Fallin off a cliff

The tax cut plans being pushed by Oklahoma lawmakers contain plenty of bad ideas, but one may eclipse them all: Governor Fallin’s tax cliff.

The tax cliff is the result of a badly designed tax bracket structure. Very few other states have such a structure, and for good reason: it creates a major disincentive to work.

In a normal rate structure, the higher rates only apply to income above a certain level. For example, in our current system, families enter the highest bracket of 5.25 percent when they make $15,001 or more in taxable income. However, they don’t pay 5.25 percent on every dollar of income. They pay 5.25 cents out of each dollar at and above $15,001, but they pay only 5 cents of the dollars they earn between $12,201 and $15,000, 4 cents of the dollars between $9,801 and $12,200, and so on.

In Governor Fallin’s plan, entering a new bracket causes the higher rate to apply to every single dollar of taxable income. That means a family with $29,999 in taxable income would not owe any income tax. But if they earned one dollar more, their tax bill would jump to $675. When moving between the second and third bracket, their taxes would jump again by $875.

How does this discourage work? In a typical marginal rate structure, a worker doesn’t hesitate to move into a higher bracket because the extra dollar of earnings will always be worth more than what the worker pays in tax. He or she may get to take home 95 cents instead of 96 cents of that dollar, but either way it’s a net benefit.

Under Governor Fallin’s tax cliff plan, earning more could be economically disastrous. If an extra dollar of earnings hikes your tax bill by $675 or $875, it makes more sense to skip work or turn down that raise. Fallin promises that her plan would boost economic activity, but the cliff would have the opposite effect. It would throw family budgets into turmoil and make Oklahomans afraid to work.

Governor Fallin’s bizarre and unworkable rate structure was no accident. Her administration designed the plan like this because it was the only way to avoid a shockingly high first year cost. When you eliminate the tax cliffs, the first year revenue loss under the Governor’s plan more than triples, going from just over $300 million to $1.069 billion, according to  calculations by the Institute on Taxation and Economic Policy.

The drag this would put on the economy goes against everything the tax cut boosters claim to believe about a good tax system. With a core that is more about politics than economics, Governor Fallin’s tax proposal should not be taken seriously.

ABOUT THE AUTHOR

Gene Perry joined OK Policy in January 2011. He is a native Oklahoman and a citizen of the Cherokee Nation. He graduated from the University of Oklahoma with a B.A. in history and an M.A. in journalism. Gene also serves on the board of the Oklahoma Sustainability Network, is a trustee of the Oklahoma Foundation for Excellence, is a member of Investigative Reporters and Editors, and has chaired the communications advisory committee for the State Priorities Partnership, a nationwide network of state fiscal policy think tanks. He lives in Tulsa with his wife Kara Joy McKee, who is a Tulsa City Councilor.

3 thoughts on “Fallin off a cliff

  1. This is a shockingly bad idea. Even a consumption tax would be preferable to this. Maybe that’s the underlying motivation here.

  2. The tax computation methodology does not support the “transparancy” theory the Governor claims to be championing. The ” tax cliff” approach is very devious and it is contrary to the normal progressive tax computation we are use to.. Thanks for the OPI for pointing this out. You don’t see the Oklahoma Legislature,The Governors’ office or state newspapers clarifying this point. This makes a huge difference in computing tax at all levels of income above the bracket break points. Fool me once shame on me Fool me twice shame on you.

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