Regress

I thought I ought to write a blog post on the topic of Oklahoma State Question 779, the one-percent sales tax that promises to raise teacher wages by roughly $5,000 per year.  If you would like to read the full bill, it is available on ballotpedia.org.

Many people are for this bill for some very good reasons; however, there are better reasons to oppose the bill.

Before we get into that, however, let's talk about the current crisis in Oklahoma.  According to teacherportal.com, Oklahoma has the 8th lowest starting salary for teachers out of all states, and the 3rd lowest average pay.  The result is that teachers are leaving the state for higher paying jobs in neighboring states.

And this year, in light of reports like that, Oklahoma legislators made drastic cuts to education funding - so drastic, in fact, that they were the biggest cuts made by any state, almost 6% larger than the next worst on the list.

The problem is two-fold: First, our state faced a record budget shortfall this year, which forced drastic cuts to a variety of programs to stay afloat; Second, planned increases in the education budget, even before those cuts, were not large enough to keep up with rising costs.

So the next question is, how did we end up with a huge budget shortfall?

A lot of it has to do with the cost of gas right now.  When you see prices at less than $2 for a gallon of unleaded, that seems like it should be a great thing - it helps you meet your own budget obligations much better, after all.  However, the price represents huge losses for oil and gas companies, companies that have to compete with oil shipped in from the Persian Gulf.  OPEC largely controls the price of gas thanks to the sheer volume of oil produced in that region, and as they've increased production in recent years, the price of gas has fallen.

The move by OPEC was seen largely as a way of eliminating competition, as The Economist reports: "When, in November 2014, Saudi Arabia forced OPEC to keep the taps open despite plummeting prices, it hoped quickly to drive higher-cost producers in America and elsewhere out of business."

But if we think back just before this price glut, part of the reason OPEC was seeking to eliminate American competition was the fact that at high prices, we were experiencing an oil renaissance.  As Luc Cohen and Joshua Schneyer report,

Before the recent 60 percent decline in oil prices, a drilling bonanza minted millionaires and billionaires in Oklahoma. The boom turned sleepy Oklahoma City into a thriving hub for drillers like Devon Energy, Chesapeake Energy and Continental Resources - the troika that lobbied hardest for the tax-break extension. The rebuilt downtown hosts top notch dining, hotels, arts venues, and a top NBA basketball team.

That was a golden time for oil businesses basing operations in Oklahoma, and we can see evidence of the bonanza in the vastly increased number of earthquakes:

Originally from USGS, now available on Wikipedia

That chart was done in February of this year, so the chart is incomplete for 2016; however, the oil price glut began in 2014.  Rather than reducing the number of quakes in Oklahoma, as you might expect if oil companies are truly going out of business, it has increased that number.  That likely indicates that the amount of drilling in the state has gone up (earthquakes in Oklahoma are caused by the injection of wastewater, water that is used in the process of fracking for oil; thus, an increase in earthquakes indicates an increase in wastewater injection, likely the result of increased use of fracking).

So, what's happening?  Companies are drilling more for oil now than ever before.  However, their profits are slimmer - they are making less per gallon than they did before the price drop.

And that's the real impact of the OPEC change - as Cohen and Schneyer note, Oklahoma drastically reduced taxes on oil and natural gas during the big boom years, as though expecting the price of gas to remain perpetually high forever.  In contrast, other states have much higher rates - they point to North Dakota, a state with a 11.5% oil and natural gas tax. Ours is around 1 to 1.5%.

These states are doing much, much better financially.  North Dakota, interestingly enough, raised its spending on teachers by 31.6%, and Alaska was second in increases at 16.4% (Alaska is another state that makes a killing on taxing oil and natural gas).

And now, with the price glut, North Dakota also has a stockpile of money that cushions the blow.

It's like the Biblical story of Joseph, who, interpreting the dreams of the Pharaoh, stockpiled food ahead of a famine.  When the famine hit, other countries who weren't prepared for it begged Egypt to tap into their stockpile.  That's what Oklahoma has to do now - beg for resources from the federal government, while North Dakota (Egypt in this story) weathers the storm just fine.

