PUBLISHED: “An Analysis and Critique of the Recent S&P Bond Rating Downgrade of Oklahoma”

I have a new paper out for the the Oklahoma Council on Public Affairs with Jonathan Small, the groups President. We published “An Analysis and Critique of the Recent S&P Bond Rating Downgrade of Oklahoma” in response to S&P’s dubious bond rating action against Oklahoma, and the even more dubious analysis and commentary by many proponent of bigger government in Oklahoma who opportunitically used the ratings action to justify their never-ending calls for higher taxes.

That paper is available here:

I’ve summarized the study in the following “MindMap”:

Read the paper’s conclusions, embedded below:

Conclusions, Summary of Critiques, and Recommendations

Recent S&P ratings action downgrading Oklahoma has enhanced preexisting pressure to raise taxes in the state. But this downgrade in ratings should not be used to advance that case, because of substantive skepticism in S&P’s underlying rating and because of a misdiagnosis in the true problems plaguing the state.

S&P’s ratings have been substantially incorrect in the past and, worse still, they have been systematically biased. Additionally, the agency is likely overly concerned with the short-term interests of bondholders of state debt, and grossly underappreciating the long-run potential of economic growth and the benefits of a less volatile tax regime.

Moreover, bear in mind that S&P’s ranking of Oklahoma still recognizes the state as having an extremely strong fiscal regime worthy of a “high, investment grade” credit ranking. Analysis by other outside organizations, as well as a review of associated data, similarly shows the strong standing of Oklahoma’s fiscal policy regime, particularly with respect to long-term items such as unfunded liabilities and outstanding state bond debt relative to appropriate baselines.

Still, there is some truth in S&P concerns regarding Oklahoma’s recent revenue shortfalls, and public policy must address these concerns. Unfortunately, both S&P and key executive-branch officials in Oklahoma provide the wrong solution.

Oklahoma’s anemic economy, in part caused by low energy prices but more broadly due to issues in economic competitiveness, must be addressed to solve the problem of chronic revenue shortfalls. This means enhancing economic competitiveness in Oklahoma through pro-growth economic reform, not further stymieing the economy through higher taxes.

Oklahoma needs to diversify its economy by fostering substantive growth in industries outside the energy sector. This will bolster overall economic performance, increase earnings and the performance of labor markets, and reduce the impact of energy prices on Oklahoma’s economic wellbeing and on annual tax returns. The only viable pathway to substantive diversification through broad, fast-paced, dynamic economic transformation is by creating a climate that offers a more competitive economic policy regime to entrepreneurs. This unavoidable reality provides the basis for understanding the necessity of improving Oklahoma competitiveness in order to improve both the stability and robustness of state revenue collections.

Additionally, the state should seek to reduce reliance on highly volatile sources of revenue—such as personal income taxes, taxes on business income, and severance taxes on energy extraction—in order to stabilize revenue collections and reduce forecast error that helps lead to chronic mid-year revenue shortfall crises.


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