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Increasingly, states are tying tax cuts to revenue targets. It sounds reasonable enough: If a state collects more tax than it needs to fund government in a future year, rates automatically go down. But such tax triggers open the door to shameless budget gimmickry.
The latest poster child for this is Oklahoma, which enacted a package of tax cuts that are too clever by half. The state triggered a major rate reduction by tying it to an essentially meaningless revenue target. The goal is not connected to any increase in actual collections. Rather the tax cut automatically kicks in if the state’s latest projection of 2016 revenue exceeds its 2013 estimate of 2014 revenue.
In other words, it is not looking at whether actual collections go up. It is merely comparing two forecasts. Nonetheless, the state’s Board of Equalization (BOE), the office that produces the state’s official revenue estimates, announced on December 18 the target had been met even though the actual 2014 revenue were $300 million less than the estimate. Thus, in 2016 the top rate will fall from 5.25 percent to 5 percent. This reduction will cost about $50 million over the last six months of fiscal year 2016 (which begins July 1, 2015) but the annual cost is well over $100 million.
Here’s what happened. In 2007, Oklahoma passed a set of tax cuts aimed at eventually reducing the top rate from 6.65 percent to 5.25 percent, a reduction almost as large as Kansas’s recent tax cuts. The new rate was subsequently reduced even more—to 5 percent.
But the legislature added a trigger in 2014, requiring the BOE to compare its February 2013 estimate of FY 2014 revenue with the December 2014 estimate of FY 2016 revenue. According to the fiscal impact summary prepared by the Oklahoma Tax Commission (OTC), the state only has to certify that its estimate of 2016 revenue is greater than its estimate of FY 2014 revenue. It is not required to say anything about whether the state can afford the tax cut—or even how big the difference is.
There are many things wrong here. Both the Oklahoma State Auditor and the State Treasurer expressed concerns about using estimates rather than real numbers. The trigger is based on one estimate about the future being greater than a prior year’s estimate that turned out to be wrong. And collapsing oil prices may cause the state to miss the optimistic forecasts for FY 2015 and FY 2016. But actual revenues are irrelevant: The tax rate in 2016 will be 5 percent regardless.
The BOE has already warned Governor Mary Fallin that she’ll have to cut spending in the FY 2016 budget by $317 million. And with oil prices continuing to sag, revenues may be revised down again, forcing even more spending cuts.
Sadly, an early version of the 2014 rate cut bill had no trigger and included a change in itemized deductions that would have produced an offsetting revenue increase. But the legislature dropped those tax hikes.
If Oklahoma wanted to cut its tax rate to 5 percent, it should have just done so rather than playing games with this trigger. It’s clear that lawmakers wanted the tax cut regardless of the budget implications. They could have at least been transparent about it.
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