OCPA: A Tale of Two Sectors

By OCPA President Jonathan Small

Sector One is in a slump, due to declining prices. Its income has fallen significantly – by nearly 60 percent – and there’s no sign of dramatic improvement any time soon. Sector One faces cash flow concerns and capital and financing concerns. So, Sector One faces reality and significantly cuts costs. That’s called good sense and responsibility.

Sector Two is facing the same downturn. But its managers and employees stubbornly resist every call to cut spending. Instead, they demand that their customers and funders pay more and enforce that demand by initiating laws that would actually hurt even more of those customers and funders.

Both sectors are based here in Oklahoma. Sector One is oil and gas and Sector Two is state government.

We know what happened to energy. Saudi Arabia led an effort by some other producing nations to flood the market, resulting in worldwide price declines from more than $100 a barrel to as low as $28. This caused an economic crisis.

So Oklahoma energy companies cut back, dramatically. In one year, we lost an estimated 21,800 energy jobs. It was painful but necessary. As Devon Energy CEO Dave Hager said, “It certainly makes you very focused on efficiency and getting the most for every dollar you spend.”

Devon and others focused more on oil fields where drilling was less expensive. They added new technology.

The same storm hit state government. Gross production taxes fell by at least $300 million due to price declines, sales and use taxes by at least $187 million, and income tax receipts by at least $363 million. Unfortunately, back in 2009 when overspending was masked and a half a billion in Obama-era stimulus funds flooded into the state treasury, state leaders continued unrealistic spending.

Then came the economic tsunami, triggered by the same oil price decline that hit Sector One. But Sector Two refused to respect its customers and funders. They made no significant effort to economize and modernize in sensible ways, like reforming significant programs or eliminating those that were less than necessary. They drained the state coffers and then resorted to asking Oklahomans and their families to yet again contribute more to allow government to avoid what Oklahomans and their families have had to do to survive.

State leaders kept telling us we were really undertaxed anyway. But a study as recently as 2015 showed that Oklahoma’s share of Gross State Product that goes to taxes, about five percent, was right at the national average. The problem was never inadequate tax rates; it was and remains a downtown in tax receipts as a direct result of the downturn in the economic activity that is taxed in the first place – largely energy production, personal incomes, and spending at the cash register.

Time after time in recent years, observers of state government have warned leaders that their failure to find real efficiencies and set sensible priorities would one day cause a budget crisis. Yet when it came, they went right back to the tax well.

There’s been pain from the decline in oil prices, but the strongest and smartest companies within that industry have survived because they faced reality. They dealt with what is, not what they wished it could be.

Sector Two, state government, can learn a lot from Sector One.

Jonathan Small serves as president of the Oklahoma Council of Public Affairs (www.ocpathink.org).


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