OCPA column: federal bailout money is a bad trade

A bad trade

By Jonathan Small

What if someone offered to serve you nothing but dessert every day for a month—but in exchange you had to promise that you would forgo the opportunity to buy health food for the rest of the year? From an economic standpoint, that’s what congressional Democrats have offered Oklahoma with the latest round of federal bailout funding.

While Oklahoma government is expected to receive $2.1 billion in bailout funding, that money comes with a catch. One provision of the federal legislation prohibits states from using the money “to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

Put simply, congressional Democrats tried to strip states of their power over state taxes. They offer states a financial sugar high so long as we promise not to do anything that would improve our economic health long term.

That’s an offer Oklahoma lawmakers should refuse. Although Oklahoma’s economic recovery from COVID-19’s effects is well underway, we can’t afford to settle for the pre-COVID status quo. Even without COVID-19, Oklahoma still faces economic headwinds—primarily because we have a state income tax and our booming neighbor to the south, Texas, does not. Reduction and eventual elimination of the state income tax, combined with other tax reforms that would make the change revenue neutral, would do much to help Oklahoma grow like Texas.

Tax cuts are among the best, and most proven, ways to boost economic growth. In contrast, the new spending that could occur from federal bailout funds is only a short-term phenomenon, and more likely to be wasted than well-spent if history is any indicator of future performance.

In fact, the last time Oklahoma government received federal bailouts, at the start of the Obama administration, it led to inflated state spending that allowed agencies to claim they were facing budget “cuts” for nearly a decade, even though agency spending was often higher than pre-bailout spending levels.

In addition, Oklahoma government can afford to forgo the federal handout. While COVID-19 created economic challenges, Oklahoma has already moved past most of those challenges. Our unemployment rate is again among the lowest in the country and state government has a surplus of more than $1 billion, created largely due to modest spending restraint last year.

Rather than spend any federal bailout funds, state lawmakers should put the money into state savings until a court or other authority declares states cannot be forced to forfeit their authority over state taxation. Taking that step will make sure that Oklahomans stay in charge of Oklahoma government.

Jonathan Small serves as president of the Oklahoma Council of Public Affairs.