Even if a deal is reached on the looming fiscal cliff, Oklahoma will have to start weaning itself from federal dollars because any agreement likely would result in reduced federal spending to the states, the state's two top financial officials say.
“Oklahoma has to get ready for a federal pullback in spending,” state Treasurer Ken Miller said. “We have got to see the United States get its spending under control and back to a sustainable level so that our taxes will remain low and incentivize production and work.
“Oklahoma's going to have to get ready for a different federal government, one that sends less direct aid to the states,” said Miller, who applauded recent efforts of House Speaker-elect T.W. Shannon, R-Lawton, to look at ways the state will face reductions in federal assistance. “We have to prepare as a state for reduced federal aid.”
State Finance Secretary Preston Doerflinger said that appears to be a certainty, even if an agreement is reached to avoid the fiscal cliff.
“No question regardless of whether a deal's reached in the immediate future, we're still going to see less federal dollars flowing to states,” said Doerflinger, who serves on Gov. Mary Fallin's cabinet. “There's no question that that's going to occur in some form or another.”
The federal cliff, or sequestration, could result in Oklahoma losing $137 million in direct federal funding as a result of the automatic, governmentwide spending cuts set to take effect Jan. 1.
Oklahoma finance officials have said the projected losses of federal funding includes $50 million in funding for education and more than $40 million for health and human services. Several federal funding streams would not be affected by the looming cuts, including funds for Medicaid, transportation, Social Security payments, food stamps and most veterans' programs.
Tax cuts passed a decade ago and renewed in 2010 also are set to expire at the end of the year. In early January, spending cuts totaling $1.2 trillion are scheduled to take effect, with most affecting the Defense Department.
“I'm probably more concerned about the ripple effects across our economy over possible defense spending cuts because of our big military presence,” Doerflinger said. “It's hard to quantify the impact, but when you consider that those folks are spending less money so your sales taxes are reduced, your income taxes are reduced. There's an opportunity for a bigger impact on our economy as a ripple effect versus so much of the direct cuts in federal money coming to the states.”
The sequestration would cause uncertainty and could result in consumers holding onto their money and not spending as much, he said.
Miller, who also is an economist, said it makes economic and political sense for Congress and the president to reach a deal to prevent the fiscal cliff.
It likely will cause the country to tumble back into a recession, which could disrupt progress that Oklahoma's economy has been making the past year, said Miller, who also is an economics professor at Oklahoma Christian University.
‘Political hot button'
Miller, a Republican, said he backed Fallin's decision last month to decide against expanding the Medicaid program in Oklahoma. The GOP governor said no matter how much money the federal government contributed for an expansion, the state ultimately would not be able to afford its share without cutting funding for other essential services, such as education and highways.
“I certainly was briefed by the governor's office on her position,” he said. “From everything that I read I thought that the governor's office and the governor had researched very well the effects that that decision would have on our state and its economy and our spending.
“They did their homework,” said Miller, who as state treasurer is the state's chief financial officer in charge of managing more than $22 billion of taxpayer money deposited each year. “It's a political hot button, but I truly don't think the governor or that her office took that decision lightly. … I'm confident that she made the best decision that she could for our state.”
After a month of no progress, Democratic President Barack Obama and Republicans in Congress reportedly were in low-level private talks late last week to break the logjam over the fiscal cliff.
“If our leaders jump off the federal cliff, we'll have some short-term pain — likely recession again,” Miller said. “But we will get through it. It's a strong country. We've prevailed over tough times before.”
A report from the White House shows Oklahoma consumers would spend an estimated $2.2 billion less next year should federal income tax rates return to the levels of a decade ago. The average Oklahoma family of four with an annual income of $63,100 would see its tax bill rise by $2,200.
“You don't raise taxes if you want to incentivize production and grow an economy,” Miller said. “Raising taxes during a recession violates just about every economic principle you can think of. You don't raise taxes during a recession or what we're in — a weak recovery.”
The federal government is spending nearly 25 percent of its gross domestic product, the goods and services produced within a country, while its receipts are about 15 percent of the gross domestic product, he said.
“Washington has a spending problem that must be corrected,” Miller said. “Our nation is on an unsustainable path with our fiscal policies.”
“This country is spending itself into oblivion. Washington has a spending problem that has to be corrected.”
Doerflinger said he's not optimistic a deal can be reached to avoid the fiscal cliff.
“We're going to go to the cliff and then the conversation will begin in earnest,” he said. “I don't think there's a real desire … to reach a deal. I think we're going over.”
Miller said there's a strong possibility Congress will act by the 11th hour. The next Congress won't be sworn in until Jan. 3, after the fiscal cliff deadline, so it's possible Congress and the president could agree to another set of stopgap measures that would delay a more permanent policy change until 2013 or later.
Regardless, the country appears headed before the end of the first quarter next year to hit the debt ceiling, the same issue in the summer of 2011 that brought about the automatic spending cuts that make up a portion of the fiscal cliff.
“I'm hopeful that they will at least put a Band-Aid on the problem and kick the can down the road to the next Congress,” he said. “That's pretty much what they did at the eleventh hour with the debt-ceiling debate which created this mess in the first place.
“This is really a homegrown threat,” Miller said. “This is no one's fault but our political leaders in D.C. They created the fiscal cliff ... now they need to fix it.”