[UPDATE: You can download ITEP's analysis here.]

Yesterday the Senate voted to abolish the state income tax after Sen. Tom Adelson (D-Tulsa) introduced the measure as an amendment to another bill. With public services heavily dependent on income tax and no immediate revenue prospects to replace it, the language will likely be removed before the bill is finalized. Democrats introduced the amendment (which they do not support) in an attempt to show that the tax cut rhetoric of the Republican majority is not compatible with responsible budgeting and the needs of public services.

While that is a political fight that will not have immediate repercussions on policy, it mirrors the trend of successive smaller cuts that have significantly reduced the income tax over time. From 2004 to 2006, the top income tax rate was cut from 6.65 percent to 5.5 percent. Unless the legislature acts to stop it, another state income tax cut will take effect January 1, 2012. The cut, which was triggered when the state projected that revenue will rise by more than 4 percent next year, would reduce the top rate to 5.25 percent. Read the rest of this entry »

In 2004, Oklahoma voters approved a series of measures intended to raise new revenues for education and health care through a state lottery (SQ 705 and 706), gaming compacts (SQ 712), and increased tobacco taxes (SQ 713).  OK Policy has now released a set of newly updated fact sheets that explains how these revenue sources operate and sets out out how much revenue each generates and where the dollars are allocated. You can access all three 1-page fact sheets as a single document, or you can download the PDF separately for the lottery, gaming and tobacco.

We found that during the most recently completed budget year, FY ’10, Oklahoma collected $335.4 million from these three revenue sources. This is an increase of $12.2 million, or 3.8 percent, from FY ’09, reflecting a clear slowdown in revenue growth from these sources compared to prior years. Some key findings:

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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 »