Along with the Oklahoma Policy Institute’s David Blatt, we’ve been urging lawmakers to use the downturn to find sensible new sources of revenue (such as ending or capping ineffective tax credits) and to better prepare for the next downturn.
This is a meaningful and much-appreciated acknowledgment, as the need for new sources of revenue is a contentious principle at the Legislature and around the state these days (See this insightful article by Patrick McGuigan on how this issue divides the state’s two policy think-tanks, us and the Oklahoma Council of Public Affairs). But the Oklahoman proceeds to reject one of our main proposals for bridging the budget gap, doing away with the exemption that allows taxpayers who itemize their returns to also claim the deduction for state income taxes from their state taxes. The exemption costs the state an estimated $118 million on income tax revenue annually, which at a time of drastic budget scenarios, could make a major difference in preserving critical public services.
We have noted that the exemption for state income tax benefits only the minority of taxpayers, about one in four, who claim itemized deductions. Their editorial states:
That alone is reason to urge caution — especially considering that some states (most notably Texas) have no income tax and Oklahoma’s maximum personal income tax rate is uncomfortably high at 5.5 percent.
The Oklahoman’s position on the state income tax exemption, which Oklahoma is one of only six states to allow, prompted a response from Citizens for Tax Justice (CTJ), a national tax policy organization that helped alert us to this exemption. On its Tax Policy Digest blog, CTJ makes a compelling point:
But rejecting a tax base-broadener because the rates are too high is getting it exactly backwards. Tax Policy 101 says if you want to avoid increasing tax rates, you should make sure your tax base is sufficiently broad. Leaving aside the very contestable notion that a 5.5 percent top rate is “uncomfortably high”, the fact is that eliminating the state income tax deduction would strengthen the Oklahoma income tax base in a way that would make it a more efficient revenue-raiser, and would reduce the likelihood that lawmakers will be forced to hike rates down the line…
If The Oklahoman’s editorial board really wants to see “ineffective” tax breaks eliminated, it should become one of the most fervent supporters of eliminating an illogical state tax break that exists only because the state happens to have built its income tax rules on top of those in place at the federal level.
Presumably, one can have it all – low top marginal tax rates and generous exemptions that primarily benefit those at the upper end of the income spectrum. But we’ll continue to insist that if the goal at this critical juncture in the budget process is to identify revenue options that can stave off further cuts to prison staffing, mental health facilities, adult protective services, and the like, an option that can avoid raising rates while making the tax system more equitable has much to offer.