Oklahoma's low taxes make revenue options feasible for closing the fiscal gap. Because Oklahoma's government revenue ranks 42^nd in the country, we have some flexibility to reduce the fiscal gap through raising revenues. These should not, of course, be the only solutions. We should use existing revenue more effectively and, as discussed in the next section, make better long-term spending decisions.

Raising revenue is not always a popular option but it is one that will be necessary to solve the structural deficit. While it is premature to suggest specific changes many options are available.

• Apply the sales tax to more services. Then revenue would grow closer to the rate of overall economic growth. Of 164 services that could be taxed, Oklahoma taxes only 32 (compared to 78 taxed in Texas, for example).

• Eliminate corporate tax avoidance strategies. A 2003 report by the Multistate Tax Commission estimated Oklahoma lost $69 million (nearly a quarter of what could have been collected) in corporate taxes in 2000. This resulted from shifting transactions outside the United States and from tax sheltering techniques within the United States. One way to reduce corporate tax avoidance is to adopt "combined reporting," which treats parent corporations and their subsidiaries as one unit for the purposes of paying state income taxes. Read the latest update on combined reporting from the Center on Budget and Policy Priorities.
• Eliminate ineffective tax breaks. All tax credits and exemptions should be evaluated on a regular basis. Those that cost more than the economic benefits they bring to the state could be eliminated.
• Expand the practice of tying tax changes to the overall revenue picture. The final years of phased-in cuts in the top income tax rate were contingent on adequate revenue growth; this feature could be included in future tax cuts and exemptions. We also could consider temporarily suspending some existing credits and exemptions when revenues do not grow enough to support services.
• Reduce revenue restrictions. Available revenues could be used more efficiently for the greatest need if their use was not restricted. Restricted or "earmarked" funds favor some government functions at the expense of those that are funded from the General Revenue Fund. Earmarking also increases the chances that programs will be funded at either a higher or a lower level than they would be without earmarks, reduces the chances that program performance is reviewed, and freezes priorities in a world where they should be changing
• Revisit State Question 640. This constitutional provision permits taxes to be raised only by a three-fourths vote of both houses of the Legislature or by a vote of the people. Local governments also face election requirements for tax increases. Eventually, significant tax changes will be required. The sooner they are made, the smaller they need to be and the faster we can shift our attention to the many public service challenges we face.

Regardless of what action is taken, we should preserve a balanced tax structure. We should not rely too much on a single tax stream (as cities are currently too dependent on sales taxes). We must continue to emphasize the income tax, which is our fairest tax and the one most able to keep up with economic growth. Sales taxes remain an important part of the revenue structure since Oklahoma voters have supported many state and local sales tax measures. At the same time, the property tax is the one least likely to lose revenue in the changing economy, so it must be part of the revenue solution.

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