The 2010 elections gave Republicans complete control of state government for the first time ever in Oklahoma. They have quietly, methodically enacted a slate of pro-business measures and are embarking on an extraordinary plan to eliminate the personal income tax outright.
"We passed almost every single thing I asked the Legislature to address last year," says Republican Governor Mary Fallin, who replaced Democrat Brad Henry. "What we said we were going to do, we did," she said in a recent interview with Stateline.
Business wish list
In legislative terms, 2011 was the year Oklahoma business had been dreaming of for decades. To reduce what Fallin called "job-killing legal fees," the state changed the way lawsuits are handled by placing a $350,000 cap on damages that compensate for intangibles like pain and suffering. Lawmakers delivered the largest rewrite in history of the state's workers' compensation system, one that reduced the time injured workers have to file claims from two years to 90 days.
Far less publicized than the workers' comp and tort reforms, but also significant for the business community, were new laws making it easier for employers to test workers for illegal drugs and imposing new limits on relief related to employment discrimination claims.
"If you look at the agenda from the last session, it's a litany of all things that Republicans have been talking about for 20 years," says Chad Warmington, chief operating officer of the Oklahoma Chamber of Commerce . "We checked off major boxes in all of those areas in the first session. It was very successful."
The state also worked to shore up its pension funds for teachers and state workers, which had ranked among the worst-funded in the country. Oklahoma took the unfunded liability of these plans down from over $16 billion to $10.6 billion, largely by requiring that all cost-of-living increases have a funding source. "It was under the radar but believe me Wall Street noticed," says Senate President Pro Tem Brian Bingman.
Attacking the income tax
Making Oklahoma more attractive to Wall Street and businesses has been and continues to be the top priority of Fallin and the GOP leadership of the state House and Senate. This year, Fallin's big-ticket item is to phase out the personal income tax. "It will give Oklahoma the lowest income tax rate in the region besides Texas (which has no income tax), making us a more competitive state for those looking to move jobs here," she says.
Here's how Fallin's plan would work: The state would first reduce the seven current brackets to three and lower the rates. Couples making zero to $30,000 a year would not pay anything. For those making between $30,000 to $70,000, the tax rate would be 2.25 percent, and for families making over $70,000, the rate would be 3.5 percent, down from the current 5.25 percent.
Tax rates would then be cut by an additional quarter point in any year in which Oklahoma hits a revenue growth trigger of 5 percent. "That growth trigger gives the state a safety net should we experience another economic downturn," Fallin says.
Many in the legislature, including the GOP leadership, support lowering the income tax and are acutely aware that neighboring Kansas and Missouri are likewise looking at reducing or eliminating their income taxes. But while they like the idea of the "trigger," their enthusiasm for completely eliminating a tax that supports about one-third of the state's budget is tempered by a concern that the state can make up the lost revenue.
"People are using that as a great reason: Texas has already done it. Kansas and Missouri are looking at it so now we have to jump on the bandwagon real quick or they will get all the jobs," says Representative Randy McDaniel, who chairs the House Pension Oversight Committee. "I think corporate leaders want to see a stable state that they know isn't going to come back and increase taxes on them."
Paying for the tax cut
Fallin figures she can pay for the tax cut in three ways: by eliminating tax loopholes and exceptions, including a list of 39 tax credits that she says no longer work; making government more efficient; and "capitalizing on economic growth we expect to see a result of our pro-jobs, pro-business policies."
Critics say her last two points are too vague and optimistic. "To suggest you can do away with the state's largest income revenue source and not have a substantial affect on services simply stretches credibility," says David Blatt, director of the Oklahoma Policy Institute , a liberal think tank. He calls Fallin's plan "radical" and says it would "bust a huge and permanent hole in the budget."
Some Democrats concede they probably don't have the votes to block an income tax cut proposal. "The train has left the station," says Representative Scott Inman, the House Democratic leader. "Because it's an election year, people want to be able to go back home and say `Well, I cut your income taxes' and hope that their constituents aren't savvy enough to look beyond that and also say, `yes, but you also cut our public schools by 10 percent.'"
Richard Johnson, chair of the political science department at Oklahoma City University , says that while Oklahoma has diversified its economy, it's still an energy state, which tends to have a boom-bust economy. He worries that if the state does away with the income tax, hits hard times and needs more revenue, "it's nearly impossible to raise taxes" in Oklahoma. The state constitution requires three-fourths of both chambers of the legislature or a vote of the people before taxes can be raised.
One of New York's bond rating services has a similar concern. Moody's this month decided not to lower Oklahoma's cost of borrowing, in part because of the state's strict limit on raising taxes and because "the trend towards reduction in personal income tax further limits flexibility." Fallin had visited the three major rating agencies on Wall Street earlier hoping to get a better rating.
Tea Party impact
Having a supermajority in the legislature and possession of the governor's mansion hasn't meant it's been easy for the Republicans, especially within their own party. Fallin and the GOP leaders are running into the same predicament that the Republican leadership faces in Washington, D.C.: Those elected with Tea Party backing want to move even more quickly and more boldly, particularly on the social front.
In one of the country's reddest states, Tea Party-backed legislators complain that the current GOP leadership gives short-shrift to illegal immigration, gun rights, pro-family legislation and other social and cultural issues.
State Representative Randy Terrill, who is pushing for illegal immigration restrictions modeled on the controversial law in Arizona, calls the House GOP leadership "a wholly owned subsidiary of the state Chamber of Commerce."
There were rumblings last year and have been some this year that House Speaker Kris Steele might be ousted in favor of T.W. Shannon, who in November was elected as next year's designated speaker to succeed Steele, who is term-limited.
"I'm sure there are those who you talk to who say they may have a different priority than perhaps I do personally or even maybe that our caucus has determined to be the priorities (for the year)," House Speaker Steele told Stateline recently. "But that's the great thing about our form of government, everyone gets to participate."
Oklahoma, ranked as one of the most pro-life states , enacted three abortion-related measures last year, including one that bans abortions after 20 weeks of pregnancy. But social conservatives have made it clear they want to go further, especially those in the Senate. While Majority Leader Bingman says his top priority is "jobs, jobs, jobs," the first bill passed by the Senate this year defined life at the moment of conception. The "personhood" question is expected to be the top social issue that the legislature takes up in 2012.
Even on the fiscal front, Tea Party conservatives fault the GOP leadership for relying on gimmicks, like raiding the transportation fund of $100 million, to balance the budget, and for being too dependent on federal money. They are livid that the state even considered accepting $54 million in federal funds to create a state-based health care exchange system under the federal health care law. They would like to get rid of all tax credits and other forms of "crony capitalism."
Despite its successes of last year, the business community worries about this. "We're extremely concerned that some of these far-right folks are so far right that they are anti-business," says Warmington of the state Chamber of Commerce. "They actually are more problematic for us than trial lawyers and labor unions right now," he says, referring to business' traditional adversaries. Some in the Tea Party movement have taken to calling Governor Fallin a RINO — a Republican in Name Only.
Despite the arguments, Fallin has largely stayed on track with an agenda that she says is clearly working. The state has already made up two-thirds of the jobs lost in the recession and is drawing more people to live there. The largest number of new residents now comes from California, a reversal of the flight of Oklahomans who left the Dust Bowl to find work in California during the years of the Depression.