Cutting taxes this year would be short-sighted and harmful

Editor’s note: This piece was published during the 2022 regular session and references specific bill numbers that lawmakers considered during session. While most bills did not become law, the core principles of the bills — and even specific language from the bills — could appear in future legislative discussions and bills.

With high state revenues this year, Oklahoma lawmakers have important choices that will undoubtedly impact the state for years — if not decades — to come. State leaders face an important choice: the choice between making a downpayment on Oklahoma’s future by investing in needed services, or cutting taxes and, in the process, gambling on the state’s ability to even provide core services in the future. 

This legislative session, the Oklahoma legislature is set to consider several proposals that would significantly cut state revenue. Rather than cutting taxes, legislators must consider the state’s long-term fiscal health and its structural deficit by maintaining revenue streams this year and for years to come.

Oklahoma is on an economic high — but it won’t last forever. 

The Oklahoma Board of Equalization (BOE) recently certified the legislature’s expenditure authority at nearly $10.5 billion for the fiscal year that starts on July 1, 2022. In nominal dollars, this is the largest state budget in history. However, this upcoming year’s state budget is smaller than the budget of fiscal year 2000 when it is adjusted for inflation and population growth. As a result of policy decisions to reduce revenue, Oklahoma now has one-fifth less budget capacity to deliver the shared public services upon which every Oklahoman relies.

These high revenues will not last forever. Oklahoma’s current budget picture is strongly influenced by “unusual economic times,” including federal stimulus payments, massive increases in unemployment insurance recipients, and inflation driving up sales tax collections. Revenue growth may appear higher than it is due to changes in tax filing deadlines during the pandemic. State leaders appear to recognize this volatility, and they have stated that the state won’t appropriate its entire authority in order to avoid coming up short in the future. 

No matter what this year’s state revenues are, state lawmakers must think of the long term and ensure that Oklahoma is able to meet its obligations to all residents during the next inevitable economic downturn. The choices that state leaders make now will determine how much capacity the state has to serve Oklahomans in 10, 20, and 30 years. Premature tax cuts will jeopardize our ability to fund public education, build roads and bridges, and provide access to mental health and treatment services, particularly because of the State Question 640 requirement that effectively ensures that lost tax revenue will rarely, if ever, return. 

If passed, this year’s proposals would permanently cost the state crucial revenue. 

OK Policy has identified several primarily bills that, if passed, significantly cut state revenues. Countless others would either have a small fiscal impact or are unlikely to move through the legislative process.

Personal Income Tax

Reducing or eliminating the personal income tax will harm the state’s ability to provide public necessities like public education, roads and bridges, and health care. Income tax revenue accounts for 56 percent of the General Revenue Fund and 42 percent of the 1017 Fund, which are the two major sources of public education funding. Cutting the personal income tax will disproportionately benefit high-income earners and return little to no benefit to the lowest-income Oklahoma families. For example, if House Bill 3350 passes, 65 percent of the benefit will go to the top 20 percent of Oklahomans. The average person in the top 20 percent of earners will see a tax cut of $2,043, while the average person in the lowest 20 percent of earners will see a tax cut of just $4, according to an analysis done by the Institute of Taxation and Economic Policy. 

Further, passing an income tax cut without a clear understanding of its costs, as is the case with HB 3635 and Senate Joint Resolution 35, is irresponsible to Oklahoma taxpayers. However, we do know that triggered tax cuts have failed Oklahoma before. HB 3635 would hamper the state’s ability to provide necessary services in the future and SJR 35 would limit the state’s opportunities for growth. Both bills would make it difficult for future leaders to make timely policy changes and keep future lawmakers from making decisions that reflect current economic realities. 

Source: Oklahoma State Legislature fiscal impact statements.

Corporate Income Tax 

If Oklahoma were to eliminate the corporate income tax, 81 percent of the benefit would go to out-of-state companies, according to an analysis by the Institute on Taxation and Economic Policy. Out-of-state businesses would receive the greatest benefit because most Oklahoma-based businesses pay taxes on their businesses profits in their individual income tax at a top rate of five percent. It would also overwhelmingly benefit corporations and their stockholders, a majority of whom are high-income and white. Last year, the state legislature reduced the corporate income tax from six percent to four percent, tying Oklahoma for the second-lowest corporate income tax rate in the nation. Since that cut, the state has not even had a chance to evaluate whether it has succeeded in bringing more businesses to Oklahoma, as its authors claimed it would. Further, business leaders recognize that poor education and health outcomes are deterrents to new corporations. Oklahoma should focus on investing in shared services rather than continuing to cut corporate taxes.

Source: Oklahoma State Legislature fiscal impact statements.

Sales Tax on Groceries 

Whether permanent or temporary, eliminating the state portion of the sales tax on groceries is a poorly targeted tax reform. Exempting groceries from the state sales tax provides a universal exemption for even very wealthy Oklahomans, whereas the state could save crucial revenue and provide targeted tax relief for low- and middle-income families by simply expanding the Sales Tax Relief Credit.

Source: Oklahoma State Legislature fiscal impact statements.

Other Areas 

Other revenue-cutting bills also are on the table this session. On balance, they are too broadly targeted, and they will negatively impact the state’s long-term ability to invest in the needs of Oklahomans. It is unlikely that all of the other revenue-cutting bills listed below will pass, but the passage of any of them will cost the state crucial revenue in future years — particularly because SQ 640’s supermajority requirement means that any revenue losses are likely permanent.

Source: Oklahoma State Legislature fiscal impact statements. 

Now is the time for fiscal conservatism.

With artificially high state revenues as a result of pandemic-related peculiarities, Oklahoma must not make permanent revenue cuts. As long as Oklahoma’s structural deficit remains, the state cannot afford to cut taxes. 

Instead, we must prepare for the future and be realistic about Oklahomans’ needs. As our population grows, the state will need more capacity to support new residents. As our population ages, state agencies will need increased funding to ensure a high quality of life. And more immediately, Oklahomans need increased public investment now; we continue to underfund education, about 1 in 7 Oklahomans live in poverty, and we consistently rank poorly on health outcomes. Rather than deepening tax cuts that worsen our state’s performance by nearly every metric, lawmakers should prioritize targeted tax relief for low-income Oklahomans and make investments in identified needs that would put Oklahoma on the path to better outcomes.