There are several options to improve progressivity of our tax system. A more progressive tax system would reduce the tax impacts on struggling Oklahoma families by providing them more resources to meet current needs and invest in the future.  Several alternatives for making Oklahoma's tax system fairer are listed below.

• Update the sales tax credit that low-income Oklahomans receive on their income tax. This credit is designed to repay part of the sales tax on groceries, which hits low-income taxpayers hardest. Oklahoma is one of just 16 states that charges sales taxes on groceries. This tax credit is not adequate to make up for the impact of grocery sales taxes. The amount of the credit has not increased since it was created in 1990. 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.
• Increase the threshold at which income taxes are first owed. Oklahoma's income tax threshold--the lowest income level at which taxes are owed--is lower than some surrounding states and is among the lower half of all states. According to the Center on Budget and Policy Priorities, Oklahoma is one of 18 states that taxes income for a family of four that is below the federal poverty level. This results from Oklahoma's low personal exemption of $1,000 per person in the household. The median exemption for surrounding states is $2,175 and the federal exemption is $3,500. Raising this level would reduce taxes for all income levels and would make a dramatic difference in taxes facing the lowest earners. The graph below shows how Oklahoma's threshold compares across the region.
• Increase the income taxed at each tax rate. Once Oklahomans begin paying income taxes, they move up the progressive tax rate structure very quickly. Most Oklahoma taxpayers pay a good share of their state income taxes at the highest possible rate. The figure below compares the level at which Oklahomans reach the top income tax bracket with the income taxes of surrounding states.
• Index the income levels at each tax rate. Inflation affects all income taxpayers due to "bracket creep," in which modest increase in pay may require the taxpayer to pay a higher 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. Revenue impacts could be significant, but less than from recent cuts in the top tax rate.
• Raise the top income tax rate. Oklahoma's 2008 top rate of 5.5 percent is lower than four of the six surrounding states with an income tax. Oklahoma should explore a higher top rate that applies only at much higher income levels than the current 5.5 percent rate.
• 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. Oklahoma should consider joining the states that offer income taxpayers a renter's property tax credit, which could be refundable for those who do not owe income tax.
• More carefully evaluate tax expenditures. Tax expenditures favor specific groups (like seniors, veterans, local governments, nonprofit groups) or specific activities (such as purchasing a home, manufacturing airplanes, creating jobs, or drilling deep oil wells). In most cases, the tax expenditure favors middle- and higher-income households and businesses. Oklahoma's system to determine the cost and evaluate the effectiveness of tax expenditures should be expanded to all tax breaks. It also should review how the benefit is spread across the income scale.

Tax fairness must be balanced with revenue adequacy. It would be counterproductive to make the fiscal gap worse by making taxes fairer. Tax fairness should be part of an overall tax plan that keeps revenues neutral so as not to increase the challenges of providing adequate public services, while creating a tax system that treats all Oklahomans fairly.

‹‹ Go back to Regressive Features of the Tax SystemupGo on to Next Steps ››