Budget & Tax, Economy
Continued oil slump threatens state finances
October 7, 2020
A new report from State Treasurer Randy McDaniel indicates the economic impacts of the COVID-19 shutdown are receding in Oklahoma, but state finances remain on shaky ground because of the continuing weakness of the oil-and-gas sector, a foundational element of the Oklahoma economy.
“Considering the major challenges the state faces, Oklahoma’s economy has been weathering the pandemic-driven downturn relatively well,” McDaniel said. “We still have reasons for concern in the months ahead, but the perseverance reflected in the September report is encouraging.”
Three of the state’s four major revenue streams contracted in September’s Gross Receipts to the Treasury report, continuing the trend in total collections during the past 12 months.
Over the past year, gross receipts total $13.26 billion, down $468 million, compared to the previous 12 months. However, September receipts from all sources were down less than 1 percent from September of last year.
Gross receipts from combined sales and use tax, oil and gas production, and motor vehicle taxes are down by a total of $40.2 million. The extraction tax on oil and gas accounts for the lion’s share with a $27.4 million reduction.
McDaniel reported that the gross production tax, the state’s severance tax on oil and natural gas, is well below collections from the prior year for a 13th consecutive month. Oil and gas prices remain depressed, and drilling activity and oil field employment levels are at historic lows.
That’s cause for concern for state lawmakers because low oil-and-gas prices were a significant contributor to state shortfalls from 2014 to 2016. During that period, lawmakers also used one-time funding to inflate spending above actual revenue collections, which made budget holes larger in subsequent years than what would have occurred had spending been brought in line with revenue.
A study released in 2019 by the State Chamber Research Foundation, “Oklahoma Oil & Gas Activity & Tax Contribution,” examined the impact of falling oil prices on the state economy and associated tax collections from the third quarter of 2014 to the fourth quarter of 2016. The report found that falling oil prices produced “a steady, cumulative decline of $1.5 billion (15.4 percent) in total state tax revenue,” but that the gap was even greater between collections and forecasts—a shortfall of $2.25 billion, or 23.7 percent.
During the period researched, the Chamber report found GDP in Oklahoma’s oil and gas sector declined by $22.1 billion. The report estimated that a $1 billion reduction in oil and gas industry GDP equates to an average reduction of $102 million in total state tax revenue.
The impact of falling oil prices on state finances may be even larger today, because in 2018 lawmakers raised taxes on energy production, increasing state dependence on that revenue source.
From October 2019 through September 2020, McDaniel’s report showed that oil and gas gross production tax collections generated were down by $428.7 million, or 37.7 percent.
This year, Gov. Kevin Stitt vetoed the budget passed by the Legislature, saying it drained too much from state savings and left the state less prepared to handle an expected major shortfall coming in 2021 as a result of COVID-19 repercussions. Stitt warned that the legislative budget had “a billion-dollar structural deficit.” Approximately $550 million provided to fund schools came from one-time sources that will have to be replaced within two years.
However, the Legislature voted to override Stitt’s veto and tap the savings anyway, negating further discussion of spending restraint this year.
McDaniel’s report included some bright spots. The Oklahoma Business Conditions Index in September remained above growth-neutral for a fourth month, following three months of numbers indicating economic contraction. The September index was set at 58.6, down from 61.8 in August. Numbers above 50 indicate economic expansion is expected during the next three to six months.
Historically volatile corporate income tax collections were on a net upswing over the last 12 months, generating an increase of $145 million compared to the prior year, which partially offset declining energy tax collections and a $24.2 million decline in individual income tax collections during that time.
Use tax collections increased $46.7 million over the last 12 months, reflecting in part the continuing shift to online shopping.
The unemployment rate in Oklahoma was reported as 5.7 percent in August, down from 7.1 percent in July and lower than the U.S. unemployment rate of 8.4 percent in August.
The monthly Gross Receipts to the Treasury report, developed by the state treasurer’s office, provides a broad view of the state’s economy. It is released in conjunction with the General Revenue Fund report from the Office of Management and Enterprise Services, which provides information to state agencies for budgetary planning purposes.
The General Revenue Fund, the state’s main operating account, receives less than half of the state’s gross receipts with the remainder paid in rebates and refunds, remitted to cities and counties, and apportioned to other state funds.