As the income tax filing deadline approaches, we return to a favorite blog post from our friend Paul Shinn that we first ran in 2009. You may also enjoy this video tribute to the many things we can be thankful our tax dollars help support. Click here  for four ways to find free tax help.

April 15. I’m not a fan of tax day. Who is? After several tortuous weeks of determining whether I have excess distributions from my 529 plan  and deciding how much I owe to the two states I lived in last year, I’m in line at the post office to send all these forms and too many checks to too many different governments. I’ve had it. Why can’t we make society work without taxes? I’m willing to try, I think, as I doze off…

In the morning, it slowly dawns on me that I’ve awakened in a tax-free America. So far, it’s great; I didn’t need to set the alarm! No real point in taking the kids to school, if it’s even open today. I’m not wealthy, so I can’t afford one of the schools that is open five days a week, requires the teachers to have a degree, uses textbooks, and has standards about what my kids should learn during the year. When little Heather asks about whether she can go to college, I just laugh. We can’t pay the tens of thousands of tuition for a private college. There’s no grant or loan programs and womens’ sports don’t make a profit, so there are no athletic scholarships awaiting her. Child care is risky too, since nobody determines if day care operators are qualified, safe, and not just in it to find victims for something. Read the rest of this entry »

Ken Fergesen, a resident of Altus, is Chairman of NBC Oklahoma, and is active in banking, farming, civic, social and cultural organizations.. He is a past President of the State Chamber of Commerce.

I am really concerned about our State.  The drum beat at 23^rd and Lincoln to eliminate Oklahoma’s income tax has me worried on many levels.  I’m afraid that I haven’t paid as close attention to the arguments until a representative from Oklahoma Council of Public Affairs spoke at the Altus Rotary meeting the other day.  That was when I realized that the proponents of eliminating the income tax were really single-purposed: ‘it’s all about business.’

I am also very pro-business and want our Oklahoma to have a healthy business climate.  I saw former Oklahoma Congressman Dave McCurdy recently and it reminded me of going with him to California and recruiting businesses to expand or move to Oklahoma, and preferably to his district.  When we called on CEOs of Fortune 500 companies, their first questions were about quality of life, not about tax rates.  They were concerned about educational and cultural opportunities for their employees.  Of course it is important to have a competitive business environment, and we do.  Oklahoma has a very favorable tax burden, tax incentives and cost of doing business, and a low cost of living for its citizens.

When I chaired the Oklahoma State Chamber, I traveled all across Oklahoma and visited many of its towns in every county.  I couldn’t help but notice communities that have flourishing arts and cultural activities were on the move, business was being done and cash registers were ringing.  At the time those observations were purely anecdotal, but now there are economic impact studies that prove my observations. Read the rest of this entry »

The income tax has been the top subject of debate this legislative session. Governor Fallin and some legislative leaders have promoted “bold proposals” to cut, and ultimately repeal, the state personal income tax.Yet after three straight years of budget cuts, funding levels remain in a deep hole. At a time when our children’s class sizes are growing, our roads and bridges are in disrepair, our prisons are critically understaffed,  higher education tuition is escalating, and we’re not treating many with mental illness and disabilities, it is simply wrong to make further tax cuts our priority.

Now is the critical time for Oklahomans to make the case against tax cuts directly to legislators. A working group of Republican legislators and  cabinet members are making decisions now behind closed doors. Advocates are not at the table – but can make their voices heard. Click here for a list of the working group members, along with their email addresses and phone numbers. We’ve set it up so you can copy and paste the email addresses of all the working group members into a single email. We’ve also included information on how to identify and reach your own Representative and Senator. Read the rest of this entry »

Elizabeth McNichol is a Senior Fellow at the Center on Budget and Policy Priorities specializing in state fiscal issues including methods of examining state budget processes and long-term structural reform of state budget and tax systems. This post originally appeared on the CBPP’s blog. See OK Policy’s animated video comparing the Oklahoma and Texas economies here.

The Governor of Oklahoma and policymakers in Kansas, Missouri, and other states have proposed income tax cuts that they say will boost economic growth. To make their case, they have cited the example of Texas, which has no income tax and where growth has been strong.

But in reality, Texas is not a helpful model for economic growth for the rest of the country. True, the number of people and jobs in Texas has been expanding. But, as we discuss in our recent paper, much of Texas’ growth results not from its policies but rather from factors that state officials cannot control and that other states cannot emulate.

