OKPOLICY.ORG
Co-authors: Josie Phillips, Policy Fellow and Paul Shinn, former Budget and Tax Senior Policy Analyst
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Oklahoma elected officials have called for state action to help Oklahomans who are struggling with inflation. The House of Representatives went so far as to pass a slew of contradictory tax cut proposals during the June special session just a few weeks before the primary election, while the Senate opted to create a tax reform working group instead. Lawmakers are right that high inflation represents a serious threat to low- and middle-income Oklahomans’ well-being, but they should ensure that any tax relief is timely enough to meet the present challenge and targeted to the Oklahomans who most need the help. By pursuing across-the-board, possibly permanent tax cuts, legislators risk irreparably damaging our state’s ability to fund public services while failing to provide the relief that Oklahomans need now.
With the primaries behind us and Panasonic officially choosing to build in Kansas rather than Oklahoma, state leaders are right to discuss inflation relief. Specifically, instead of enacting tax cuts that will hurt our state in the long-run (and possibly even in the short-term), Oklahoma’s Legislature should consider updating the state Sales Tax Relief Credit, passing a one-time tax rebate targeted to the Oklahomans most impacted by inflation, restoring inflation protection for our state’s Earned Income Tax Credit (EITC), and increasing the state EITC.
Inflation hits low- and middle-income families hardest
Inflation is painful for everyone, but it does not impact all families equally. When faced with higher prices, well-off families may choose to either cut back on spending, particularly on luxury goods, or simply save less money while keeping their spending the same. However, these options are not as available to lower-income families, who already spend most of their money on necessities and may have difficulty saving money even during good economic times. Most low- and moderate-income families spend all or most of their income on core needs, so inflation eats more directly out of their ability to save for retirement and emergencies like a car repair or a medical bill. In fact, inflation has been called “the most regressive tax” because it places a much higher burden on lower-income families.
To make matters worse, the current bout of inflation is targeting the very goods that lower-income families tend to spend more on and have the least ability to spend less on: rent, food, and energy. Because inflation is currently raising the prices of things low-and middle-income families cannot do without, our legislature’s inflation relief efforts must uplift the ability for low- and middle-income families to weather the price hikes on necessities.
Increasing the Sales Tax Relief Credit is overdue and the most effective tool the legislature has
Oklahoma created its Sales Tax Relief Credit in 1990 to help low-income families better weather the sales tax, which had been recently increased to help fund education. Unfortunately, its benefits have never been updated nor adjusted for inflation, meaning it has lost 60 percent of its value since its creation. While the nominal value has remained flat at $40 per person, it is now worth only $16 in 1990 dollars. Increasing the credit would offset the disproportionate cost of the sales tax to low-income households. It would also provide significant support to senior citizens, who would be largely unaffected by income tax-related relief measures.
House Bill 1011XXX, introduced during the special session in June, would increase the value of the Sales Tax Relief Credit to $200 for tax years 2022 and 2023. While this would provide meaningful and well-targeted inflation relief to low-income Oklahomans, any increase in benefit value should be made permanent. Providing inflation relief through the Sales Tax Relief Credit also has the drawback of not taking effect until the spring of 2023. While inflation is projected to last through 2023, making an update to the Sales Tax Relief Credit a wise move, sales tax relief would fail to help Oklahomans meet their immediate needs until nearly a year from now, indicating a need for more timely inflation relief, such as a targeted cash rebate.
The interactive map below shows county-by-county the impacts of a scenario that increases the credit from $40 to $180 per person and slightly increases the qualifying income limits with a phase-out. The map includes how many Oklahoma families would see a tax reduction, the number of newly eligible households getting the credit for the first time, and the number of households with seniors who would save on their grocery sales tax.
A targeted, timely one-time rebate would quickly get assistance to the Oklahomans who most need it
The original House- and Senate-passed budget for the coming fiscal year included a rebate of $75 (or $150 for joint filers) per household, but it was not an efficient use of taxpayer funds because it was an across-the-board rebate that would not have been available until December 2022. While it would have given some relief to low-and middle-income Oklahomans, it also would have funneled taxpayer money into the hands of well-off Oklahomans who are already managing inflation without assistance. This rebate proposal was vetoed by Gov. Stitt, giving the Legislature another opportunity to target this relief measure to those in most need of relief.
