Let’s have full accountability for tax cuts (Guest Post: Kent Olson)

blindfolded cliffKent Olson is Professor of Economics Emeritus at Oklahoma State University

Over the past decade, the Oklahoma legislature enacted several measures that reduced the top bracket rate of the individual income tax from 7 percent to 5.25 percent, and more cuts of this type have been proposed. These tax cuts, both those from the past and those proposed, are back-loaded; they’re tax cuts that create revenue losses that occur largely in the future. In Oklahoma, back-loaded tax cuts are likely to result in back-loaded spending cuts, as well. The estimates below indicate that this is a serious problem. It can be fixed only if the legislature considers the long-run impacts of both tax cuts and spending cuts as a package.

The 2014 legislative hopper contains 3 major proposals aimed at further chipping away the top bracket rate:

  • HB 2508 by Rep. Earl Sears, would cut the top rate from 5.25 percent to 5.0 percent beginning in 2015. This is also the same as the proposal in Governor Fallin’s current budget;
  • HB 2698 by Rep. Dennis Johnson, would cut the top rate from 5.25 percent to 5.0 percent in 2015 and then to 4.85 percent in 2016;
  • HB 3291 by Rep. Leslie Osborn (as well as SB 1849 by Sen. David Holt), would cut the top rate from 5.25 percent to 4.75 percent in 2015, and then reduce it in additional quarter-point increments until reaching 4.0 percent in 2018.

You may be thinking that the past and proposed tax cuts are fairly modest. However, they’re not. Given Oklahoma’s tax rate structure, nearly all income tax revenue – currently, about 98 percent – is collected on income subject to the highest tax rate. So, a good approximation of the revenue loss from a cut in the top rate can be obtained by applying the percentage cut in the rate (with allowances for the phasing-in of proposed cuts) to the forecasted income tax base. This means, for example, that the past (2005-12) tax cuts will reduce future revenue by approximately 25 percent (= (7.0%-5.25%)/7.0%) relative to what revenue would be without those cuts. The most draconian of the proposed cuts – HB 3291 – would reduce future revenues by an additional 23.8 percent (= (5.25%-4%)/5.25%) when fully phased in.

The figure below illustrates the forecasted revenue losses from past and proposed tax cuts. For those who want to know how the forecasts were developed, the data and estimating procedures are available here).

Olson_Projections_2014-2
Projections by Dr. Kent Olson

 

Olson-Table2Table 1 summarizes key information that the figure doesn’t reveal. Without any more cuts, we’re facing a future in which past cuts in the top bracket rate will reduce income tax revenues by $826 million in 2015. The annual loss in revenue will grow, however, as the economy grows – reaching nearly $1.9 billion in 2030. The average annual loss over the period, 2015-2030, will be over $1.3 billion. All three of the proposed tax cuts would add a substantial revenue loss to the loss imposed by past legislation. In the worst case, the passage of HB 3291 would increase the average annual revenue loss by nearly $1.2 billion ($2.523 billion – $1.337 billion) when fully phased in.

Surely, revenue losses this large would require substantial cuts in future government spending. However, yesterday’s legislators simply shifted these hard choices to future legislators and today’s legislators will do the same, absent any changes in budget procedures. This is budget-making without full accountability and it gives a big edge to proponents of tax cuts. With full accountability, authors of tax cut legislation would have to specify how the cuts would be offset. If this were the practice, I believe we’d have a discussion about both the benefits and costs of tax cuts; that is, what we gain and what we give up when taxes are cut. It would also give a voice to proponents of government programs who are neither as well-organized nor as well-funded as proponents of tax cuts, to future lawmakers, and  especially, to our children and grandchildren.

The opinions stated above are not necessarily those of OK Policy, its staff, or its board. This blog is a venue to help promote the discussion of ideas from various points of view and we invite your comments and contributions. To see our guidelines for blog submissions, click here.

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ABOUT THE AUTHOR

The opinions stated in guest articles are not necessarily those of OK Policy, its staff, or its board. To see our guidelines for blog submissions, click here.

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