In a recent House interim study led by Rep. Mark McCullough, lawmakers returned to a subject that has been attempted several times in Oklahoma’s recent history. They once again looked at eliminating Oklahoma’s income tax or transforming it into a flat 3 percent rate for all incomes. To replace some of the lost revenue, they discussed expanding the sales tax to cover services.
Rep. McCullough claimed that this would ensure more reliable revenue for the state because it would not be as sensitive to the ups and downs of the oil and gas industry. Yet in a presentation during that same study, Oklahoma Tax Commission Director Tony Mastin pointed out that sales tax can be just as susceptible to downturns in the industry as other taxes. The hit to sales tax revenue in an oil bust is both direct — purchases of expensive drilling equipment are a major source of sales taxes — and indirect — when energy companies lay off workers and pay fewer royalties, Oklahomans spend less on taxable purchases.
Oklahoma cities and counties are quite familiar with the drawbacks of relying too much on sales tax — that’s why the mayors of Oklahoma City and Tulsa, as well as 350 other mayors across the state, have called repeatedly to diversify cities’ revenue sources. Meanwhile in Oklahoma, we already have one of the lowest property taxes in the country at less than half the national average. In this context, undiversifying the state to rely even more on the already stretched sales tax doesn’t make much sense. Indeed, a nationwide trend of states growing more reliant on sales tax has many experts concerned that we will be less prepared for the next economic downturn.
Another concern is that the shift in taxes sought by Rep. McCullough would clearly provide the most benefit to the already-wealthy while significantly increasing taxes on low and moderate income Oklahomans. Families earning the least already pay the highest share of their incomes in state and local taxes, with low and middle-income households paying about twice as much as the wealthiest. That’s in large part because of the regressive sales tax, and it’s only partially alleviated by what remains of our progressive income tax.
Expanding the sales tax while eliminating or flattening the income tax would shift even more of the tax load onto low- and middle-income Oklahomans. In our analysis of a previous proposal to establish a flat income tax in Oklahoma, we showed that it would hike taxes the most on households earning just $24,000, and all households with incomes of less than $57,000 would see a tax hike.
Oklahoma’s current revenue system clearly needs reform. In good years and bad, we’re not bringing enough revenues to provide the basic services that Oklahomans want and that a strong economy needs. Unfortunately, the tax reforms being talked up by Rep. McCullough and others in the Legislature would not solve this problem — they would likely to make it worse. Lawmakers got us into this situation by approaching tax policy with only a mind to flatten or cut; more of the same failed strategy won’t get us out.