Betting the Farm: Ending the income tax creates huge risks for rural Oklahoma

Could doing away with Oklahoma’s income tax shift taxes not only onto low and middle–income families but also from urban areas to rural areas? Many programs, services, and incentives important for rural Oklahoma rely on our existing revenue structure and the income tax in particular.  In addition, switching to more reliance on other taxes would especially hurt farmers and ranchers.

States without an income tax have to get resources somewhere to fund their core services.  As the chart below shows, the majority of those states look to the property tax to fill the gap.  Every one of the states without an income tax pay more in property taxes per capita than we do in Oklahoma. The average per capita property tax collections in no-income tax states, $1,507, is more than two-and-a-half times that of Oklahoma, $582.

(Source:  Tax Foundation, FY 2008 data)

While proponents of eliminating the income tax dispute that we would ever raise property taxes in Oklahoma, their argument leaves out a lot.  Loss of the income tax would put huge pressure on local governments to raise property taxes when assistance from the state disappears.

We would also face the threat of court-mandated property tax increases. For example, because of ongoing litigation over inadequate and inequitable funding of Texas schools, several Republican legislators have proposed implementing a statewide property tax on top of property taxes already almost three times higher than Oklahoma’s. Money to fund core services has to come from somewhere, and Oklahoma’s landowners may be asked to foot a larger portion of that bill if there is no income tax from which to draw.

Second, many of the proposals being discussed in the legislature would eliminate tax credits for rural economic development.  The Rural Venture Capital Formation Incentive Act, Small Business Capital Formation Incentive Act, Oklahoma Agricultural Producers Credit, Credit for Rural Economic Development Loans, Deductions for Discharge of Farm Debt, Ag Commodity Processing Deduction and various wind energy incentives all have been on the chopping block under major tax proposals.  Economic developers in Oklahoma use these incentives to bring and keep good jobs in their communities; eliminating them could make that task more difficult in rural Oklahoma.

Should the income tax be eliminated, the sales tax would become the primary statewide revenue source to fund core services. The need to bolster sales tax collections would likely force legislators to give closer scrutiny to the wide range of sales tax exemptions granted under current law. Oklahoma’s rural farmers and ranchers hold dear the sales tax exemption for agricultural sales, which was worth $33 million in 2010, as well as the exemption for  livestock purchased out of state ($45.4 million) and the sales of horses ($1.4 million). The legislature is becoming more urban with redistricting, so rural lawmakers may be less able to defend their exemptions during the scramble for revenue after the loss of the income tax.

As well as creating pressure to raise more revenue from the property and sales tax, eliminating the income tax would directly affect funding for a wide range of services that are vital for rural and small town Oklahoma. Small schools are the backbone of many rural communities across the state.  With Oklahoma’s public education system just having faced three straight years of major budget cuts, and with a flat budget on the horizon, many of Oklahoma’s small schools are barely making ends meet.  Class sizes are higher and operational costs continue to go up.  Eliminating the income tax would squeeze state funding for education even tighter.  If rural schools are forced to close because of declining revenues, the rural communities where these schools are located would also suffer.

Many of Oklahoma’s rural communities also have serious community and economic development infrastructure challenges.  REAP has been a tool to finance community development in rural areas and small towns. With grants to address issues such as outdated water systems, inadequate sidewalks, and senior and community centers in poor condition, REAP has helped communities across the state to become more prosperous.  From FY 09 to FY 12, REAP sustained budget cuts of over 25 percent.  If state revenues continue to erode, this program that provides valuable funds for rural areas could be eliminated.

Rural Oklahomans want and deserve great public schools, safe communities, healthy citizens, stable roads and bridges, and the ability to offer incentives to businesses that bring jobs to their communities.  Doing away with the income tax would threaten all these services, while shifts to other taxes would increase costs for farmers and ranchers.

Click here for a 1-page fact sheet, ‘Why it’s Critical for Rural Oklahoma to Save the Income Tax’ and here for our tax reform information page