Weekly Opinion EditorialLEAVE INCOME TAX INTACT!
by Steve Fair

State Representative Randy McDaniel, (R-OKC), who is chairman of the House Pension Oversight Committee, has announced he intends to run a Joint Resolution/Legislative Referendum in the upcoming legislative session. If approved by the legislature, it would place a state question on the ballot in November. If voters approve McDaniel’s proposal it would amend the state constitution to require more accountability in future government pension system decisions. “The constitutional amendment contains the fundamental principles of proper pension oversight. We need a higher law that takes into consideration the future generations of Oklahomans,” McDaniel said.

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Last year, the legislature tackled Oklahoma’s unfunded pension issues by dealing with the teachers, state employees and judiciary pensions. This year they will try to improve the stability of the firefighter and law enforcement systems.

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“The goal is to put all our systems on a sustainable path, which would be a notable accomplishment for public workers and taxpayers alike. We have negotiated with representatives from both the firefighter and law enforcement organizations. I think we have come to an agreement that is fair to our public safety employees and fair to taxpayers,” McDaniel, R-Oklahoma City, said. “Employees and employers will both pay a little more into the system in order to ensure the pension plans are financially strong over the long run.”
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McDaniel’s proposed constitutional amendment has four tenets: (1) Protect plan assets by prohibiting diversion of pension funds to other uses; (2) Institute a prudent investor rule to ensure wise investments of pension funds; (3) Reduce future debts by directing adequate funding to pension systems; (4) Require funding standards and practices to be established before additional benefits are authorized. McDaniel’s proposed amendment is needed for the future, but that still leaves the underfunding issue unresolved.

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Make no mistake- Oklahoma’s unfunded pensions are a problem. Oklahoma Council of Public Affair’s Steve Anderson wrote an article back in October 2010 entitled, “The Coming Explosion of Oklahoma’s Pension Bomb.” http://www.ocpathink.org/articles/274.%20%20Anderson which correctly pointed out the unfunded pension issue was one that could bankrupt Oklahoma government in the next few years if it wasn’t dealt with.

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In a March 2011 article (http://www.ocpathink.org/articles/953), the OCPA pointed out Moodys(the bond rating company) was using the state government’s unfunded pensions as a factor in calculating Oklahoma’s credit rating- and not in a good way They pointed out that Oklahoma state government’s ‘debt load’ was substantially higher as a percent of GDP than neighboring states and the national average.

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We got to this point because past Oklahoma legislatures were reckless and irresponsible when they promised benefits to teachers and state employees and then didn’t fund them.

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It is important to understand the current Republican led legislature didn’t create this pension crisis- they inherited it. That said, the way they fix the pension systems is important.
Currently, there is a lot of talk about phasing out Oklahoma’s state income tax. Several Republican legislators are planning to introduce bills in the next session to phase out the state income tax over the next decade. They claim eliminating the state income tax would help recruit jobs and industry to Oklahoma, but before elimination of the state income tax happens, it should be carefully vetted.
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For example, currently the teacher’s pension system, the state’s largest system, gets five (5) percent of the state income tax. If the income tax is eliminated, how will the teacher’s system get funded? That is something that has not been addressed.

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Oklahoma’s individual state income tax is 5.5%. It represents about 20% of state government revenue- second only to state sales tax. Phasing out this revenue stream and letting Oklahomans keep more of their own money is a good thing and would result in economical growth in the state. But it’s not the phasing out of the state income tax that worries me; it’s how the legislature will deal with the possible loss of revenue. Will they hide taxes and fees or will they cut government in direct proportion to the loss of revenue. The second action is not a normal characteristic of government.

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I understand supply side economics and believe in the Laffer curve. It is likely the growth projections are feasible, but it’s still a risk to state government (and taxpayers) to eliminate the state income tax without a fail safe plan. If projections fell short, what would state government do?

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A more prudent plan would be one that reduces state government spending in direct proportion to the amount of revenue lost by the phasing out of the state income tax. Until that is done leave the state income tax intact.