Stephen Ellis, Ph.D., is Associate Professor in the Department of Philosophy at the University of Oklahoma. His research areas include philosophy of economics, decision theory, philosophy of mind and ethics.

The Oklahoma income tax ‘wars’ have gone national!  The latest salvo was fired last week by the Wall Street Journal in an editorial urging Oklahoma to enact major income tax cuts.  While the editorial offers nothing new (except for a high level of snark), it is worth noticing because it reveals the intellectual bankruptcy of the tax-cut case. Read the rest of this entry »

NOTE: This post has been updated as new information becomes available

Yesterday, the Governor and legislative leaders announced agreement on a ‘joint proposal for income tax reduction and tax code simplification’. (Click here for a summary and here for HB 3061 which contains the proposal).  Here are some questions and answers addressing the main aspects of the agreement: tax rates, offsets, fiscal impact and triggers. You can see our statement on the plan here.

Question #1: What are the changes in the income tax rates?

Answer: Personal income tax rates will change in two ways. First, the top rate will be lowered from 5.25 percent to 4.85 percent as of January 1, 2013. Second, the number of brackets is reduced. Currently, there are seven tax rates, ranging from 0.5 percent on the first $1,000 of taxable income for a single individual ($2,000 for a married couple) to 5.25 percent on taxable income above $8,700 ($15,000 for married couples) (see the current brackets here). The proposal will reduce this to three brackets: 1 percent on the first $2,500 of taxable income ($5,000 for married); 3.3 percent on income between $2,501 and $7,500 ($5,001 – $15,000 for married), and 4.8 percent on all income above that. If you make over $7,500 in taxable income  ($15,000 for married), you will be in the top income tax bracket, and your income above that amount will be taxed at the top rate. Read the rest of this entry »

This post was written by Nick Johnson, Vice President for State Fiscal Policy with the Center on Budget and Policy Priorities. This originally appeared on the Center’s Off the Charts blog and is reposted with permission.

Yesterday’s Wall Street Journal editorial supporting a proposal by Oklahoma governor Mary Fallin to phase out the state’s income tax contains a slew of incorrect or misleading statements.  For instance:

• The editorial wrongly asserts that states without income taxes have had stronger economic growth than other states, echoing a claim from a recent report from economist Arthur Laffer and the American Legislative Exchange Council.  As we have explained:

A key flaw in the Laffer analysis is that all of its measures of “economic growth” are really just measures of population growth.  As a state’s population grows, you would expect its total number of jobs and its total economic output to grow with it.  But, that’s not the same thing as a state’s per-capita performance.

A study from the Institute on Taxation and Economic Policy shows that residents of states with relatively high income tax rates are doing as well, if not better, than residents of states lacking a personal income tax in terms of per-capita economic output and household income.

• The editorial claims that states with relatively high income tax rates have faced the biggest budget shortfalls.  That’s simply not true.  Four of the nine states without an income tax — Nevada, New Hampshire, Texas, and Washington — have closed (or are closing) above-average shortfalls for the upcoming fiscal year, while some of the high-income-tax states that the editorial mentions, like Illinois and Maryland, had below-average shortfalls.Also, the editorial’s boast that no-income-tax states “manage to balance their budget nearly every year” makes little sense, since all states except Vermont are required to balance their budgets.
• The editorial cites Governor Fallin’s warning that Oklahoma is about to become an “income tax sandwich” as neighboring states consider eliminating their income taxes.  It’s true that anti-tax activists have been promoting income tax repeal in Kansas and Missouri for years.  But they haven’t succeeded.   In fact, Governor Fallin’s proposal would make Oklahoma the only state ever besides oil-rich Alaska to repeal its income tax.

The editorial correctly notes that many of Oklahoma’s leading economists have challenged claims that eliminating the income tax would help the economy.  But it wrongly suggests that non-economists feel differently.  A recent survey found that Oklahomans oppose the tax cut by a 42-35 percent margin, partly because they overwhelmingly view an educated, well-trained workforce as more important than low taxes — and a state that lacks income tax revenue will find it harder to find the resources to educate its own people.

A key question in the income tax debate has been whether tax cut supporters were taking a “responsible” approach in their proposals. They have worked hard to convince Oklahomans that we can afford tax cuts without disrupting core services.

Revenue growth triggers are the latest gambit in this effort. Under triggers, automatic tax cuts would go into effect whenever revenues increase by a certain percentage. Supporters say that triggers promote fiscal responsibility because they prevent us from cutting taxes during a recession.

The word out of the Capitol is that Governor Fallin is pushing to include triggers in the final proposal that comes out of conference committee. Triggers were part of the Governor’s original plan, and they have been added by the Legislature to two other bills.

We previously discussed why triggers are bad policy in general. An examination of the specific language in these triggers reveals numerous ways that they would not protect us from cutting taxes when we cannot afford it. Read the rest of this entry »

A poll released today by the Oklahoma Advocacy Project reveals strong opposition among Oklahomans to proposals for reducing and eliminating the state income tax. The poll finds that large majorities oppose a tax cut if it means less funding for schools, roads, and public safety. The poll also shows voter concern that cutting the income tax will lead to higher sales and property taxes to make up for lost revenues.

The poll reveals that while voters may support phasing out the income tax in theory, support evaporates when voters are presented with concrete choices and consequences involved in proposals to reduce or eliminate the tax cuts. In particular:

• A plurality of voters (42 percent) oppose decreasing the state income tax and paying for it by eliminating popular tax credits like the child tax credit and the sales tax relief credit, as has been proposed by Governor Fallin and some legislators. Opposition to the proposal increases significantly (rising 28 points to 70% oppose), when voters are informed that the proposal will increase taxes for most families with children and seniors who earn under $50,000 a year while the largest tax cuts will go to the wealthiest five
  percent of Oklahoma households. Read the rest of this entry »

Lawmakers began the year promising large, immediate cuts to the income tax, but their hopes soon collided with budget reality. With state funding already falling behind Oklahoma’s needs in many areas, legislators have found no easy way to pay for income tax cuts, whether by eliminating tax preferences, reducing services, or raising other taxes. Meanwhile, new obligations are piling up, like the $100 million per year that will be needed to reform the child welfare system.

Even so, a significant danger remains that we will find another way to cripple our state’s finances. Some legislators are pushing an automatic trigger that would ratchet down the income tax any time state revenue grows by a certain percentage. Read the rest of this entry »

On April 5, OK Policy sponsored a forum of leading Oklahoma economists, economic developers, and budget experts to discuss plans to reduce or eliminate the state income tax.  The eight speakers exposed fundamental flaws in the research being used to justify eliminating the income tax, explained what’s really needed for sustained economic growth in Oklahoma, and set out  the dangers that further tax cuts pose to our fiscal stability and economic prosperity. We’ve compiled a 10-minute highlight reel, embedded below, with clips from each of the speakers [click here for the transcript].

You can also watch video of the full forum, download the speakers’ PowerPoint presentations, and find supporting materials from the Economist Forum page. For all of our fact sheets, issue briefs, news coverage and other materials from the income tax debate, please go to the tax reform information page.

View other clips from OKPolicy’s Watch This video series:

• Fighting Hunger, Feeding Hope
• The Economy Bowl
• What is an IDA?
• Elderly parole
• Long term unemployment, 1967-2011
• Packed Oklahoma prisons, rising costs

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 »

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 »

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 »

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 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 »