OKPOLICY.ORG
More than 80 percent of Americans say it bothers them “some” or “a lot” that corporations don’t pay their fair share, and 65 percent of Americans think that corporate taxes should be increased. Oklahoma’s corporate income tax generates valuable revenue that is used to provide vital public services on which all Oklahomans rely — including corporations that conduct business in the state. In addition to being an important revenue source, the corporate income tax makes our tax system more fair and gives lawmakers a tool for economic development. Although state leaders have reduced the taxes that corporations pay in recent years, the public and businesses both agree that Oklahoma has more pressing concerns that, if addressed, will provide more long-term success and economic growth for our state.
Oklahoma’s corporate income tax is already low, and lawmakers have been further reducing corporations’ tax liabilities.
At 4 percent, Oklahoma’s corporate income tax is tied for second lowest in the nation. The tax is only paid by corporations and trusts with taxable income of at least $500. This does not include limited liability companies (LLCs), as their individual members pay taxes through the individual income tax; this means that the entities paying the corporate income tax are more likely to be large and/or out-of-state companies. Corporations pay taxes only on their taxable income, which is equal to their profits minus expenses – like the cost of goods sold and employee wages.
In recent years, state lawmakers have made repeated attempts to further decrease corporations’ already low tax responsibility. Effective Jan 1, 2022, lawmakers decreased the corporate income tax from from 6 percent to 4 percent. Effective in Tax Year 2024, they also eliminated the franchise tax, which assessed a small tax on capital.
Lawmakers have also attempted to restructure the way taxable income is determined. Currently, the share of income that is taxable in Oklahoma is determined by a three-factor formula that equally weights the corporation’s total payroll, property, and sales that occurred in the state. In the 2023 legislative session, lawmakers introduced House Bill 1375, which would change the calculation of taxable income from the three-factor formula to a formula based solely on sales. Making this change would significantly cut taxes for corporations that are based in Oklahoma but make most sales out of state.
State revenue from the corporate income tax is decreasing.
Lawmakers’ attempts to reduce corporate income taxes have directly coincided with a drop in the amount of state revenue that is generated by the corporate income tax. In the fiscal year ending June 30, 2022, the corporate income tax generated more than half a billion dollars for the General Revenue Fund (GRF), the primary fund that lawmakers use to fund state services like infrastructure and mental health treatment. In fiscal year 2024, corporate income tax revenue is estimated to decline by one-third – from $527 million to just $357 million.
Why do we tax corporations?
In addition to generating vital state revenue, the corporate income tax serves other purposes. These include making the state’s tax system more fair and balanced for individual taxpayers, giving state leaders a tool to incentivize certain business activity, and positively impacting the broader economy. Oklahoma has one of the most unfair tax systems in the United States, but the corporate income tax makes the system more fair than it otherwise would be. Indeed, because Oklahoma’s corporate income tax applies only to C corporations, the tax primarily impacts foreign investors, the ultra-wealthy, and non-Oklahoma residents.
In addition to the tax implications, the corporate income tax simply asks businesses to help pay for the state services that they use. Corporations that operate in Oklahoma use the state’s roads to transport goods, the state’s schools to educate their employees’ children and to train their workers in career techs and universities, and, in some cases, may pay wages that are low enough for their employees to qualify for public assistance programs. Many business owners and operators in Oklahoma recognize this; they know that to facilitate corporate success, the state must invest in infrastructure and workforce development.
Oklahoma leaders have a track record of creating and expanding tax incentives, which are reductions in taxes owed. Oklahoma offers many tax incentives for businesses, some of which are provided through the income tax. In other words, the corporate income taxes that corporations would have paid are reduced because they engage in some activity that lawmakers have decided is important, such as the production of Oklahoma-mined coal or becoming a qualified zero-emissions facility. Without the corporate income tax, state leaders would lose one of the tools in their economic development tool belt.
The impact of the corporate income tax on the broader economy is mixed, but there is compelling evidence to suggest that the presence of the tax actually benefits the state economy. Indeed, higher taxes on businesses have been found to correlate with higher wages and higher median income. And because corporate tax cuts do not significantly boost economic growth, it’s unlikely that reducing the corporate income tax would have any meaningful benefit, either. Further, some analyses have found that to increase job growth and economic output by 2 to 3 percent, states would need to cut corporate taxes by 10 percent. Cutting Oklahoma’s corporate income tax from 4 percent to zero would be unlikely to have any significant positive impact and would lead to an even greater decrease in state revenue.
The public supports requiring businesses to pay their fair share, and businesses are more worried about workforce than tax rates.
Just like public sentiment favors higher taxes for corporations, business leaders also recognize the need for more state revenue. Most business owners and operators are more interested in addressing economic pressures and workforce needs than they are in trying to further reduce the taxes they pay. Indeed, when making choices about selecting new sites, national business decision makers are prioritizing labor costs, quality of life, and workforce. Tax rate is listed as seventh on the list.
And specific to Oklahoma, workforce and education are businesses’ most pressing concerns, with 44 percent of business leaders listing this as their top concern, compared to just 12 percent who listed taxes as their top concern, according to the State Chamber. It is clear that with most Americans feeling that corporations should pay more in taxes, and most businesses prioritize public services that rely on that tax revenue; Oklahoma must maintain or increase its corporate tax revenue in coming years.