• Texas has unique geographic and demographic characteristics that have helped lift its economy in recent years. Its border location brings trade opportunities and encourages immigration that, together, help fuel population and job growth.
• A combination of available land and lending regulations have kept housing prices comparatively low and helped Texas avoid the real estate depression that dragged down many other state economies.
• Though Texas’ economy has diversified in recent decades, the state’s abundant oil and gas resources remain a valuable asset — especially when prices for those commodities are high — that most other states lack. Read the rest of this entry »

Data Source: Institute on Taxation and Economic Policy

As they ponder plans to cut Oklahoma’s top income tax rate, most lawmakers admit the state cannot afford a cut without eliminating many other tax breaks. They emphasize that we should close loopholes for corporate “special-interests.” Yet as details of their plans emerge, we’ve discovered that the biggest cost would fall not on special-interests, but on hundreds of thousands of low- and moderate-income taxpayers, especially families with children and seniors.

These families would lose a host of broad and effective state tax credits to make way for income tax cuts that primarily benefit wealthier households. A new issue brief from Oklahoma Policy Institute explains how these broad-based credits work and why Oklahoma should preserve them.

The at-risk credits include the Earned Income Tax Credit (EITC), Sales Tax Relief Credit, and Child Tax Credit/Child Care Tax Credit.  The state EITC and the Child Tax Credit help about one out of every four Oklahoma families, and the Sales Tax Relief Credit goes to one-third of all Oklahomans. Read the rest of this entry »

In the final days of the 2010 session, when legislative leaders were faced with historic revenue shortfalls and were desperate for ways to balance the budget, a deal was struck with representatives of the energy industry on oil and gas drilling incentives. The industry agreed to defer payment of credits on horizontal and deep well drilling for twenty-four months, until July 2012, and then to pay out over the next three years the credits that accrued during this period. In return, the legislature adopted several changes to how drilling is taxed that were sought by the industry .

At the time, it was anticipated that deferring the payment of credits on horizontal and deep well drilling for two years would put the state on the hook for $150 million. Instead, when oil and gas companies submitted their claims in late 2011, the price tag turned out to be nearly double: $297 million. The state now must pay out close to $100 million annually between 2013 – 2015 for credits accrued in 2010 and 2011, leaving less money than expected for state appropriations. These back payments are in addition to credits that are accruing for current production

The announcement that tax breaks for horizontal and deep well drilling amounted to nearly $150 million per year in 2010 and 2011  should serve as a wake up  call to Oklahoma policymakers and the public. All evidence points to horizontal drilling accounting for a substantially greater share of Oklahoma oil and gas production in the years ahead.  The generous tax treatment we provide this form of drilling threatens to compound our budget woes and hamper our efforts to provide adequate funding of core public services. Read the rest of this entry »

Photo by Martha Soukup used under a Creative Commons license.

States without an income tax rely on other taxes to fund government. Far from discovering magical, revenue boosting powers by not having an income tax, these states simply charge higher sales and property taxes.

A new report from the Center on Budget and Policy Priorities shows how much higher:

• In fiscal year 2009, the nine states without an income tax had property taxes that were, on average, 12 percent higher per capita and 8 percent higher as a share of personal income than the national average.
• Sales taxes in those nine states were 21 percent higher per capita and 18 percent higher as a share of personal income than the national average.

The property tax comparison is especially relevant for Oklahoma, since our income tax helps us to keep property taxes very low. In every state without an income tax, people pay much higher property taxes compared to Oklahoma. The average per capita property tax in no-income tax states is more than two-and-a-half times what we pay here. Read the rest of this entry »

As Oklahoma’s tax debate unfolds, it has been encouraging to hear a rising chorus of influential voices insist that any tax plan must be revenue neutral. Given deep cuts that state agencies have absorbed in recent years and the long-term fiscal challenges the state faces in the years ahead, eroding our revenue base with one-sided  tax cuts would be hugely irresponsible and fiscally unsustainable. One promising approach to ensure that we do not bankrupt the state is for Oklahoma to adopt a pay-as-you-go, or PAYGO, requirement.

State Treasurer Ken Miller recently stated:

Budget writers should adopt a “pay-as-we-go” approach to reducing taxes. To responsibly finance tax cuts, policymakers should eliminate one dollar of spending or credits for every dollar cut in taxes.

This can be accomplished with fiscal discipline, better spending prioritization and a refined approach to budgeting.

Miller’s call for a pay-as-you-go approach was quickly endorsed by both the Oklahoman and Tulsa World. Read the rest of this entry »

The push to eliminate Oklahoma’s personal income tax relies heavily for intellectual support on a study done for the Oklahoma Council of Public Affairs by economist Arthur Laffer and his colleagues at Aduin, Laffer & Moore econometrics. Last month we reported on a pair of studies from the Institute on Taxation and Economic Policy, a leading national tax policy think-tank, that revealed fundamental flaws with the Laffer/OCPA report.

