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.

Oklahoma Policy Institute released the following statement in response to the state budget deal announced today:

According to today’s budget agreement, appropriations for core services remain flat even though expenses continue to rise. That means we will fall further behind what Oklahomans need and expect state government to do.

We can already see the result in rising class sizes and tuition costs, roads and public buildings going unrepaired, and public safety workers and caregivers for the most vulnerable who remain overburdened and underpaid.

At the same time, the legislature is considering cutting revenues by more than $30 million in the upcoming year and more than $100 million in 2014. If we continue to put tax cuts ahead of investments in our shared responsibilities, we risk seriously harming Oklahomans’ quality of life, making the state a worse place to do business, and pushing off more debts onto the next generation.

In addition to an immediate cut in the top income tax rate from 5.25 to 4.8 percent,  the tax plan agreed to last week by Governor Fallin and legislative leaders includes an automatic future tax cut tied tied to revenue growth. In tax year 2015, an additional cut in the top income tax rate from 4.8 to 4.5 percent would be triggered if revenues from five specified taxes grow by 5 percent.  This would result in an estimated revenue loss of $170 million.

Previously we argued that triggers are bad policy. We stated:

Proponents of triggers may try to sell this as a “responsible” way to cut taxes, but it’s the opposite. It’s an attempt to avoid responsibility by putting the tax system on auto-pilot. The result could be a wreck that everyone can foresee but no one can prevent.

These kinds of concerns led a bipartisan group of 30 prominent business and civic leaders to urge the rejection of triggers.

Regardless of the problems with triggers in principle, the specific trigger mechanism in the tax bill,  HB 3061, is particularly flawed. The bill states that in December 2014, which is mid-way through FY 2015,  the Board of Equalization will determine if FY 2014 revenues from the five identified taxes rose by 5 percent from FY 2013.  If so, the income tax rate reduction will take effect on January 1, 2015. The Legislature has no involvement in authorizing or approving the cut.

The problem with this approach is that it could lead to automatic tax cuts that will take effect even if the economy is faltering and revenue collections are beginning to fall. As long as revenues grew in FY 2014 by 5 percent compared to FY 2013, the tax cut will be triggered on January 1, 2015. But what if Oklahoma enters an economic downturn in June or September 2014? Revenues could fall below estimates in the first half of FY 2015, yet the tax cut would still kick in automatically based on the previous year’s increase.  The tax cut could create or exacerbate mid-year revenue shortfalls in FY 2015 and lead to greater budget shortfalls for FY 2016. Since the lower rate would already have kicked in, there would be no chance for the Legislature to undo the tax cut without a supermajority.

Unfortunately, there is no provision in HB 3061 that could suspend the automatic tax cut if the state’s economic or fiscal circumstances change in the period prior to the trigger taking effect. By putting the controls on auto-pilot, the result of HB 3061 could indeed be a wreck that everyone can foresee but no one can prevent.

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.

As reported in CapitolBeatOK, a group of 30 prominent business executives, civic leaders and philanthropists recently sent an open letter to the Governor, Speaker and Senate Pro Tem urging them not to adopt a trigger mechanism that would lead to automatic future tax cuts.  The signatories represent business leaders from both political parties, including George Kaiser, Kirk Humphreys, Tom Ward, Larry Mocha, Stacey Schusterman, Ken Fergeson, Bob Ross and Stan Lybarger.  The letter reads in full [click here to download a copy]:

An Open Letter to Governor Mary Fallin, Speaker of the House Kris Steele and Senate President Pro Tempore Brian Bingman:

As business executives and community leaders concerned with Oklahoma’s fiscal stability, we urge you to reject proposals to adopt tax trigger mechanisms that would automatically lower Oklahoma’s income tax in future years based on future growth in state revenue.

We are of diverse opinions as to whether cutting Oklahoma’s top income tax rate is the right policy at this time. However, we are all in strong agreement that this legislature should not bind the hands of future legislatures by enacting a tax trigger.

It is the responsibility of each legislature to make decisions based on the state’s needs at the time. Once tax cuts are written into law, it will be almost impossible, constitutionally or politically, to change course, whatever the situation.

Enacting future tax cuts now would especially hinder our ability to address future unforeseen circumstances, such as natural disasters or an abrupt economic downturn.  As the Oklahoman stated in an editorial, “ income tax triggers are a one-way ticket to lower taxes no matter what happens to the economy.”  University of Oklahoma President David Boren notes that, “We have no crystal ball. That is why we should examine tax and budget decisions on an annual basis. That is the conservative approach.”

Deciding tomorrow’s tax cuts today would tie the hands of future legislators, make them less accountable to their constituents, and limit their ability to make the best decisions based on the circumstances that they face.  We sincerely hope you will reject the concept of triggers that would mandate future tax changes..

