(Oklahoma City, May 4, 2009): Oklahoma faces a budget shortfall of at least $600 million in the coming fiscal year, 2009-10. Federal stimulus bill (American Reinvestment and Recovery Act of 2009, or ARRA) tax provisions could make this gap $46 million larger. Oklahoma Policy Institute today released a fact sheet describing the federal business tax provisions, how they cut into Oklahoma revenue, and what the Legislature can do to avoid further cuts in essential public services.
The fact sheet, “Oklahoma Should Protect State Services by Decoupling from Federal Business Tax Provisions,” describes the federal bonus depreciation tax break. It allows businesses to deduct half of the cost of new equipment and other large purchases from their federal income taxes the year they buy it. Without bonus depreciation, businesses must spread smaller deductions over a longer period of time. Bonus depreciation encourages businesses to make major purchases to spur the economic recovery.
Like many states, Oklahoma’s income tax is coupled to the federal one. Normally, when Congress changes the definition of income, it automatically affects Oklahoma income. David Blatt, Oklahoma Policy Institute’s Director of Policy, pointed out some problems with this automatic coupling. “In general, coupling allows Congress to set the state’s tax rules, without regard for whether it improves Oklahoma’s economy or how it affects state revenue. In the case of bonus depreciation, we may not see much of the intended investment because Oklahoma businesses will make most of their major purchases outside Oklahoma.”
The fact sheet argues that decoupling–changing the Oklahoma definition of income so that businesses must add back the depreciation to figure their state income tax–will help preserve state services. Blatt noted that recent economic analysis suggests that state budget cuts can make the economic downturn worse. “We are already looking at substantial cuts; this is not the time to dig the hole any deeper.” The state decoupled from bonus depreciation laws in 2002 and 2008 and other states are decoupling this year to minimize the loss of state services.
You can read full text of the fact sheet here.