OKPOLICY.ORG
Last year’s monumental tax debate was marked by a slew of competing proposals to reduce and potentially abolish the state’s personal income tax. Some of the plans tried to make up for some or all of the lost revenue by eliminating or curtailing various income tax credits, deductions, and exemptions After months of squabbling, the Governor and legislative leadership finally announced an agreement in the waning days of session that failed to gain final legislative support.
This year, the Governor and legislative leaders are again seeking a cut in the state’s top personal income tax rate. Unlike last year, there are no serious proposals that would dramatically lower the top rate or phase out the income tax entirely. This year’s debate seems to be shaping up as a direct showdown between two distinct approaches: the Governor’s versus Senate Republicans’.
The Governor’s plan, which we analyzed here, is straightforward: the top income tax rate would be cut from 5.25 to 5.0 percent in 2014. The tax cut would lead to a loss of some $40.7 million from next year’s budget (FY 2014) and over $100 million when fully implemented in FY 2015. Two in five households would get no benefit from a reduction in the top rate, while the median household enjoying a tax cut would see savings of just $39. House Republican leadership seems to be on board with the Governor, with both House Speaker TW Shannon and Budget chair Scott Martin authoring bills modeled on the Governor’s proposal.
The Senate Republicans’ plan, authored by Sen. Mike Mazzei as SB 585, is more complex. Its main components, which build off last year’s final leadership agreement, include:
- Lowering the top income tax rate to 4.75 percent;
- Restricting eligibility for certain tax preferences – including the child tax credit, child care tax credit, personal exemption, and full itemized deductions – to households with income below certain income thresholds;
- Eliminating various business tax incentives and individual tax deductions (including the deduction for political contributions and the itemized deduction for state and local taxes); and
- Temporarily converting several tax credits that are currently transferable into refundable credits.
In a recent public letter to Senate President Pro Tem Brian Bingman and Appropriations Chair Clark Jolley calling for a significant boost to education funding in next year’s budget, Senator Mazzei and two of his colleagues assert that the Senate’s tax plan “restructures our tax code over a 3 year period in a revenue neutral fashion.” In reality, the Senate plan is not revenue neutral. All the provisions of SB 585 would take effect in 2015, so the bill would have no fiscal impact for next year’s budget. The revenue loss from cutting the top income tax rate to 4.75 percent would be only partly offset by the revenue gain from limiting or eliminating tax preferences. The Tax Commission projects the bill to have a net fiscal impact of $43.6 million in FY 2015 and $108.4 million in FY 2016 – very close to the revenue losses from the Governor’s proposal, but deferred by one year. Senator Mazzei has suggested that when other changes in tax policy over the coming years are taken into account, the overall fiscal impact will be revenue neutral.
Several aspects of the Senate Republican plan are deserving of praise. By deferring any tax cut until 2015, SB 585 would allow all available resources to be directed to restoring some of the funding cuts of recent years in next year’s budget. By curtailing various tax breaks as part of their plan, the Senate Republicans are pursuing a fiscally responsible approach that acknowledges the need to maintain our revenue base and allow for adequate funding of public services. Unlike some earlier proposals, the plan properly maintains tax preferences for low and moderate-income Oklahomans by preserving the Earned Income Tax Credit and Sales Tax Relief Credit, and by curtailing other tax preferences for higher-income households only. SB 585 also keeps the Child and Child Care Tax Credits; however, it lowers the eligibility from $100,000 to $50,000 in family income.
At the same time, it is disappointing that this year’s Senate plan, like many before it, focuses narrowly on the top personal income tax rate and fails to consider other worthwhile proposals for modernizing Oklahoma’s tax system. And while revenue-neutral tax reform is a laudable goal, SB 585 itself is not revenue neutral. It remains to be seen whether any of the possible approaches for generating additional revenue, which could include curbing exemptions for oil and gas drilling, will come to fruition.
Most interestingly, perhaps, it remains to be seen whether Senate leaders will be able to withstand what is certain to be furious lobbying by proponents of the business tax credits that are on the chopping block in SB 585. If they cannot, the Senate’s ambitious tax reform plans may come for naught, and the outcome of the 2013 tax debate may either be the Governor’s unpaid-for tax cut, or no tax cut at all.