Sincerely,

Bob Ross	Tom Ward	Kirk Humphreys
Mike Neal	Francis Rooney	John W. Gibson
Bill Cameron	Ken Lackey	Chet Cadieux
Henry Zarrow	Don Millican	George Kaiser
Ken Fergeson	Stacy Schusterman	Melvin Moran
Stan Lybarger	Meredith Siegfried	Becky J. Frank
Fredrick Drummond	Jody Parker	Alan Armstrong
Frod Drummond	David Adams	Guy L. Berry
Larry Mocha	Ken Levit	Robert C. Poe
Vince LoVoi	Renzi Stone	Jeff Dunn

For more on why triggers are bad policy, see our blog posts “Politicians make bad fortune tellers” and “The terrible thing about triggers“.  For full information on the tax debate, go to our Tax Reform page.

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 »

Lost amid much of the tax cut discussion has been the fact that proposals coming out of the legislature would actually increase taxes on hundreds of thousands of low- and moderate-income families. That’s because they could lose a host of broad and effective tax credits designed to encourage work, support basic nutrition, and support families with children. A new video produced by OK Policy shares personal stories of what the impact could be.

We encourage you to watch the video and share it widely. Then head over to OK Policy’s take action page where you can learn more about what you can do to protect these important credits.

Supporters of income tax cuts have been touting a recent poll that purports to show strong support for tax cuts in Oklahoma.  A telephone survey of 500 registered voters were asked four questions about tax cuts, tax credits, and the size of government.  The discerning consumer of public opinion research should be skeptical about this poll’s conclusions for two reasons.  First, the survey is delicately phrased to elicit attitudes about tax cuts ‘in a vacuum’ and leaves too many influential factors out of the questions entirely.  Second, the pollster’s report relies heavily on results within sub-samples (e.g. party, income) – with margins of error that reach double-digits for some groups.

The Sooner Survey poll, conducted by Republican lobbyist and consultant Pat McFerron, asks voters if they favor ‘eliminating some tax credits‘ to reduce the top tax rate, but it doesn’t tell them which tax credits.  It’s likely that when asked directly about popular credits slated for elimination – including the child tax credit, child care tax credit and sales tax relief credit – many respondents would answer this same question very differently.  The same applies when the poll asks respondents to agree or disagree with the statement: ‘I would favor cutting government programs and services so the savings can be passed along to taxpayers in the form of a tax cut.’  The key to an accurate answer is to present an accurate choice.  How would the answers change if the poll had posed instead, ‘I would favor larger class sizes so the savings can be passed along to taxpayers in the form of a tax cut, ‘ or ‘I would favor fewer police officers..,’ etc? Read the rest of this entry »

What is the best course for strengthening Oklahoma’s economy and providing broad-based benefits for Oklahoma families?

Proponents of cutting or eliminating the state’s personal income tax claim that doing so will boost the state’s economy. However, as University of Oklahoma economist Dr. Cynthia Rogers explained at our recent economists’ forum, economic research is highly inconclusive about the relationship between state taxes and economic performance. While the extent to which tax changes cause growth is not clear, the research clearly establishes that tax cuts that are funded by reducing spending on productive public goods such as infrastructure and education leads to economic decline.

While there is no clear connection between low taxes and economic success, there is a clear and strong correlation between the educational attainment of a state’s population and its economic well-being.  The chart below, created by the Massachusetts Budget Project based on 2009 Current Population Survey data,  plots all fifty states based on the percent of its workforce with a bachelor’s degree and the medium hourly wage worker of its workers. Medium hourly wage, which is the middle wage of all wages paid to workers, is one of the best measures of a state’s economic well-being because it ignores the effects of extremely high wages of a few workers and provides a fair picture of what a middle-class employee earns. Read the rest of this entry »

Despite frequent claims by proponents of cutting or eliminating Oklahoma’s personal income tax , it is a myth that tax revenues grew because Oklahoma cut income tax rates in the mid-2000s.  Their claims are based on highly selective use of data and flawed methodology that is contradicted by more careful analysis.

We can trace the myth that tax cuts sparked revenue growth to last year’s study by Arthur Laffer and his colleagues for the Oklahoma Council of Public Affairs. This study has served as the basis for the Governor’s tax cut proposal and various bills introduced this session. In the report, Laffer contends:

Oklahoma has demonstrated the dynamic effects of tax cuts. For example, prior to personal income tax cuts beginning in FY-2005, the annual state sales tax growth rate was 2.7 percent for the preceding four years. Once the personal income tax cuts began in FY-2005, annual sales tax growth for the following five years was 6.6 percent.

The growth in sales tax revenue means people were buying more things, a sure sign of an improvement in the state’s economy. But it is a huge methodological flaw to simply compare growth rates in two period and attribute the difference to a single, specific policy change. To do so is to claim causation when there is only correlation, and these are two very different things. Read the rest of this entry »