Beware the tax shift

An idea floating around in the tax reform debate has been to swap tax credits for a reduction in the top income tax rate. That’s one of the motivations behind the tax credit task force, which has looked at reigning in a number of business and economic development tax credits.

Oklahoma also provides another kind of credit, directed not to favored industries, but to all taxpayers below a certain income level. Some lawmakers seem tempted to eliminate these as well. They should think again.

The largest of these credits is the Sales Tax Relief Credit. Oklahoma is one of the few states that charges sales tax on groceries at the full rate. The credit is meant to offset the impact of that tax on low-income Oklahomans, who spend a larger portion of their incomes on basic necessities. It provides $40 per person to tax filers below an income cap ($20,000 for individuals or $50,000 for households with dependents). In 2009, it was claimed on almost one-third (32.3 percent) of all of the tax returns filed, and it benefited more than 1 million Oklahomans.

Similarly, the Low Income Property Tax Relief Credit is meant to help low-income seniors and people with disabilities who, because they often live on fixed incomes, can be disproportionately harmed by rising property taxes. The credit is available to anyone who is over 65 or totally disabled with incomes less than $12,000. It refunds property taxes that exceed 1 percent of household income, up to a maximum of $200. In 2009, this credit was claimed on 1,402 returns for an average benefit of about $160.

The Oklahoma Earned Income Tax Credit (EITC) is meant to provide an incentive to work, as well as offset the effect of highly regressive payroll taxes. Oklahoma’s EITC provides a 5 percent addition to what filers receive from the federal EITC, which is the largest poverty-fighting program in the United States. The EITC provides critical income support to those moving from unemployment to low-wage work. According to the Census, it lifted 5.4 million people above the poverty-line in 2010. The Oklahoma EITC was claimed on 307,253 tax returns in 2009, for an average benefit of about $104.

Finally, the Child Care Tax Credit/Child Tax Credit helps families pay for child care they need in order to work or look for work. The state credit can be claimed for 20 percent of the federal child care credit, which provides as much as $2,100 to cover expenses related to the care of a child or adult dependent. Families also have the option to instead take 5 percent of the federal child tax credit of $1,000 per child, so those who don’t pay out of pocket for child care can still receive a benefit. It is available to households with incomes up to $100,000. Unlike the other credits on this list, it is nonrefundable, which means it cannot be returned as cash after tax liability has gone down to zero. In 2009, this credit was claimed on 362,470 returns for an average benefit of about $80.

The tax credit task force has not specifically discussed these income-based credits, but some state leaders have indicated they would favor eliminating them in exchange for further reductions to the top rate. One proposal by Governor Fallin’s task force on economic development would eliminate all of the income based credits in order to pay for reducing the top rate.

This would be a serious mistake. A family of four with two children making $30,000 a year would lose at least $422 from the elimination of these credits ($160 from sales tax relief credit, $162 from state EITC, and $100 from the child tax credit). Meanwhile they would receive nothing at all from a reduction in the top rate, since they have only $14,600 in taxable income and the top rate kicks in above $15,000. The state would not even realize much of the expected savings from eliminating these credits, since many Oklahomans would be pushed further into poverty and reliance on other forms of government assistance.

These broad-based credits perform a completely different function than those going to special interests. Like the income tax bracket structure itself, they are designed to counteract regressive sales and property taxes so that everyone pays their fair share. Eliminating these credits to pay for a reduction in the top rate (which disproportionately benefits the already wealthy) could not even be fairly characterized as a tax cut. Instead, it would be a tax shift from the poor, who already pay more of their income in state and local taxes, to the already wealthy. We should watch out for any purported tax cut ideas that shift more costs onto low and medium-income Oklahomans.