Guest Blog (Ken Miller, PhD): Tax reform revisited

Ken Miller is the Oklahoma State Treasurer.  This post originally appeared as an article in the May Oklahoma Economic Report and is reprinted with permission. 

Oklahoma is doing more than fine with unemployment three percentage points below the national average, the third best job creation rate, and fourth highest growth in per capita income. Even so, we could better encourage entrepreneurial activity, productivity and growth by reforming our entire tax code. Unfortunately, some are singularly focused on the personal income tax.

A May 15 Wall Street Journal editorial lamented the Oklahoma Legislature’s recent failure to eliminate the state income tax, asking: “Do Republicans stand for economic growth and tax reform or not?” Tax reform should not be confused with simply eliminating the state’s largest revenue source on a wing and a prayer. Tax cut promises are easy to make when necessary cuts in spending and tax incentives are ignored. Financing tax cuts with assumed future growth revenue works well at the margins, not as well with incremental changes around the median, and not at all if current rates lie outside the prohibitive range, as demonstrated by the Laffer curve.

In a May 29 WSJ opinion piece, editorial writer Stephen Moore surmised that Oklahoma conservatives are angry about the missed opportunity based on comments from an employee of the think tank that hired his and Art Laffer’s firm to develop the income tax elimination plan. Moore unfairly lays much of the blame at the feet of Senate President Pro Tem Brian Bingman. Rather than cave to special interests, as Moore suggests, it is Bingman who demanded the tax cut be paid for with incentive cuts and wisely rejected the use of triggers, which are more about politics than sound economic policy.

One editorial pointed to Texas’ lack of an income tax as proof that Oklahoma shouldn’t have one either. It stated that Texas pays its bills with a sales tax, but ignored its property tax burden is about three times higher than in Oklahoma. Interestingly, Oklahoma has had positive in-migration from Texas for three years running and a per capita income growth rate that has outpaced most no-income tax states during the last decade.

Moore and Laffer often contend that America’s nine no-income tax states maintain superior economic performance, yet their book, Rich States/Poor States, shows the state with the highest marginal personal income tax rate, New York, outperformed two no-income tax states in gross state product growth over the last 10 years. They awarded Utah, also an income tax state, the best economic outlook for the fifth consecutive year.  Their rankings suggest recognition there is not a one-size-fits-all approach to tax policy due to the economic and cultural differences that exist throughout states and nations.

It is this conservative economist’s contention that the ideal tax structure would generate a stable and diversified revenue stream that sufficiently funds core services while retaining the profit motive that drives entrepreneurship. It would not unfairly burden property owners, discourage consumption or reward idleness. Surely, one can be fiscally conservative and favor a diverse revenue structure that includes a low and flat tax on income – even Laffer, the father of supply-side economics, advocates for such on the federal level.

Rather than lament the missed opportunity and play the blame game, policymakers can carry forward the recent momentum to design a tax code that is best for our state. Most of Oklahoma’s main revenue sources can be lower and fairer if made broader and flatter.

Focusing on the state personal income tax at the exclusion of government spending, inefficient incentives and all other revenue sources falls woefully short of real tax reform.

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