Note: This came at a time when the Oklahoma's key economic engine, energy industry, was booming.

Corporate income tax drop slashes Oklahoma's budget
Journal Record, The (Oklahoma City), Feb 20, 2008
Janice Francis-Smith

A sharp decline in corporate income tax collections accounts for much of the budget shortfall this year. The corporate income tax estimate for Fiscal Year 2009 is nearly 40 percent lower than the estimate for FY 2008, a drop of more than $178 million.

In December, the state Board of Equalization estimated there would be $7.06 billion available for lawmakers to spend during the 2008 legislative session for the fiscal year that begins July 1 and ends in June 2009. On Tuesday, the Equalization Board revised its certification for Fiscal Year 2009, finding lawmakers have $6.92 billion to spend this session - $146 million less than lawmakers expected to have for this year and $113 million less than they had available to spend last year.

"Corporate income tax is the largest contributor to the drop," said Director of State Finance Tony Hutchison at Tuesday's Equalization Board meeting. Corporate income tax collections are the most volatile facet of the state budget, sometimes accounting for huge gains and other times huge shortfalls, said Hutchison.

Back in June 2007, finance officials estimated the state would collect more than $450 million in corporate income taxes for FY 2008; now finance officials expect to collect less than $284 million. For FY 2009, finance officials estimate the state will collect less than $274 million in corporate income taxes, an 18.9- percent reduction from the previous year.

Individual income tax collections, on the other hand, are expected to hold steady at $2.15 billion. Finance officials were able to accurately anticipate the effect of tax cuts the Legislature passed during the last three years, which contributed to a slight drop in income tax collections. In FY 2007, the state collected $2.3 billion in personal income tax, compared to projected collections of $2.14 billion in FY 2008 and $2.15 billion in FY 2009.

When asked why corporate tax collections are so erratic, finance officials said the answer is complicated. State Treasurer Scott Meacham said corporate income tax collections are reliant upon national economic conditions. Companies that operate in multiple states allocate tax revenues to the states in which they operate, loosely based on the amount of business the company does in that state.

Many Oklahoma-based companies, particularly those in the energy or aerospace sectors, continue to perform well, said Meacham, despite the economic downturn that has adversely affected the financial performance of other companies that operate on a nationwide basis.

"If the national economy is not doing very well, then those allocations go down because they don't measure just what they do in Oklahoma," said Meacham. "It's a very complex formula, and that's why you see a lot of audits on the corporate side about that. The short answer is we do see a lot of fluctuation always with corporate collections."

Though corporate income tax collections in Oklahoma fluctuate up and down, the trend nationwide for the past several years has been a decline in corporate income tax. The Center on Budget and Policy Priorities, based in Washington D.C., addressed the national decline in corporate income tax collections with a report issued in 2003.

The report attributed lowered corporate income tax collections not only to the weak economy, but to ever-increasing corporate tax breaks and aggressive tax sheltering. Corporate income tax collections in 2003 represented only 1.2 percent of the Gross Domestic Product and 7.4 percent of all federal tax receipts in 2003. The last time corporate taxes dipped to such low levels was in 1983, when corporate receipts hit record lows not seen since the 1930s.

Corporate income taxes peaked at 32 percent of federal tax receipts in 1952, the report shows, compared to 2003, when collections represented 7 percent of federal revenues. On the other hand, payroll taxes accounted for about 10 percent of all federal tax receipts in 1952, and about 40 percent in 2003.

Some analysts note a shift away from C corporations and toward the formation of more S corporations since 1986, when the federal government "liberalized" the rules governing S corporations, the report states. S corporations do not pay corporate income tax, but pass through profits to shareholders who are taxed as individuals. But only smaller C corporations are able to change status due to limitations on the number of S corporation shareholders and other factors. The large corporations that account for the bulk of tax collections are C corporations, the report shows.