Will Oklahoma families pay higher or lower taxes under HB 3061, the tax plan agreed to last week by Governor Fallin and legislative leaders? The answer depends on a number of variables, including household income, family size, and whether or not they claim itemized deductions on their federal and state tax return.

The tax policy specialists at ITEP, the Institute on Taxation and Economic Policy, calculated the change in tax liability for sample family types. They found:

• A single parent with two children earning $20,000 per year will pay $45 more tax under HB 3061 than currently. This is primarily due to changes in the lower tax brackets that would tax more of their income at a higher rate.
• A single parent with two children earning $40,000 per year will pay $75 less tax. This family would retain their current deductions and credits and would have part of their income taxed at a lower top rate.
• A two-parent family with four children earning $100,000 per year will pay $134 more tax under the plan. Their taxes would increase because the additional tax from losing their personal exemptions (currently $1,000 per family member) and the itemized deduction for state income tax would exceed the benefit from a lower top rate.
• A two-parent family with four children earning $250,000 per year will pay $93 less tax. In this case, the gains from the top rate cut will more than offset the loss of personal exemptions and the deduction for state income tax.

Looking at all families, ITEP calculates that roughly one in five families earning between $17,000 and $85,000 will pay higher taxes, while about three in five will pay less. The middle- and upper-middle taxpayers with income between $85,000 and $173,000 are likeliest to see a tax hike: in this income range, 43 percent of households are projected to pay more tax, while 53 percent will pay less.  At the highest income levels, almost all families will do substantially better. ITEP calculates that among the top 5 percent of households, 88 percent will pay less tax, compared to just 10 percent who will pay more. A four-person family earning $1 million can expect a $1,528 tax cut under the plan.

Overall, according to an analysis from the Oklahoma Tax Commission, the plan will lower taxes by $98 million in 2013. Of the total tax cut, just 13 percent of the benefit – $12.6 million – will go to households earning under $50,000, who represent 60 percent of all Oklahoma households. Conversely, 41 percent of the total cut – $40.6 million – the highest 4 percent of households, those earning over $200,000. Some $16 million in tax reductions would go to the roughly 9,600 Oklahoma households that earn over $1 million per year.

The bill has passed out of conference committee and is awaiting final passage in the House and Senate. Click here to contact your legislators about HB 3061.

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.

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 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 »

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 »

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 »