Some of the fiercest battles of recent legislative sessions have centered on tax policy as lawmakers debated competing tax proposals to limit funding cuts and provide teachers a raise. This year, thanks to a strong economy and recent tax increases, the state’s budget outlook is greatly improved, with initial projections of over $700 million in additional revenue available for the Legislature to appropriate. Even if, as expected, that amount is lowered in the revised revenue estimate later this month, there is almost no chance that this session will witness another all-out war over tax policy.
Yet even if the stakes are lower, lawmakers still filed hundreds of bills this session that would revise Oklahoma’s tax system. As the 2019 session gathers steam, here are a few of the tax bills that are worth careful attention.
No tax cuts or tax increases?
After the long, uphill struggle of recent years to raise revenues and put the state’s finances in order, there appears to be a consensus among elected officials of both parties on the importance of protecting the revenue base and not veering back down the tax cut path. The Governor has proposed no tax cuts in his FY 2020 budget, and legislative leaders such as House Appropriations Chair Kevin Wallace have emphasized the “need to look at the 10-year budget history of all agencies and invest in those core government services that are most critical.”
Two Senate bills, however, SB 2 (Sen. David) and SB 6 (Sen. Daniels), would repeal the 1.25 percent sales tax on motor vehicles that lawmakers approved in 2017 and that brought in over $130 million last year. No other tax cut bills would likely have a revenue cost of over $100 million, but many bills would offer new or expanded tax breaks to favored groups, including retired veterans, rural doctors, and educators, and offer tax deductions or sales tax exemptions for items such as school supplies, hearing aids, or guns.
A few lawmakers have introduced measures that would boost revenues, even if the Legislature is likely to have a limited appetite for such efforts in 2019. A bill by House Minority Leader Emily Virgin, HB 1453, would reverse some of the income tax cuts of recent years, which have primarily benefited the wealthiest taxpayers, by adding a 6 percent rate on high incomes. Several bills, including HB 1455 and SB 638, would eliminate or limit the deduction for capital gains income, a proposal that passed the Senate last year with bipartisan support before running into strong opposition from the Republican majority in the House.
Restoring the EITC
The prospects may be better for efforts to restore the state’s Earned Income Tax Credit. In 2016, when lawmakers were in the deep throes of a budget crisis, they narrowly voted to make the EITC non-refundable, which eliminated or reduced the credit for over 200,000 low-income working families. The Legislature has been close to a bipartisan agreement to restore the EITC in the last two legislative sessions. This year, nine bills have been filed to make the EITC refundable again, including SB 659 (Sen. Montgomery), which would also raise the credit amount from 5 to 7.5 percent of the federal credit.
A level playing field for Oklahoma businesses
Lawmakers from both parties have also shown interest in efforts that level the playing field between Oklahoma businesses and out-of-state or multi-state competitors. Several bills (HB 1118, HB 1864, HB 2182) would require combined reporting to stop multi-state corporations from exploiting tax loopholes, while measures including HB 2033 (Rep. Albright), HB 2352 (Rep. Caldwell), and SB 513 (Sen. Bice) would ensure that Oklahoma’s laws are aligned with the Supreme Court’s recent ruling that expands states’ authority to tax sales through online retailers. Two measures would expand the sales tax to include all downloaded digital products (HB 2531) or downloaded computer software (SB 842).
Tax credits and incentives
As in recent years, there are likely to be very vigorous debates this session about tax credits and incentives. One proposal that could be especially contentious would substantially raise the total annual tax credit that can be claimed to support scholarships for private school students under the Oklahoma Equal Opportunity Education Scholarship Act. The credit is currently capped at a total annual amount of $5 million; HB 2621 (Rep. Echols) would allow credits totaling $60 million, while SB 407 (Sen. Rader) would raise the cap to $80 million. This credit has already generated concern for potentially allowing wealthy individuals and businesses to turn a profit by claiming tax credits that exceed their actual charitable contributions. There could also be renewed fighting this year over tax breaks for the wind industry. Rep. Mark McBride, who has emerged as the fiercest critic of the wind industry, has introduced HB 1233 to make the zero-emission tax credit fully non-refundable, while SB 479 (Sen. Quinn) would cut the credit from $0.005 per kilowatt hour to $0.0025 per kilowatt hour.
State Question 640
Finally, with memories still fresh of the Herculean efforts needed in recent sessions to raise taxes, there could be a renewed effort this session to ask voters to revisit the three-quarters supermajority requirement for tax increases under State Question 640. Revisiting SQ 640 to lower the threshold and apply the same standard to tax cuts as to tax hikes was selected as this year’s top legislative priority of the Oklahoma Academy. However, all three bills introduced to put SQ 640 revisions to a vote of the people (HJR 1003 by Rep. Albright and SJR 9 and SJR 10 by Sen. Mathews) were introduced by Democrats and may fail to be granted a hearing in committee.