While Oklahoma has a reputation as a low tax state, poor and middle-income Oklahomans are actually paying a greater share of their income in taxes than the national average, while the richest 5 percent of households — with annual incomes of $194,500 or more — pay less.
That’s why Oklahoma ranks among the ten worst states for tax inequality in the newly updated Who Pays report from the Institute on Taxation and Economic Policy (ITEP). The analysis evaluates major state and local taxes, including personal and corporate income taxes, property taxes, sales and other excise taxes. It finds that the poorest Oklahoma households pay 2.1 times as much of their incomes in taxes as the wealthiest 1 percent, and the middle 60 percent of households pay 1.7 times as much as the wealthiest. The poorest 20 percent of households pay the 5th highest taxes as a share of their incomes — 13.4 percent — in the country. You can read the full Who Pays report at www.whopays.org and see the fact sheet for Oklahoma here.
Oklahoma’s tax system is regarded as regressive because the lower one’s income, the higher one’s effective tax rate. This is in part because Oklahoma relies more heavily on sales and excise taxes to raise revenue and less on personal income taxes, which tend to be more progressive (meaning the higher one’s income, the higher one’s effective personal income tax rate).
Among Oklahoma’s neighboring states, only Texas has a more regressive tax system. In Texas, which has no personal income tax, low income families pay more than 4 times the tax rate paid by the wealthiest, giving that state the 2nd most regressive taxes in the U.S.
In Oklahoma, lawmakers cut our top income tax rate by nearly 25 percent since 2004, at a cost of more than $1 billion annually, while providing just over $200 to the median income household. These repeated tax cuts for the wealthy meant less money to adequately fund our children’s education, our parks and public spaces, our infrastructure, and other basic services. Besides cutting these essential services, Oklahoma lawmakers took aim at measures that primarily benefit low- and middle-income working families by making the state Earned Income Tax Credit non-refundable and freezing the state standard deduction.
As the Who Pays? study shows, broad-based graduated personal income taxes are the most equitable way to raise revenue. Given that low-income people are paying more than twice as large a share of their income in taxes as the richest Oklahomans, lawmakers should carefully weigh the regressive or progressive impact when considering any changes to the tax code.
Lawmakers should expand on a bill passed last year that allows the chairs of Oklahoma’s budget committee or finance committee to request reports from the Tax Commission showing how any significant changes to the tax system would affect Oklahomans at different income levels. A sensible next step would be for the Tax Commission to conduct a regular study of the distributional impact of the whole tax system, similar to the study done by ITEP.
Now that the state budget is recovering, lawmakers should also restore the refundable Earned Income Tax Credit, which provided some balance to the tax system and offered a critical boost to low-income working families before lawmakers cut it in 2016.
There’s a practical reason for Oklahoma and all states to be concerned about regressive tax structures, according to ITEP. If the nation fails to address growing income inequality, states will have difficulty raising the revenue they need over time. The more income that goes to the wealthy (and the lower a state’s overall tax rate on the wealthy), the slower a state’s revenue grows over time.
“Rising income inequality is unconscionable, and it is certainly a problem that local, state and federal lawmakers should address,” said Meg Wiehe, deputy director of ITEP and an author of the study. “Regressive state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem. State lawmakers have control over how their tax systems are structured. They can and should enact more equitable tax policies that raise adequate revenue in a fair, sustainable way.”