Instead of giving an across-the-board rebate of $75 per person, the Legislature should double the rebate amount but restrict it to the bottom half of income earners (those earning roughly $50,000 or less), and issue check no later than the December 2022 target from the original legislation This would keep the cost of the rebate roughly the same ($181 million) while providing even more relief to the families most impacted by inflation and ensuring that taxpayer money is not given inefficiently to families who do not need it.
The state Earned Income Tax Credit can help fight inflation, and we can improve it
The Earned Income Tax Credit is one of the most effective anti-poverty tools available to lawmakers because it rewards work and helps Oklahomans with low-wage jobs keep more of what they’ve earned. In 2021, the Oklahoma Legislature tied Oklahoma’s EITC to 5 percent of the value of the 2020 federal EITC. Unfortunately, by tying the benefit value specifically to the 2020 federal value, this ensured that our state’s EITC would no longer increase alongside inflation, meaning that the past year’s heightened inflation has eaten away at the real value of this tax credit. Under this law, the real value of the state EITC will already fall 4 percent this tax year. While dollar impacts each year are small, without restoring inflation protection, low-income working families will be a little worse off every year. In addition to reconnecting the state EITC with the federal credit, we can also increase the state credit from 5 to 10 percent of the federal credit. Of the 38 states with EITCs, only two have smaller credits than ours.
We have better options to help those who need it
Increasing the Sales Tax Relief Credit and the Earned Income Tax Credit, combined with an immediate rebate, is the only way to provide timely and targeted relief without jeopardizing our ability to provide public services we all depend on. Any inflation relief on the part of our state government needs to be targeted and timely.
Unfortunately, the many tax cut proposals from this special session fail both of these tests. Tax cuts are not timely because they don’t take effect until next year’s tax season, by which time inflation should have significantly declined (although still be higher than usual). They also mainly benefit wealthy taxpayers. For instance, a 0.25 percentage point decrease in the personal income tax rate — as laid out in HB 1008XXX and HB 1009XXX — will only save middle-income Oklahomans about $60, and low-income Oklahomans $4.
Tax cuts, particularly if made permanent, would also severely damage our state’s ability to fund core services. For example, if Oklahoma were to eliminate the grocery sales tax — such as proposed in HB 1014XXX, HB 1015XXX, HB 1016XXX, and HB 1017XXX — the state would lose up to $300 million in annual revenue. Thanks to State Question 640, which requires a legislative supermajority to raise taxes, once this tax revenue is foregone, it will be nearly impossible to recover this funding once inflation returns to normal. Oklahoma has declared revenue failure nine times in the past 20 years, and completely forfeiting revenue from the grocery sales tax would either put our state in even more danger of recurring revenue failure or force us to further reduce our already diminished investment in our state.
The chart below shows that only the credit and rebate options provide more than half of overall relief to those who need it most. Roughly three-fourths of the tax reduction from these three options would go to Oklahomans making under $38,000 a year. In contrast, these families would see only about a quarter of the savings from suspending or eliminating the sales tax on groceries, and virtually no benefit from personal or corporate income tax cuts.
Legislators have the opportunity to help Oklahomans struggling with inflation and should do so effectively and deliberately
Oklahoma’s legislators have a number of fast-acting and targeted options to tackle the problem of inflation. Unfortunately, many of the broad-based tax cut proposals currently being considered would fail to provide targeted or timely relief and would instead imperil our state’s ability to fund the necessary government functions upon which we all rely. When deciding which bills to enact during the special legislative session, Oklahoma’s legislators should consider both the immediate needs of low- and middle-income Oklahomans as well as the long-term financial health of our state government.
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Take Action
If you would like to contact your legislative representatives to let them know that inflation relief should be targeted and timely, you can find their information here.
