Timing For Tax Cut Exactly Wrong

The decline in state tax revenues last month and the continued decline in gross production taxes on natural gas will make any income tax cut this legislative session especially irresponsible and unconscionable.

If Republicans proceed with a tax cut, it would represent a complete capitulation to “starve the beast” ideology, which advocates widespread and deep tax cuts, rather than responsible policy, to cut government spending.

Gov. Mary Fallin, pictured right, and other Republicans should drop their tax cut proposals and work to generate revenues for state agencies and educational institutions, which have faced large budget cuts since the 2008 economic downturn. The recent tax-cut debate here has been worth it for some political and philosophical reasons, but the timing is exactly wrong for a cut of any kind. Obviously, the issue is not going away as long as conservatives dominate the legislature.

At a recent forum on the issue hosted by the Oklahoma Policy Institute, Alexander Holmes, a University of Oklahoma economist and a former state finance director, called the math behind some of the proposed cuts “insane.”

The state’s intellectual community, for the most part, is opposed to a cut. The state’s two largest newspapers are urging caution about the potential for lost state revenues. There appears to be no active or visible groundswell of popular support for the tax cuts. That might leave only the Oklahoma Council of Public Affairs, a right-wing think tank, and some, but not all, GOP elected officials still actively working for a major tax cut. Support for a cut is waning.

One initial proposed plan would cut the top income tax rate from 5.25 to 2.5 percent. If GOP elected officials proceed with such a major cut at this time, without raising other taxes, the ensuing loss of government services and decline in education funding will fall squarely on Fallin and her party. The cut, if enacted, would have a huge potential to disrupt Fallin’s chances at reelection.

Ironically, what has most recently exposed the extreme danger behind the tax cut proposals may have been the effects of global warming. This is in a state that has repeatedly elected U.S. Sen. Jim Inhofe, the world’s loudest skeptic of climate change science.

The state’s tax revenue last month came in under last year’s March revenues by $2.6 million or 0.3 percent. A main reason for this is the decline in gross production taxes on natural gas, according to State Treasurer Ken Miller, one Republican who has urged a responsible approach to the tax cut issue.

According to a media release issued by Miller:

Gross production collections were down in March for a fourth consecutive month, reflecting the impact of low natural gas prices. On Monday, the spot price of natural gas closed at its lowest point for the year, below $1.90 per thousand cubic feet (mcf), at the Henry Hub in Louisiana, the primary marketplace for Oklahoma-produced natural gas.

Miller said, “While one month does not a trend make in overall revenue collections, four continuous months of decreasing gross production collections is getting trendy. And due to the timing of gross production collections, March receipts reflect market activity from January. We should expect a period of shrinking natural gas tax collections until prices rebound, especially if the price triggers a lower extraction tax rate.”

Although Miller doesn’t mention it in his release, one factor driving low natural gas prices has been what some have referred to as “the year without winter” in America. In March, the average temperature was 8.6 degrees above normal in the lower 48 states. It was the fourth warmest winter in the country’s history.

According to an Associated Press article, “The magnitude of how unusual the year has been in the U.S. has alarmed some meteorologists who have warned about global warming. One climate scientist said it is the weather equivalent of a baseball player on steroids, with old records obliterated.”

Any given weather event doesn’t prove or disprove climate change. It’s the long-term information that counts. But this year’s warm winter does tell us that Oklahoma is still heavily reliant on the ups and downs (or the boom and bust) cycle of the energy industry. A business blog published in The New York Times, for example, mentions how Oklahoma’s Chesapeake Energy has had to recently raise cash to deal with “the effects of a warm winter.”

What if next winter is even warmer? How will that affect state revenues?

The state’s income tax provides approximately one-third of the state’s revenues. To cut it without raising taxes or revenues elsewhere at this time, given the uncertainty of the natural gas market and other factors, would be reckless.