Now three leading Oklahoma economists – Dr. Kent Olson, Professor of Economics Emeritus  at Oklahoma State University, Dr. Jonathan Willner, Professor and Chair of the Department of Economics and Finance at Oklahoma City University, and Dr. Cynthia Rogers, Associate Professor of Economics at University of Oklahoma -  have released their own reviews of the Laffer/OCPA report. Each has found serious errors and shortcomings in the OCPA/Laffer analysis and each cautions strongly against using it as the basis for public policy decisions.

Dr. Kent Olson, in a paper titled, “The Voodoo Economics of Phasing out Oklahoma’s Personal Income Tax,” focuses on a regression equation that yields Laffer’s predictions of spectacular economic growth rates from eliminating the income tax. Carefully replicating the data and assumptions built into Laffer’s equation, Olson uncovers multiple errors that lead to mistaken conclusions. Olson writes that the design of Laffer’s key equation and his use of data:

… produces biased and greatly exaggerated estimates of the effects on personal income and non-personal-income tax revenues from phasing out Oklahoma’s personal income tax. In this author’s view, it fails totally to provide adequate justification for such an important change in Oklahoma’s tax structure. Read the rest of this entry »

The share of income Oklahomans pay in state taxes has fallen to its lowest point in decades.  In 2010, Oklahomans paid just 5.5 percent of their total income in state taxes.  This includes sales tax, income tax, motor vehicle tax, excise taxes on oil and gas production, and all other state taxes. This is a major drop from the average of 6.9 percent over the past three decades, and it is well below the previous low of 6.1 percent in 1987 and 2009.

Source: U.S. Census Bureau - Tax Collections; Bureau of Economic Analysis - State Personal Income

As the graph shows, the share of income paid in taxes has been falling since 2006. In 2007 and 2008, collections grew but less rapidly than the state economy as the income tax cuts of the mid-2000s phased in. Once the state was hit by the recession in 2009, collections fell for two straight years, with 2010 collections coming in 15 percent below 2008.. During the same period, state personal income  contracted by 4 percent.

Even before the latest steep drop, Oklahoma was among the lowest tax states in the nation, ranking 40th in total state and local taxes as a share of personal income in 2009.  As we struggle through an incomplete recovery, and with tax cuts back on the front burner of the political agenda, the failure of our tax collections to keep pace with growing costs and growing needs raises critical questions of how we can meet the core responsibilities that Oklahomans expect from state government.

Photo by Kevin O'Mara used under a Creative Commons license.

Arthur Laffer and OCPA have begun responding to a few of the many criticisms of their tax proposal. Their latest argument boils down to this: it’s “Economics 101” that tax cuts are always pro-growth, because when less income goes to taxes, people have more incentives to work.

Unfortunately they don’t seem to have made it as far as Economics 102, because they leave out the fact that it’s not just “incentives” that decide how much income a person brings in. The most motivated worker or business is limited by their own skills and by available resources. They need raw materials, technology, access to markets, and a safe environment for commerce.

OCPA and Laffer totally ignore the role of taxes in ensuring this prosperous environment. All of that tax money isn’t piled up and set on fire, and its purpose is not simply to redistribute income, as OCPA contends. We spend it on schools, roads, health care, and public safety. Combining our resources to build these institutions that none of us could create individually is both efficient and pro-growth.

Oklahoma is already a low tax state, but OCPA is pursuing a goal to push us always to a further extreme. They would risk our economy for a mantra that tax cuts are the solution to every problem, a claim totally unsupported by real economics. That kind of Economics 101 might make for a good slogan, but it doesn’t match the real world.

The tax cut plans being pushed by Oklahoma lawmakers contain plenty of bad ideas, but one may eclipse them all: Governor Fallin’s tax cliff.

The tax cliff is the result of a badly designed tax bracket structure. Very few other states have such a structure, and for good reason: it creates a major disincentive to work.

In a normal rate structure, the higher rates only apply to income above a certain level. For example, in our current system, families enter the highest bracket of 5.25 percent when they make $15,001 or more in taxable income. However, they don’t pay 5.25 percent on every dollar of income. They pay 5.25 cents out of each dollar at and above $15,001, but they pay only 5 cents of the dollars they earn between $12,201 and $15,000, 4 cents of the dollars between $9,801 and $12,200, and so on.

In Governor Fallin’s plan, entering a new bracket causes the higher rate to apply to every single dollar of taxable income. That means a family with $29,999 in taxable income would not owe any income tax. But if they earned one dollar more, their tax bill would jump to $675. When moving between the second and third bracket, their taxes would jump again by $875. Read the rest of this entry »