Is Texas beating Oklahoma because it lacks an income tax? That’s been a common argument made by proponents of eliminating Oklahoma’s personal income tax. But a new animated video from OK Policy bust the myths about our rivals to the south.

To learn more and find out what you can do, see our take action page. For all of OK Policy’s materials on the income tax debate, see our tax reform information page.

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. The Laffer report makes two claims: (1) that states without an income tax enjoy stronger economic growth, and (2) that abolishing the income tax would boost Oklahoma’s economy to such a great extent that the state would recapture a major share of lost revenue and not have to slash core services. Last week, we reported on a study from the Institute on Taxation and Economic Policy (ITEP) showing that when more accurate indicators of economic growth are used, states without an income tax are doing no better than other states, including Oklahoma. A follow-up ITEP study now reveals that Laffer’s second claim regarding the economic growth that will result from eliminating the income tax is equally dubious. Together, the debunking of its two main economic arguments leaves the OCPA proposal tottering. Read the rest of this entry »

Something we often hear about Oklahoma’s tax system is that the top rate kicks in so low that it affects almost everyone. Most recently, a Tulsa World article stated:

The current comparable top rate is 5.25 percent, which kicks on net income over $15,000 a year.  That’s correct: The state’s top tax bracket – and there are six other lower tax brackets – kicks in at $15,000 a year, about $80 a year less than the gross earning of someone working full time at the U.S. minimum wage.

Actually, that’s incorrect. It leaves out two major components of our tax system: the standard deduction and personal exemption. Because of the standard deduction, the first $5,800 of income for singles and $11,600 for married couples is not taxed. The personal exemption means an additional $1,000 for each person in the household is not taxed. Read the rest of this entry »

Update: We have put out a fact sheet summarizing major flaws in the Laffer report.

Do states without an income tax enjoy stronger economic growth? This is one of the central claims made by economist Arthur Laffer in a recent report published by the Oklahoma Council of Public Affairs and echoed repeatedly by proponents of eliminating Oklahoma’s income tax, including by Governor Mary Fallin in her 2012 State of the State address (1). However, a new report from the Institute for Taxation and Economic Policy (ITEP) shows that Laffer’s claim is based on a highly misleading analysis.

The ITEP report, titled “Don’t Be Fooled By Junk Economics”,  shows that: 1) Laffer cherry-picked metrics that are all tied to population growth; 2) population is growing in the South and West, where most of the no-income tax states happen to be, for reasons of climate, demographics, and the housing market, not state tax rates; 3) when more accurate indicators of economic growth are used, states without an income tax are doing no better than other states, including Oklahoma.

Laffer’s study compares the nine states without an income tax to the nine states with the highest personal income tax rate. He concludes:

Economic growth is stronger in states with no personal income growth and weaker in the states with the highest income tax rates – in good times and bad… To single out just one metric over the past decade, employment growth in the zero-tax states was 5.38 percent versus 0.51 percent for the nation and -1.68 percent for the highest tax-rate states. Read the rest of this entry »

Governor Mary Fallin

In her State of the State address, Governor Fallin laid out numerous areas where Oklahoma needs to invest to fix serious problems. She mentioned the shortage of troopers on the highways, the millions still owed to local governments to reimburse emergency expenses, the dilapidated state capitol and medical examiner’s office, crumbling bridges, high infant mortality, a beleaguered foster care system, and unfunded teacher health benefits.

These diverse problems have a common denominator: they are all substantially caused by inadequate funding to core public services after three straight years of budget cuts. Rather than setting a bold course for Oklahoma’s future, we are playing catch-up just to repair what we have allowed to fall apart.

In the same speech, Governor Fallin proposed a huge cut to the personal income tax. The plan is estimated to cost $350 million in the first full year. It also includes triggers to automatically cut taxes again any time the budget begins to recover.

The effect is that for the foreseeable future, tax cuts are shoved to the front of the line. It won’t matter what problems or responsibilities we face as a state. It won’t matter if our infant mortality stays high, if our water isn’t safe, if our schools are failing, if our communities are devastated by extreme weather. Whenever there is additional revenue, the number one priority will always be tax cuts. Read the rest of this entry »

Arthur Laffer

Some Oklahoma politicians have trumpeted a report by economist Arthur Laffer to claim that eliminating the state income tax will fuel an economic boom. Laffer is best known for the Laffer Curve, which he famously sketched on a napkin while meeting with Dick Cheney in a hotel bar. It went on to form the basis of the Reagan administration’s trickle-down economics.

The Laffer Curve makes an obvious point: government revenues peak at a tax rate somewhere between zero and one-hundred percent. In the lower half of the curve, raising taxes will increase revenue, but go too high and the reduced economic activity due to excessive taxation will result in lower revenue.

The argument was not original to Laffer. It had been stated previously by thinkers ranging from 14th Century Arab philosopher Ibn Khaldun to John Maynard Keynes, the founder of modern macroeconomics. What made this idea influential in recent decades was not any special insight into economics, but its powerful appeal for politicians. Rather than explaining how tax cuts (popular) would be paid for by budget cuts or increases in other taxes (unpopular), they could simply claim that the tax cuts would pay for themselves. Read the rest of this entry »

Click for larger image.

