Everyday Oklahomans will be hurt by sweeping revenue cuts

NOTE: On Sept. 11, 2023, Gov. Stitt called for a special session in October 2023 to address tax reforms. One of the items included in the governor’s request was a “path to zero income tax.” 

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Oklahoma should be a place where all residents have equal access to public services, and where public dollars are spent in pursuit of meaningful, statewide well-being. However, when elected officials like Gov. Stitt call for the elimination of the personal income tax — the state’s largest revenue source that provides more than one-third of the funding for those services — the state cannot meet the needs of its citizens. Rather than continuing to cut our way to the bottom, Oklahoma should protect vital revenue and leverage tax dollars to improve quality of life for all Oklahomans.  

The cost of eliminating the personal income tax is prohibitively high

The personal income tax is the largest source of revenue into Oklahoma’s General Revenue Fund (GRF). It generated $3.4 billion – or 37 percent of the total GRF – in the fiscal year that ended on June 30, 2023. Eliminating 1 out of every 3 dollars from the General Revenue Fund would undoubtedly lead to deep cuts in public services like common and higher education, mental health treatment, rural hospitals, CareerTech programs, and more. Indeed, moving the personal income tax to zero would eliminate an amount almost equal to the entire budget of Oklahoma’s largest state agency, the Department of Education ($3.97 billion in FY 2024).

Replacing the revenue from the personal income tax would be virtually impossible

Eliminating the state’s largest revenue stream would be irresponsible because replacing that revenue would be virtually impossible. To fully replace the revenue solely with existing sales taxes, the state would need to generate between $34 and $78 billion in new sales each year, according to the Legislative Office of Fiscal Transparency. That would roughly equate to every adult and child in Oklahoma generating between $8,500 and $19,500 in new spending every year. 

Recognizing the infeasibility of generating such a significant amount of new sales, state leaders could look for opportunities to replace that revenue by increasing other taxes. The examples below show that this, too, is unreasonable. If lawmakers wanted to recapture this lost revenue through a single source, they might choose from several options: raise the state portion of the sales tax from 4.5 percent to 6.6 percent, increase the gas tax to $2.28 per gallon, or raise cigarette taxes to a whopping $37.31 per pack. Each of these taxes – sales, gasoline, and cigarette taxes – are regressive. Increasing them would shift the tax responsibility from Oklahoma taxpayers who can afford it to those who cannot.

In reality, replacing the revenue from the personal income tax would likely require a combination of tax increases, rather than just one silver bullet. The table below helps provide context as to the magnitude of the budget hole lawmakers would need to fill to offset the elimination of the personal income tax.

There are no realistic or feasible single-source options for replacing the revenue that would be lost with elimination of the personal income tax

Any proposed changes to state tax and revenue have to be considered against the backdrop of Oklahoma’s supermajority requirement to raise revenue due to State Question 640. This means that for a revenue-raising bill to pass into law, it must pass with a three-fourths majority of both legislative chambers, something that has happened only once since the requirement went into effect in 1992. 

Since there is no supermajority requirement to reduce revenue, lawmakers could easily vote to eliminate the personal income tax, and then be unable to pass a bill that replaces that lost revenue. Reducing the General Revenue Fund by $3.4 billion without a viable plan to replace those funds is not fiscally responsible. Doing so will significantly harm the state’s long-term fiscal health and economic growth. 

Revenue is vital for Oklahoma’s well-being

Becoming a “top 10 state” will require strategic investments that heavily depend on revenue from the personal income tax. A recent national report ranked Oklahoma as the 41st worst state for business, compared to Texas’ much higher rank of 6th. But this is decidedly not because of tax differences between the two states; Oklahoma actually ranks better (3rd) than Texas (16th) for the cost of doing business, the measure that accounts for taxes. We also score higher (21st) than Texas (25th) on business friendliness, which is the measure that accounts for regulation and bureaucracy. 

Oklahoma’s business ranking tanks because of other areas in which we score significantly lower than Texas, including workforce (36th), economy (30th), technology and innovation (38th), and education (48th). The study looks at factors like the percentage of the population with college degrees or industry certifications, job growth, number of research grants, and spending levels on public education. Each of these factors – and many others discussed in the study – depend heavily on state funding. Reducing or eliminating the personal income tax would directly undermine the state’s efforts to become a true top 10 state.

Oklahoma is beating Texas on business cost and friendliness, but has significantly more work to do on workforce, education, and innovation

Lawmakers should prepare for an uncertain economic future

Oklahoma and the United States are in uncharted economic territory with economists unsure about what the future holds. While the possibility of a recession is comparably lower than it has been in recent months, many factors could impact the future of the economy. These can include how the Federal Reserve continues raising interest rates, how oil and food prices react to the continuing war in Ukraine, and how the job market performs in coming months. 

As we continue to recover from pandemic-related economic instability, many questions remain. State lawmakers should be prepared for more economic instability, an economic downturn, or worst of all, a recession. The state’s financial reserves can provide some emergency relief in hard times, but lawmakers can’t rely on this pool of funds for long-term needs. The best long-range strategy is protecting existing state revenue streams. During a downturn or recession, stable revenue will help the state meet vital needs to ensure that essential public services continue to operate, that health care providers are able to keep our families healthy, that we don’t fall behind on road and bridge repairs, and so much more.  

Eliminating 1 in 3 dollars of state revenue is a sure recipe for reducing the quality of life in Oklahoma, and it would even further worsen our position in national rankings. Rather than racing to the bottom, Oklahoma leaders should prioritize investments in things that are more likely to take us to the top. This includes ensuring workforce training is readily available, making child care more accessible for young workers, expanding affordable housing that will help keep college and CareerTech graduates here, and increasing funding for public and higher education. Such state investments will support existing Oklahoma entrepreneurs, while attracting new business and industry as well. Cutting the income tax — while perhaps politically helpful for some politicians — will not.