We didn't learn from the book our state is so quick to erect monuments to.

Oil and natural gas, however, are not the entire reason for the budget crisis.  They are responsible for some 400 million of the 1.3 billion we found ourselves in the hole, but the rest was all our legislature.  Despite a strong economy and budget shortfalls, the state continues to cut taxes further, and while most of these were built into the tax code before the shortfall started, legislators have refused to put any safeguards into place (and sometimes eliminated them completely).

Case in point, our top tax rate.

As the Oklahoma Policy Institute reports, the top tax rate continues to fall:

As they note, this affects the budget in a big way:

The annual cost of cuts to the top personal income tax rate enacted since 2005 is $1.022 billion, according to an analysis conducted for Oklahoma Policy Institute by the Institute on Taxation and Economic Policy (ITEP), a non-partisan national research organization. This amount includes the reduction of the top income tax rate to 5.0 percent from 5.25 percent that took effect in January 2016.

One billion dollars.  That plus our losses in oil and natural gas easily add up to well more than the 1.3 billion dollar budget shortfall.

The result is that we've slashed the education budget, and now legislators are asking us to fix it through a sales tax.

Note that the income tax that lost us 1 billion is part of a progressive tax - that is, as people make more money, we expect them to pay a larger share of their money back to the state.  That helps take the economic burden off the poor, but it also makes sense for a variety of other reasons I won't go into here.

Sales tax, by contrast, is a regressive tax - that is, it makes more of its money off the poor.  There's a simple reason for this, and we can use simple logic to suss it out.

Imagine a person who makes $20,000/year.  Such a person pays rent, car repairs, food, clothing, and so on out of that income.  Their budget is extremely tight, with little room for spending on niceties.  They tend to save very little money, and when tragedy hits, they are more likely than average to have to go into debt to deal with it.

Now imagine a person who makes $40,000/year.  This person still pays rent, car repairs, and so on, but has a little bit more wiggle room.  In fact, such a person could theoretically live on the same budget as the person making $20,000 - the only reason they might not is if they spend more on a house, more on a car, more on clothing, and so on.  Because their expenditures are more by choice than necessity (that is, if necessity strikes, they can cut back), they are more likely to save, and less likely to have to go into debt to deal with tragedy.

And as income increases, those trends continue - the expenses get bigger, but the person can choose to save a larger portion of their income.

Second, think back to our two people - the $20,000 and $40,000 person.  The car that the $20,000/year person gets is likely used, because he or she can't afford the monthly payments on a new car.  The car that the $40,000/year person gets might be new, or at least recent enough used to be like-new.  That newer car, on average, is going to need much, much less work than the older car.  As a result, the person with the newer car ends up spending much less of a portion of their income on the car than the person with the old car will.  The person with the old car, additionally, is worrying constantly about the car breaking down, as such a breakdown might lead to expenses that person can't afford, leading to greater stress (and greater health problems) for the person with the older car.

This means that a person making more money not only can buy nicer things, but have them for longer, thus reducing their expenses.  This is a well-known phenomenon.

Thus, people who make less spend a larger portion of their income in ways that can be taxed.  A person making $20,000/year might spend $20,000/year on taxable items, such that a 1% increase in taxes represents a $200/year increase in their expenses.  A person making $40,000/year might only spend $39,000/year on taxable items, such that a 1% increase represents a $390/year increase - which is less than 1% of their income.

Rather than being progressive, the tax is regressive.

So the result of all of this is that Oklahoma legislators have given huge tax breaks for the most wealthy residents (both in income tax and oil tax), and are asking us to fund the shortfall caused by those tax breaks by increasing taxes on the poor.  They are trading progressive taxes for regressive taxes.

And this, my friends, is wrong.

While we need the money, we cannot let our legislature get away with selling our children's future away for higher corporate profits.  We cannot approve of their ridiculous tax mistakes by fixing them on the backs of those who need public education the most.

This might be OK if we were doing this only temporarily as a stopgap measure; however, this amendment changes the state's constitution. It makes this law in perpetuity. Constitutional changes are notoriously hard to repeal.