NCPA - National Center for Policy Analysis

Oklahoma's Fiscal Crisis

January 7, 2003

Like many states, Oklahoma is facing a fiscal crisis, and reforms in both spending and tax policies are needed, says economist William B. Conerly. At the heart of the problem is the state's over dependence on income taxes.

Since income tax revenues tend to increase in good economic times, politicians are tempted to raise spending beyond what is needed. When economic growth slows, income tax revenues -- particularly revenues from taxing capital gains -- tend to fall more than other types of tax revenues.

  • Oklahoma state spending has grown in recent years faster than underlying population growth and inflation.
  • As the economy turned down and revenue growth began to sag, spending accelerated at a rate that equaled or exceeded revenue in 1999, 2001 and 2002.
  • Furthermore, while employment growth in the private sector slowed in 2001 and 2002, hiring by the state accelerated.

Oklahoma's personal income tax is the largest single source of state revenue, and there, as in other states that depend on income taxes, it is the biggest problem with the revenue forecast for the current fiscal year. That is because personal income revenues are relatively volatile compared to other taxes:

  • For the four quarters ending in July 2002 (the most recent data available), all states with personal income taxes saw revenue from this source drop by an average of 22.3 percent.
  • In contrast, over the same period sales tax revenue increased by 1.5 percent.
  • The state with the worst sales tax decline, Vermont, saw a revenue drop of 11.7 percent, whereas the worst personal income tax drop, in California, was a whopping 39.4 percent.

Income taxes also tend to discourage investment and work, reducing long-term economic growth.

Source: William B. Conerly (NCPA), "Point of View: Spending, tax policy fuel crisis," The Oklahoman, January 5, 2003, and "Oklahoma's Fiscal Crisis: an Outside Perspective," Perspective, January 2003, Oklahoma Public Affairs Council.

 

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