We are an advocacy organization, however, so the Guide points out two major areas where we believe Oklahoma can and must do better. One is the ongoing fiscal gap between our ability to pay for services and our demand for those services. We’ll address that next week. For today, we’ll preview some of the Guide’s discussion of tax fairness.

This graph shows the percentage of income paid in taxes by each of  seven income groups. The regressivity of the system is obvious since the percentage paid in  taxes drops with each increase in income. Those who are in the lowest 20 percent of income earners–making $12,000 or less each year–pay 12 percent (one-eighth) of their income in taxes. The percentage of income paid in taxes falls slightly for each income group above the middle. Those in the top 1 percent–making $250,000 or more each year–pay 8 percent (one-twelfth) of their income.

As much as we argue about taxes, most of us don’t think poor people should pay more in taxes than rich, but that’s how we’ve set up the system in Oklahoma. The Guide does not make recommendations or demands, except to urge we get to work on the problem. It offers a range of options for consideration.

• Update the sales tax credit that low-income Oklahomans receive on their income tax. Increasing the amount of the credit and making it apply to higher incomes would be a targeted, fiscally responsible way of helping families in need keep pace with rising food costs. (Here’s our earlier fact sheet on this important tax relief measure.)
  
• Increase the threshold at which income taxes are first owed. Raising this level would reduce taxes for all income levels and would make a dramatic difference in taxes facing the lowest earners.
• Increase the income taxed at each tax rate. Once Oklahomans begin paying income taxes, they move up the progressive tax rate structure very quickly.
• Index the income levels at each tax rate. Oklahoma’s income tax would be lower for all taxpayers and more equitable to low-income taxpayers if it was indexed so that the income level at which a taxpayer reaches a higher rate increases each year along with inflation.
• Raise the top income tax rate. Oklahoma should explore a higher top rate that applies only at much higher income levels than the current 5.5 percent rate. This report from the Tax Policy Center shows Oklahoma’s top tax rate is in the middle group of states.
  
• Provide property tax relief to low- and moderate-income renters. Much of the property tax on renters is passed along to tenants in the form of higher rent, but tenants have no tax relief.
• More carefully evaluate tax expenditures. Oklahoma’s system to determine the cost and evaluate the effectiveness of tax expenditures should be expanded to all tax breaks. Here are some guidelines from the Center on Budget and Policy Priorities.
  

At the same time, though, the guide reminds us that the vital goal of tax fairness must be accomplished in a way that does not rely too much on a single tax source and that keeps state and local revenues at a level to support essential public services.

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We’re pleased our elected officials understood that state services are in a precarious position, even with our current revenue structure. We’re  even happier that they largely avoided the “easy” alternatives of making reductions that took place in later years or only affected local governments. Proposals to cut the income tax from 5.5 percent to 5.25 percent next year–regardless of the revenue picture–and to put more limits on the growth of property taxes, were both left on the shelf. So were elimination of the sales tax on groceries, reducing the 50-cent monthly 911 tax, and any number of sales and income tax exemptions.

Just a few tax changes lived to see the Governor’s desk. Here’s a rundown:

• SB 318 “decouples” from federal tax changes in the stimulus bill,  most of which affected business income tax provisions. Under this bill, taxpayers will get a new federal deduction but have to add the same amount back to their Oklahoma income. The net result is no change in their Oklahoma taxes and no change in state revenues. This bill also exempts the first $600 of winnings at 4-H events from income taxes, exempts rural irrigation and conservation districts from paying gas taxes, and expands tax breaks for making films in Oklahoma.
• SB 318 also increases revenue by authorizing more aggressive efforts to collect unpaid income taxes. Modifying income tax withholding by employers is estimated to add $27 million in revenue. Three other provisions–contracting for collection of some delinquent taxes, creating an Internet listing of delinquent taxpayers, and requiring delinquent taxpayers to pay collection fees, will generate an additional $17.2 million. These new revenues, which will be certified by the Board of Equalization in June, were appropriated as part of the FY ’10 budget.
• SB 881 exempts all active military pay from the state income tax, starting July 1, 2010. This is not expected to affect FY’10 revenues, but the Tax Commission estimates a $12 million loss in FY’11. Over the long run, sponsors argue the bill will generate positive tax revenues as more military members choose Oklahoma as their home state. The provision ends in 2015 unless the Board of Equalization determines the net tax impact is positive.
• SB 313 extends tax credits for oil and gas exploration three years. Our fact sheet describes these provisions, which cost the state an average of $68 million annually the last five years.
• SB 938 creates the 21st Century Quality Jobs Act, which provides a new class of job creation that qualifies for payroll reimbursements.
• HB 1953 extends one of the existing quality jobs programs to certain wind energy services.
• HB 1949 expands income tax credits for clean-burning vehicles and support facilities to hydrogen fuel cell vehicles, public electric vehicle charging stations, and home compression units for natural gas vehicles, but removes M-85 ethanol vehicles from eligibility for credits.
• SB 721 exempts payments made by the Defense Department for the death of a member of the armed services as well as income earned by the spouse of that member from state income taxes in the year of death.

Next year is an election year and state leaders now seem to share our expectation that revenue will be growing again. The tax cut tide can be expected to roll in again. Caution, however, should still be the watchword. Oklahoma already has among the lowest tax rates in the country. Cutting taxes further can only jeopardize our education, infrastructure, public health, welfare and safety and other essential state services.

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