Lawmakers and the governor will have $214.6 million more to build into the state budget for fiscal year 2014 than they did in the current budget, according to early estimates of revenue the state is required to certify Thursday.
“This isn't a typical certification because of the uncertainty surrounding the fiscal cliff,” said Preston Doerflinger, state finance secretary. “National events could change the equation down the road, so we must proceed cautiously as we begin building the state budget.”
Nonetheless, Doerflinger expressed optimism about the extra cash that is projected to come to state government in 2014 largely due to gains in personal income, corporate income and sales taxes.
The state's budget committee — the Equalization Board — will meet Thursday to certify the numbers for use in the state budget. Final numbers will be certified in February when financial analysts will have a better picture of the economy.
For now, it looks as though $7 billion will be available in certified funds that lawmakers can work into the budget for fiscal year 2014, which begins July 1, 2013. In the current fiscal year — after a midyear increase in funding — there was $6.8 billion.
Oil and gas tax breaks
Gains in state revenue overall are coming despite a projected $120.8 million decline in revenue from gross production taxes on oil and natural gas.
The declines are due in part to tax breaks given to the companies as incentives for greater drilling and production. The incentives were put on hold for two years while the state grappled with a fiscal crisis, and are hitting in fiscal years 2013 and 2014.
Producers of oil and gas usually pay a 7 percent gross production tax, but if those resources are pulled from the more expensive horizontal and deep wells, incentives reduce the tax to 1 percent for the first 48 months of production. Horizontal wells tend to peak within weeks of production and taper off significantly within several months.
About 40 percent of all Oklahoma wells drilled in 2011 were horizontal, up from 15 percent in 2006, according to IHS, a Colorado-based data company for the energy industry.
“We have a much larger increase in those deep and horizontal drilled wells which are going to be taxed at the 1 percent rate, which was our deal a couple of years ago with the industry,” said Shelly Paulk, deputy budget director.
The deal came when the fiscal crisis hit and the state owed oil and gas producers an estimated $150 million in rebates. Unable to pay the incentives, oil companies agreed to delay payment — essentially deferring the hit to state coffers.
In October, however, the state owed $294 million in rebates on oil from horizontal and deep wells; the state is paying back nearly $98 million a year for three years, beginning with this fiscal year. That is in addition to the current incentives they are receiving as well.
Paulk said an increase in that rebate over what was projected is part of the reason for the decrease in revenue. Oil and gas prices are projected to remain low, with slight increases over projections for this fiscal year.
Of the projected $214.6 million windfall, Doerflinger cautions that a portion of it — roughly $60 million — will not be realized if an agreement is made at the federal level to avoid the tax increases that come with the fiscal cliff.
Federal taxes would rise if a plan can't be reached that would keep in place tax breaks granted by former President George W. Bush. The increase also would have an impact on state taxes, Doerflinger said Wednesday.
“Because of income taxes going up, that revenue number is higher by $60 million,” he said. “I'm not saying that, that's the number because I think there's going to be some agreement whether it's somewhere between zero and $60 million.”
The federal tax rate will impact taxes in Oklahoma since state taxes are based entirely on what people report from their federal taxes as their taxable income. If the nation falls off the fiscal cliff the standard deduction will be lower, and thus most Oklahomans will report a greater taxable income.
Doerflinger said with or without a reduction in the standard deduction, he supports talk of reducing Oklahoma's income tax. Plans last session by the governor and Republican lawmakers to reduce the state income tax failed in the Legislature, and ironically it looks as though collections for income tax will grow in fiscal year 2014.
“I'm a believer in income tax reduction, and it will be part of the conversation this session again,” Doerflinger said. “You will not see something out of the governor's office … that involves as much complexity as we saw last session.”
He said there will be a much simpler proposal this year.
Doerflinger said he isn't of the mindset that the state should spend all the excess money, but there's certainly no shortage of suggestions for how the money should be spent.
From repairs needed on the state Capitol, to funding needed to complete the American Indian Cultural Center and Museum, the money needs a home.
Additionally the state must fund a plan to reform the Oklahoma Department of Human Services.
State agencies have submitted their budget needs for fiscal year 2014 and have requested a combined $1.4 billion more than was budgeted for the agencies last year, he said.
“When you take individual agencies, I see more reasonableness,” he said. “But there's no question … there is a thirst for more money.”
Contributing: Adam Wilmoth, energy editor