A recent OK Policy fact sheet that analyzed the distribution of  benefits from cutting the state’s top personal income tax rate from 5.5 to 5.25 percent  has generated considerable interest and discussion. The tax cut would have a $120 million revenue impact; the analysis – conducted for us by the Institute for Taxation and Economic Policy (ITEP) -  found that:

• The top twenty percent of Oklahoma households – those with annual income above $85,800 – would receive 73 percent of the benefit of the tax cut;
• The average household would receive $24;
• More than two of every five households (43 percent) would receive no benefit at all.

We argued:

By taking so much revenue away and giving the benefits to a relatively small group, the state will be shifting a larger proportion of the cost of providing services onto lower- and middle-income Oklahomans.

Some critics of our brief have responded by asserting that tax cuts must by definition benefit the wealthy because they pay the most taxes, while lower-income Oklahomans are excluded because they lack any tax liability. For example, The Oklahoman’s editorial Board wrote, “Since the rich pay much more in taxes, it follows that they benefit much more from tax cuts.” Read the rest of this entry »

Earlier this year, we called attention to one of the stranger loopholes in the Oklahoma tax code, the case of the “double deduction” of state income taxes.  Federal tax law allows taxpayers who itemize their deductions to claim a deduction for state income tax, along with such expenses as home mortgage interest payments, charitable contributions, local property taxes and extraordinary medical expenses. While Oklahoma is among 31 states that allow taxpayers to itemize their deductions on their state income tax return as well, only in Oklahoma and five other states are taxpayers allowed to claim a deduction for state income taxes on their state tax return. In the context of the state’s huge revenue shortfalls and painful budget cuts, we urged the Legislature to follow New Mexico’s lead in taking action to disallow this deduction, which, according to estimates provided us by the Institute on Taxation and Economic Policy (ITEP), would generate $118 million in additional revenue. Since only a minority of mostly wealthier taxpayers itemize their deduction, eliminating the deduction for state income taxes would also help address the inequities of our tax system, where low- and middle-income Oklahomans pay more of  their income in state and local taxes than do the wealthy. This proposal generated some interest but did not make its way into the final FY ’11 budget agreement.

ITEP is now out with a new report that provides a critical look at the subject of itemized deductions more broadly. Their basic argument is that itemized deductions  are an extremely regressive component of tax systems:

Itemized deductions impact tax fairness: low-income families receive virtually no benefit from these deductions, and the biggest benefits are reserved for the upper-income families who arguably need them the least Read the rest of this entry »

As Oklahoma faces record budget shortfalls, the threat of massive cuts that would slow the state’s economic recovery and have potentially devastating effects on schools, social services, and public safety loom large. In this context, there is an urgent need for a balanced approach to bridging the state’s budget gap that includes identifying possible sources of additional one-time or ongoing revenue. This post is the second in a series that discusses some of the most promising policy ideas for generating additional revenue that would go at least part of the way to closing the budget deficit; the first looked at the sales tax discount paid to vendors.

Were you aware that Oklahoma allows a state income tax deduction for state income taxes? The idea doesn’t sound plausible, but it’s true.  Among the allowable deductions for those who claim itemized deductions on their federal taxes is one for state income tax. In 2007, according to IRS statistics (Excel file),  about 400,000 Oklahomans claimed this deduction to the tune of $2.2 billion. Due to a quirk of Oklahoma tax laws, those deducting state income taxes from their federal taxes are also allowed to claim this deduction against their state income tax. Read the rest of this entry »