OKPOLICY.ORG
Contact: David Blatt, dblatt@okpolicy.org, (918) 859-8747
Oklahoma Policy Institute finds that task force’s income tax proposal would do lasting damage to state’s prosperity
A new report on economic development prepared for Governor Fallin includes some worthwhile ideas, but its suggestions on tax policy would do serious harm to the state’s economy, according to the Oklahoma Policy Institute, a state policy think-tank. The report calls for doing away with the state income tax in favor of heavier sales and property taxes and funding cuts.
“Despite claims in the report, there is little evidence that income tax cuts lead to economic growth when the only alternatives are increasing other taxes or cutting vital public sector supports needed by businesses and citizens alike,” said Oklahoma Policy Institute Director David Blatt. “Simply put, the math does not add up. The report’s suggestions on taxes would make permanent the state’s current budget woes and cripple our ability to meet our obligations in the years ahead.”
The income tax is the state’s single largest revenue source. As a result of the economic downturn and permanent income tax cuts passed in recent years, state tax collections and state appropriations have fallen sharply, which has led to deep and painful cuts to our schools, health care system, public safety agencies, and safety net providers. The income tax is also the only major tax based largely on the ability to pay, partly offsetting a tax system where low- and moderate-income households pay more in state and local taxes than do higher income earners.
The report proposes eliminating Oklahoma’s income tax over ten years. In the first step, it suggests reducing the top tax rate to 3 percent by eliminating tax credits and exemptions, including several major supports for low and moderate-income working families: the child tax credit, the low income property tax credit, the sales tax relief credit, and the earned income tax credit.
“The result could not be fairly described as a tax cut,” Blatt said. “It would be a tax shift that provides the greatest benefit to the wealthiest Oklahomans by increasing taxes on those already struggling most to get by.”
Next, the report suggests phasing out the remaining income tax over ten years. This would be funded with one or a combination of the following methods:
(1) Expanding the sales tax to cover more services. While expanding the base of the sales tax is a good idea to ensure stable revenues, Oklahomans already pay the 5th highest state and local sales tax rates in the nation. If anything, revenue from taxing more services should go towards reducing the sales tax rate, not cutting the income tax.
(2) Hiking the property tax. To replace current revenue from the income tax, the report finds that property tax revenues would need to more than double. Oklahoma does have comparatively low property taxes, but these are still easily the most unpopular taxes in the state. In addition, the property tax is a purely local tax in Oklahoma, so it is unclear how raising property taxes would offset state income tax cuts.
(3) Cutting the income tax rate without offsetting revenues. The report recommends using 5 percent of anticipated revenue each year to lower the income tax rate. State agencies have already undergone severe cuts during the recession, with funding for almost all agencies down by at least 10 to 20 percent from pre-downturn levels. Agencies have slashed staff, cut contracts to providers, raised fees, and curtailed services.
“Further cuts risk serious damage to Oklahoma’s economic growth, because businesses depend on the public sector for healthy and educated workers, infrastructure, and public safety,” Blatt said. “Continuing revenue shortfalls would also prohibit implementation of many of the other ideas for economic development in the governor’s report.”
The 45-person task force responsible for the report was comprised mostly of business executives.
“There was little to no representation of non-profits, educators, or local government,” Blatt said. “While the business community is an important voice in planning for Oklahoma’s future, it is unfortunate that the task force did not include many of those most affected by its recommendations.”
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Oklahoma Policy Institute (OK Policy) is a 501(c)(3) think-tank that provides timely and credible information, analysis and commentary on policy issues affecting Oklahoma. The full report prepared for the governor can be viewed at http://www.ok.gov/governor/documents/Economic%20Development%20&%20Job%20Creation%20Task%20Force%20Report.pdf. See OK Policy’s presentation to a separate legislative task force on comprehensive tax reform at https://okpolicy.org/presentation-oklahoma-task-force-comprehensive-tax-reform-sept-2011.
