts said.

The Moody’s report Monday came as teachers in the state entered the second week of a strike. Gov. Mary Fallin signed into law a bill giving teachers a 16% raise, but the state teachers union sought more for school funding.

“The revenue package raises approximately $523 million in fiscal year 2019, signifying that under certain fiscal and political circumstances — in this instance, the threat of a teacher strike — the state can reach consensus to implement a solution to its fiscal challenges,” according to the report written by a team of analysts led by Joshua Grundleger.

When Fallin signed a series of revenue increases into law March 29, it was the first time in nearly 30 years that the state was able to surpass the 75% legislative supermajority required for a tax increase. Fallin called two special sessions to address a budget shortfall and provide a raise for teachers.

“The passage of the package caps a lengthy process of failed attempts by the legislature to raise new revenues or otherwise achieve structural budget balance in recent years,” analysts said. “The ability to raise new revenues is especially hard in Oklahoma, limited by a 1992 state constitutional amendment that requires a three-quarters majority in each legislative chamber or majority popular approval via referendum for all new taxes. Until now, that hurdle has proven insurmountable.”

The revenue measures include new taxes of $1-per-pack on cigarettes, three cents per gallon on gasoline, six cents per gallon on diesel, and an increase in the gross production tax on oil from 2% to 5%. A separate measure capped itemized deductions on state income tax returns at $17,000. Some of those measures had failed to garner support only a few months ago.

Most of the new revenues will be used for $470 million in new expenditures, raises for state employees, with teachers gaining an average pay hike of $6,100.

Teacher demands for a $10,000 raise and the threat of a walkout were the primary force behind the package.

“Although the strike is ongoing — supporters contend that education still remains underfunded and are seeking the repeal of an income tax deduction on capital gains — mounting political and fiscal pressures surrounding the funding of teachers and education were sufficient to generate a large enough coalition to overcome the high constitutional requirements,” Moody’s wrote.

The school funding authorized in House Bill 3705 marks a 19.7% increase over the $2.4 billion appropriation bill for K-12 public education for the current fiscal year, which ends June 30.

“I’m hoping this additional funding will result in improved K-12 public school results,” Fallin said. “Improving the quality and outcomes in education is the single-most important thing we can do to attract and retain jobs, alleviate poverty, and help Oklahomans have fulfilling and productive lives.”

The total increase in common education funding for the 2019 fiscal year is $480.2 million.

Oklahoma’s largest teacher’s union said protests will continue unless lawmakers repeal a capital gains tax exemption and the governor vetoes a repeal of a proposed lodging tax. Killing the capital gains tax deduction would generate about $120 million annually.

The $5-per-night lodging tax for hotels and motels would generate about $50 million annually. The measure is opposed by chambers of commerce and the hospitality industry.

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State and local finance State taxes State budgets State tax revenues Oklahoma