A proposal by the legislature’s tax reform task force would raise taxes for most Oklahomans, with the worst impact on low-income seniors and families with children, according to a new fact sheet from the Oklahoma Policy Institute. The task force suggested paying for further cuts to the top income tax rate by ending numerous tax credits and exemptions relied on by low and moderate income Oklahomans.

An analysis by the Institute on Taxation and Economic Policy (ITEP) reveals that if this plan were to take effect today, taxes would increase for 55 percent of Oklahomans. Only 31 percent of Oklahomans would receive a tax cut. There would be no change for 13 percent of Oklahomans, a group largely made up of childless singles and married couples with incomes smaller than the standard deduction. [Note: ITEP included about 3/4ths of the credits slated for elimination but did not model tax credits believed to be taken primarily by corporations.]

Among all households, the top 1 percent (those making $357,400 or more) would receive by far the largest benefit, with an average tax break of $2,833. The bottom 60 percent would see an average tax increase of $107. Read the rest of this entry »

This afternoon, the Senate Task Force on Comprehensive Tax Reform released its final report. The most significant recommendation is to make further cuts to the top rate and replace that revenue by ending numerous tax credits. Almost two-thirds of the tax benefits targeted for elimination do not go to special interests or favored industries, but to hundreds of thousands of taxpayers below a certain income level in order to offset regressive sales and property taxes. They would also end the personal exemption, which reduces the tax liability for every household in Oklahoma.

This proposal is a bad deal for hardworking Oklahomans. Doing away with broad-based tax benefits like the personal exemption, earned income tax credit, and sales tax relief credit in exchange for a cut in the top income tax rate would actually increase taxes for a majority of Oklahomans. This would hit hardest the poor and middle class families who are struggling most to make ends meet in a tough economy. Read the rest of this entry »

Last week we reported that next year’s revenues are expected to be 7 percent below their levels of six years ago (FY ’07), even though costs are higher due to inflation, population growth, and increased caseloads

Elsewhere, people seem to have read a different budget estimate than the one we saw. Two elements of the discussion show a growing disconnect between Oklahoma’s budgetary politics and reality.

First, Governor Mary Fallin and many others continue to advocate for reduction or elimination of the state income tax. A closer look at the budget shows that, of the $400 million forecast revenue growth from FY ’11 to FY ’13, fully  half comes from the income tax. Overall, the income tax is expected to provide $2.5 billion next year for General Revenue, the HB 1017 Education Reform Fund, and the ROADS Fund, which has helped restore the worst of our roads and bridges. Cutting this vital revenue support makes no budget sense. It also makes no economic sense. Read the rest of this entry »

While some state leaders continue to discuss making top-down cuts to the income tax or eliminating it entirely, a new OK Policy issue brief shows why that policy is ill-advised.

Before the economic downturn, the income tax brought in more than $2.5 billion a year. In FY 2010, it made up about one-third of all state tax collections. It is the single largest source of support for education, health care, transportation, public safety, and other necessities. The state could not provide basic, essential services without income tax revenue unless other taxes were drastically increased.

The issue brief shows that shifting to greater reliance on other taxes would disadvantage local business, create more risk of revenues not being adequate to needs, and put a disproportionate burden on low- and moderate-income Oklahoma families. Contrary to the claims of its critics, Oklahoma’s income tax is not a hindrance to the state’s business climate or a spur for people to move out of state. In fact, Oklahoma is out-competing most states that lack an income tax.

After three years of repeated cuts to the state budget, the state has fallen further behind in funding teacher salaries and benefits, staffing our prisons and juvenile facilities, and ensuring the safety of children at risk of abuse and neglect, among other vital functions. We face growing obligations to fund our public pensions, protect our water system, repair our crumbling infrastructure, and take care of an aging population. In this context, cutting the income tax is the wrong priority for Oklahoma’s future.

You can download the full 8-page issue brief here. Find more presentations, fact sheets, blog posts, op-eds and newspaper articles addressing Oklahoma’s tax reform debate here.

What’s up this week at Oklahoma Policy Institute? The Weekly Wonk is dedicated to this week’s events, publications, and blog posts.

This week OK Policy released a paper showing that state costs under the new federal health care law are likely to be modest and could even yield net savings.  Click here to access a 1-page summary of our issue brief: Health Care Reform and the State Budget: Savings Likely to Partly or Fully Offset Modest New Costs.

OK Policy testified this week before the Joint Committee on the Federal Health Care Law.  Click here for our presentation exploring Oklahoma’s options for implementing state health insurance exchanges, a major requirement of the new law.  Read the Tulsa World’s coverage of our paper along with a summary of the committee meeting. Read the rest of this entry »

ConocoPhillips headquarters in the Energy Corridor area of Houston

Why do some companies choose to locate their businesses  in Texas rather than Oklahoma? During the first two meetings of the Task Force on Comprehensive Tax Reform, co-chair Representative David Dank has stated repeatedly that the absence of the personal income tax accounts for the cases where Texas wins out in relocation and investment decisions.

Finding hard evidence to support his case, however, has proven elusive. At a recent Task Force meeting, Wes Stucky, CEO of the Ardmore Development Authority and a widely respected leader in the economic development field, spoke of his long-standing efforts to bring investment and jobs to Ardmore. Stucky told the Task Force:

For 24 years, I’ve been conducting interviews with executives of companies that we tried to recruit to Ardmore that ended up locating elsewhere. Not once in all those years did a company that rejected Ardmore base its decisions on taxes. Read the rest of this entry »