Oklahoma ranks in the top 10 states in “economic outlook,” according to the 2020 “Rich States, Poor States” report issued by the American Legislative Exchange Council (ALEC). But there’s reason to think that may not last.
“There’s a lot of storm clouds on the horizon for Oklahoma as it relates to some of the policy decisions that it made recently,” said Jonathan Williams, chief economist for ALEC and one of three authors of the report.
Williams noted this year’s “Rich States, Poor States” report is based on data collected prior to Jan. 1 and does not reflect any policy decisions made by Oklahoma lawmakers during the 2020 session. That means the report does not reflect recent policy shifts that would otherwise hurt Oklahoma’s ranking, such as lawmakers’ decision to raid the corpus of state pensions for an unfunded increase in state retiree payments and lawmakers’ decision to override a veto from Gov. Kevin Stitt in order to drain most state savings this year. Critics say next year’s state budget will likely involve a $1 billion shortfall as a result.
Outside the Legislature, recent (narrow) voter approval of Medicaid expansion will also harm Oklahoma’s prospects.
“Oklahoma, coming in at number nine, I think one of the big questions there will be how long they will be able to last in the top 10 after voters just expanded Medicaid under Obamacare in recent weeks,” Williams said. “Obviously, that’s going to have a big fiscal imprint on the future of that state budget and future financial decisions by policymakers.”
A previous study commissioned by the Oklahoma Health Care Authority, which administers Medicaid, predicted up to 628,000 Oklahomans would become Medicaid-eligible under expansion. Based on current Medicaid expenses, that translates into a state cost of up to $374 million annually.
During this year’s session, lawmakers approved a hospital “fee” that operates as a de facto tax on revenue to partially fund Medicaid expansion, but the governor vetoed it. Officials have indicated similar tax-increase measures will be pursued again next year to fund Medicaid expansion.
In addition, Oklahoma’s economic-outlook improvement was tied almost entirely to just one factor among 15 reviewed by the report’s authors.
“The reason why we saw such an improvement—a four-spot improvement from number 13 to number nine this year in economic outlook for Oklahoma—was that U.S. Chamber survey on tort liability where Oklahoma gained, going from 31st place to 14th place,” Williams said.
Yet there’s reason to think that ranking may shift as well.
In 2019, the American Tort Reform Foundation (ATRF) announced it now ranks Oklahoma among the nation’s 10 worst “judicial hellholes,” due in part to the Oklahoma Supreme Court striking down caps on noneconomic damages in certain lawsuits.
During the 2020 session, legislation to reinstate a cap on noneconomic damages through a constitutional amendment cleared the Senate, but that legislation was never granted a hearing in the Oklahoma House of Representatives.
According to the ALEC report, Oklahoma’s cumulative state gross domestic product growth from 2008-2018 was 26.9 percent, which ranked 42nd nationally. The state also recorded net outmigration in 2016, 2017, and 2018, according to data compiled in the report.
Among the report’s bright spots, Oklahoma’s property tax burden is ranked second lowest in the country, while the state’s top personal income tax rate of 5 percent is 18th lowest in the nation. On sales tax burden, however, Oklahoma ranked 36th.
Most tellingly, only one state enacted more tax increases per $1,000 of personal income than Oklahoma lawmakers did in 2018 and 2019. Oklahoma lawmakers enacted a greater level of new taxation than even Illinois, which came in third, and narrowly trailed only Connecticut.
According to the “Rich States, Poor States” policy calculator, had Oklahoma lawmakers not enacted that rash of tax hikes, Oklahoma would today rank second in the country in the report’s economic outlook forecast.
Williams said Oklahoma’s gains in the U.S. Chamber of Commerce report on tort liability “more than compensated” for other policy missteps, such as the state’s poor ranking in “recently legislated tax changes.”
However, Williams said more than 30 states have “substantially cut taxes” in the last five years.
“With that much movement in the direction of tax cuts, even doing nothing can see you fall behind in the rankings,” Williams said.
When government spending outpaces tax collections, it leads some groups to demand tax increases, as was the case in Oklahoma in 2018. States that restrain spending also create room for pro-growth tax relief, Williams said.
“Taxes and spending are two sides of the same fiscal coin,” Williams said.
Even with its solid rating in this year’s report, Oklahoma policymakers may have to address numerous areas of concern to maintain that rating, particularly if they want to compete with the state’s neighbor to the south. And, while Oklahoma ranked high in “economic outlook,” the report placed the state far lower in “economic performance.” Oklahoma ranked 31st in economic performance, compared to the first-place ranking given Texas, which has no personal income tax. Texas’ state gross domestic product increased 45.7 percent from 2008 to 2018.
While there are many policy areas of potential concern in Oklahoma when it comes to making the state more attractive to business, Williams said states can significantly improve their economic prospects through steady, incremental reforms.
“You can really dramatically change your economic outlook in a relatively short amount of time,” Williams said, “even without dramatic policy measures right away.”