Lawmakers should choose targeted relief amidst budget uncertainty

State-level budget and tax policy matters deeply for Oklahomans because it directly affects how the state can meet its obligations to our fellow residents. This includes shared services like public safety, education, transportation construction, workforce development, and other programs that help all Oklahomans thrive.

As is typical during an Oklahoma legislative session, legislators filed hundreds of bills on budget and tax issues. The bills are grouped below in three key spheres: tax credits, sales tax exemptions, and income tax. This article summarizes legislation and concepts likely to move forward this spring.

Effective tax credits mean targeted tax credits

Oklahoma should use tax credits to benefit low-and-moderate-income households directly. Instead, so far this session, the focus has largely been the opposite: tax breaks for the rich.

At the least, three bills – House Bill 1279, Senate Bill 684, and SB 472 – would update the Parental Choice Tax Credit program, which was recently found to predominantly subsidize private schooling for wealthy households. While none of these changes increase the cost of the program, they also do not provide any oversight or accountability for how the Parental Choice Tax Credit is awarded.

Another tax credit bill, HB 1201, would reimburse donors for 70 percent – capped at $50,000 per taxpayer – of their donations to pregnancy resource centers. HB 1201 and measures like it would allow wealthy households to double-dip: donations are already tax-free, but the additional tax credit would refund donations that donors have made to a particular type of charity while eroding revenue for schools, health care, infrastructure, and more.

By contrast, a handful of bills are directly aimed at helping everyday Oklahoma families. SB 367 sought to annually adjust the state Earned Income Tax Credit (EITC) for inflation by tying it to the current federal EITC; legislators froze the tax credit at 2020’s federal EITC amount. HB 1848 would provide income tax credits to employers who provide child care for their employees. Lastly, HB 2228 and SB 72 were identical bills that sought to modernize the Sales Tax Relief Credit by increasing the credit amount to $100 per person and substantially modernizing eligibility. Even though neither bill passed out of their respective committees, the concept should be part of budget conversations as the session continues.

Sales tax exemptions are an ineffective way to provide tax breaks

Oklahoma lawmakers have proposed several sales tax exemption bills this session. These measures would waive sales tax on specific purchases or for certain people. These exemptions, however, have significant drawbacks for the state’s fiscal health. They tend to narrow the tax base, placing a greater tax responsibility on a smaller number of people while decreasing state revenue.

SB 50 provides a sales tax exemption for firearm safety devices in hopes that will encourage gun safety habits. SB 44 seeks to extend sales tax exemptions received by non-profits to any contractors or subcontractors they may work with.

SB 231 adds more products to the list of sales exempt items for the three-day state sales tax holiday occurring annually in August.

The intent behind sales tax exemptions is earnest and aims to help. However, when seen in the full context of tax policy, they do more harm than good. Concepts like sales tax holidays and exemptions are shown to mainly help the pockets of wealthier families while reducing revenue and creating administrative difficulties for retailers. Instead, the state should invest more in targeted and proven methods like the Sales Tax Relief Credit and the Oklahoma Earned Income Tax Credit.

Income tax revenue is at risk

Oklahoma relies heavily on income tax revenue; income taxes provide about 1 in 3 dollars in Oklahoma’s general revenue fund. Nonetheless, some legislators are dead set on cutting that revenue.

Let’s start with the most harmful idea: income tax trigger bills. HB 1539 would automatically cut the income tax rate if state revenue increased above a certain threshold compared to the prior year. The language of a triggered tax cut like the one in HB 1539 led Oklahoma into a simultaneous tax cut and revenue failure in 2016, forcing across-the-board budget cuts for the Department of Education, the Health Care Authority, the Department of Health, and others. SB 291, also a trigger bill, is a bit different. It does not cut the tax rate itself, but does reduce revenue availability for the legislature when a certain threshold is passed. The bill requires excess revenue to be returned to taxpayers in the form of a tax credit instead of allocating funding to underfunded services.

Another proposal is flattening the income tax, as proposed in SB 304 and HB 2740. These bills would remove Oklahoma’s graduated income tax structure, replacing it with a flat 4.75 percent tax rate. This measure is paired with doubling the standard deductions for single filers and married filing jointly, but not quite doubling it for heads of households. While SB 304 does provide some relief to a large income range of Oklahomans, including wealthier Oklahomans, it does not provide much relief to the lowest income earners. This is because there is no change for people whose income is already below Oklahoma’s current standard deduction, which leaves this group with no direct benefit. Additionally, since the standard deduction for head of households is not quite high enough, some filers in this category will see a tax hike.

Most importantly, flat income tax structures make our tax code less fair. Oklahoma’s current graduated income tax structure helps to balance out the other taxes residents pay, including sales, excise, and property taxes, that are disproportionately felt by lower-income households.

The Board of Equalization in February estimated the state will have $311 million less available for appropriation for fiscal year 2026 compared to last year’s February estimates. At the same time, there is significant uncertainty around federal funding cuts for Indian Health Services, SNAP (the nation’s largest food security program), and Medicaid that would increase state costs for these programs. Given this context, Oklahoma lawmakers should be focused on maintaining its revenue base, funding necessary infrastructure, and bracing for potential federal funding shortfalls.

Heed the caution signs

Much of Oklahoma’s tax and budget policy is up in the air. Legislative leaders are publicly urging caution when proceeding with tax cuts. At the same time, legislators are moving forward with bills that would implement sweeping tax cuts and shrink the state’s budget. Such moves are especially concerning given the significant uncertainty about federal funding and warnings of an economic downturn on the near horizon. The state’s historic fiscal overreliance on the volatile oil and gas industry further compounds future uncertainties. Taking all of these factors into consideration, this is a moment that demands fiscal caution from state lawmakers. Instead, legislators should consider measures specifically targeted to address issues faced by everyday Oklahomans. This includes making child care more within reach for working families and building on effective, proven, and targeted tax credits – like the Sales Tax Relief Credit (SB 72) and the Oklahoma Earned Income Tax Credit (SB 367) – that provide tax relief for everyday Oklahomans while protecting the state’s fiscal health.