Impact of the Sales Tax Relief Credit on Oklahoma Families | House Interim Study | Oct. 23, 2024

OK Policy’s Fiscal Policy Analyst Aanahita Ervin spoke with lawmakers about how modernizing the state’s Sales Tax Relief Credit can benefit low- and moderate-income families. Ervin spoke during an Oct. 23, 2024, interim study in the Oklahoma House focused on the modernizing Sales Tax Relief Credit. The following is a transcript of her prepared remarks. Ervin’s overview to open the session can be found here. The full video of the interim study — IS-24-082, A Study on Modernizing the Sales Tax Relief Credit (Rep. Cyndi Munson) — can be viewed at the Oklahoma House website. Rep. Scott Fetgatter, Chair of the Appropriation and Budget-Finance Subcommittee, presided over the session.

Note on corrections: 1) When calculating the taxes owed for a family of five taxes, the income and sales tax values were incorrect during the presentation. Income tax amount owed is $1,645 (not $277) and sales taxes owed is $2,200 (not $1,650). This is discussed during the video presentation. 2) The legend was incorrect on slide 4, showing taxes paid as a percentage of income by income level. Both items are corrected in the presentation slides linked here. 3) Rounding may result in discrepancies of +/- $1.

Comments from Aanahita Ervin, Fiscal Policy Analyst for the Oklahoma Policy Institute:

In this presentation, we are going to focus on the impact the Sales Tax Relief Credit has on Oklahoma families.

To just lay out what’s to come, we will first cover the tax burden Oklahoma’s tax code places on low- and middle-income families. Then we will conceptualize the cost savings Sales Tax Relief Credit can provide if it were modernized.

I want to begin to provide data here that pushes back against the narrative that low-income people get such large tax breaks from the state that they aren’t paying any taxes. This is simply not true.

Low-income individuals and families pay substantial taxes. It just looks a little different for low-income families than upper-income ones, because low-income households pay more of their taxes gradually throughout the year, rather than in April.

The horizontal axis on this slide has increasing income brackets, and the vertical axis represents the percentage of income paid in taxes. There are four tax types graphed: property, sales, income, and other.

But before I continue, I want to note, there is an error in this graph – the sales tax and property tax have been switched. So, I will say them correctly now. In the dark blue at the bottom of each column is property taxes, the red color represents sales taxes, the yellow is income taxes and the light blue is other miscellaneous taxes.

We can clearly see through this graph that lowest earning households, making between $0 and $25,000 annually, pay almost 12 percent of their income in taxes overall. Whereas people in the top 1-percent income bracket in Oklahoma making $680,000 or more annually, only pay 6.3 percent of their income in taxes.

As a share of their income, the lowest-earning households pay double the tax rate as wealthier ones. This clearly shows the higher burden the Oklahoma tax code places on lower earning households.

The root cause of this disparity is because of the sales tax, which is a regressive tax. This graph has the same axes, income level by percentage of income paid in taxes. And what we see is that while the lowest-income bracket making less than $25,000 annually pays negative income taxes. Because of the small amount they get refunded, they actually pay the highest percentage of their income in the sales tax. And even though the state income tax is progressive, with higher income earners paying a higher percentage of their income, it does not adequately address the stark disparity seen in the sales tax collections.

The Sales Tax Relief Credit is a tool to address the disparities we just discussed by providing targeted relief to low-income families.

I want to preface this section by saying in the example that follows we are only talking about Oklahoma level taxes and OK tax credits since this Interim study is focused on a state-level credit. It does not talk explicitly about federal level taxes or tax credits because it is beyond the scope of this study.

So let’s consider a middle-class family with three children where both parents work. They earn a joint income of $50,000. But that’s not how much they get to take home. Of course, they have to pay taxes. They have to pay $1,645 in Oklahoma income taxes in April.

But we all know Oklahomans pay more than just income taxes. We just saw data about sales and property taxes at least. So the sales tax is paid every time we purchase something.

For a family with a joint income of $50,000, their sales tax cost is estimated at about $2,200 annually. Again, this is not a lump sum amount people pay in April, but it is the cumulative amount people pay over the course of a year.

Lastly, there is the property tax. This family annually pays around $1,050 for their property taxes, either directly if they’re homeowners or through their rent if they’re not.

Add this all up, and we see our family of five spends $4,895 in taxes throughout the year — but this is without factoring in tax credits. Let’s see what changes when we account for tax credits.

So $4,895 is the amount of taxes this family owes without tax credits. But, we know that this family qualifies for the state Child Tax Credit, which is $100 per child. So they receive $300 because they have three children. Then there is the state Earned Income Tax Credit, which is 5 percent of the 2020 Federal Earned Income Tax Credit, coming to $333. Lastly, there is the Oklahoma Sales Tax Relief Credit, which is $40 per exemption. And with five exemptions for this family, that totals to $200. Subtracting the credit amounts from the tax cost of $4,895, we reduce their tax burden to $4,062.

Now imagine if the Oklahoma Sales Tax Relief Credit was modernized to account for inflation and was set to $200 per exemption claimed. Let’s calculate this family’s tax burden now.

Well, the taxes owed before any state credits are applied stays the same. The state Child Tax Credit and Earned Income Tax Credit remain unchanged. But the Sales Tax Relief Credit jumps up to $1,000, because $200 times five exemptions. This reduces the families tax burden to $3,262.

The increase in the sales tax relief credit from $40 per exemption to $200, decreases the families tax burden by 20 percent.

This increase in the Sales Tax Relief Credit saves the family $800, which comes close to covering half the amount they pay cumulatively on sales taxes through the year. As you recall, the state eliminated the state sales tax on groceries. But Oklahomans still pay city and county sales taxes on groceries, as well as state, county, and city sales taxes on non-grocery items like gas, toilet paper, and clothes.

Now they can spend that $800 on other essentials, like rent or if they have unexpected car troubles.

I also want to point out that if this family made $50 dollars more, they would not qualify for the current Sales Tax Relief Credit credit at all, so they would lose $200 in credits for a $50 raise.

So to summarize, the STRC can be modernized by increasing the credit amount, by increasing the income eligibility for the credit, and by implementing a phase out scheme as presented by ITEP and in Rep. Munson’s legislation, which helps people avoid being essentially punished for getting modest raises.

I want to end this presentation by comparing the Sales Tax Relief Credit modernization to the grocery sales tax elimination.

This last legislative session, the Oklahoma legislature passed the grocery sales tax elimination. It aimed at alleviating the grocery sales tax burden on low- and middle-income households.

Instead, the benefit was upside down, disproportionately benefiting households making $130,000 or more. The lowest income households saw a tax cut of $65 annually, which is one-quarter of the size of the $408 tax cut the top 1 percent saw.

A modernized Sales Tax Relief Credit in the amount of $265 with a phase out scheme as presented by ITEP would provide targeted tax cuts to the lowest-income households, ensuring those funds go to those that need it most.

The Sales Tax Relief Credit modernization would only cost the state $202 million, which is cheaper and provides more targeted benefits than the $307 million dollars annual loss in revenue seen with the grocery sales tax cut.