Oklahoma’s capital gains tax break is a windfall for the wealthiest with no proven benefit for the economy

money.One of Oklahoma’s largest tax breaks got no attention from legislators last year, despite its questionable legality, its questionable benefit for the economy, and a $1.3 billion budget shortfall that inspired legislators to go after many other tax breaks and programs.

The “Oklahoma Source Capital Gains Deduction” was enacted in 2004 as part of State Question 713, which also increased Oklahoma’s tobacco tax. The deduction allows taxpayers to exempt from their taxable income any gains from the sale of property located in Oklahoma or stock of a company headquartered in Oklahoma. To qualify for this exemption, the seller must have owned the property for at least five years or the stock for at least two years before the sale.

The benefit of this tax break goes almost entirely to wealthy business executives and investors. The Tax Policy Center estimates that nearly three-quarters of the benefit from lower tax rates on capital gains goes to taxpayers making over $1 million annually. The only major asset that a middle-class household is likely to sell for more than they bought it — their home — is already largely exempt from capital gains tax under federal rules that carry over to the Oklahoma tax code. So Oklahoma’s extra capital gains tax break does nothing for these families.

This tax break for a few wealthy households comes at no small cost. In FY 2014, the capital gains deduction cost Oklahoma $157 million. It cost more than four times as much as the Earned Income Tax Credit (EITC) for low-income working families, which was slashed in the latest budget deal. The capital gains tax break cost far more than the EITC even though it went to just over 18,000 households, compared to more than 330,000 households receiving the state EITC.

The only argument left for keeping this tax break is that it might boost the economy by incentivizing investment in Oklahoma companies and real estate. What the real impact on the economy is for capital gains tax breaks is a complex question, but at the federal level, the maximum capital gains tax rate has fluctuated significantly without any clear relationship to economic growth, as this chart from the Tax Policy Center shows.

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We’ve seen no significant correlation between economic growth and capital gains tax rates at the federal level, where the top rate has fluctuated from a high of 40 percent to a low of 15 percent. With Oklahoma’s top income tax rate now at just 5 percent, the state tax break is even less likely to be incentivizing growth.

Former State Treasurer Scott Meacham was instrumental in securing passage of the capital gains tax break while serving as Finance Secretary for Governor Brad Henry. Today, Meacham leads a firm specializing in Oklahoma startup business investment. But he no longer believes Oklahoma’s capital gains tax break is worth the cost. He told Oklahoma Watch that since Oklahoma’s numerous income tax cuts have reduced the tax break’s effectiveness as an investment lure, “it doesn’t make a lot of sense to do both.”

“With Oklahoma making dramatic cuts to higher education, on top of the largest cuts in the nation to our K-12 funding formula, it’s hard to make the case that the need for this tax break is greater than the need for reinvesting in core services.”

It’s also important to remember that the burden of proof for this tax break is not just whether it benefits the economy, but whether that $157 million tax break helps the economy more than would comparable investments in core public services. With Oklahoma making dramatic cuts to higher education, on top of the largest cuts in the nation to our K-12 funding formula, it’s hard to make the case that the need for this tax break is greater than the need for reinvesting in core services.

Meanwhile, there’s some evidence that that tax break could be violating the Commerce Clause of the U.S. Constitution by discriminating against out-of-state companies. Oklahoma avoided that issue being brought before the U.S. Supreme Court only by settling with a Florida company that challenged it in court.

For all of these reasons, Oklahoma should do away with the costly capital gains tax break. This tax break is the largest single incentive being examined by Oklahoma’s new Incentive Evaluation Commission. The Commission members should bring a skeptical eye to the idea that exempting a few very wealthy households from much of their state income taxes is the best way to create an economy that works for all Oklahoma families.

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ABOUT THE AUTHOR

Gene Perry joined OK Policy in January 2011. He is a native Oklahoman and a citizen of the Cherokee Nation. He graduated from the University of Oklahoma with a B.A. in history and an M.A. in journalism. Gene also serves on the board of the Oklahoma Sustainability Network, is a trustee of the Oklahoma Foundation for Excellence, is a member of Investigative Reporters and Editors, and has chaired the communications advisory committee for the State Priorities Partnership, a nationwide network of state fiscal policy think tanks. He lives in Tulsa with his wife Kara Joy McKee, who is a Tulsa City Councilor.

7 thoughts on “Oklahoma’s capital gains tax break is a windfall for the wealthiest with no proven benefit for the economy

  1. Unfortunatly this is what the sheep in oklahoma vote into political office. The repubs in oklahoma care nothing about people. Also most of the people voting the repubs in cant afford their candidates ultra-consersative policies.

  2. Reckon this is one of the reasons Oklahoma has a low unemployment rate? Raise taxes, fees, sales tax and have lots of social, education, and benefit programs, but no companies to provide jobs and therefore no revenue for the budget, just different approach. Maybe we need to look at cutting expenses?

  3. My recollection is one reason for this was provision was to reduce the incentive for retiring business owners to move to Texas to avoid Oklahoma income tax on sale of their business and Oklahoma estate tax on what they left for their offspring. It was known at the time to have a Federal constitutional defect and, sure enough, this was realized in the CDR case. Although upheld by the Oklahoma Supremes, the OTC saw it could not be defended in the SCOTUS and voluntarily paid the refund for the out of state corporation sale. I think it cannot be salvaged and should be repealed.

  4. I have to say I disagree with this assessment because so many rural families benefit from such policies that allow them to keep the value of what they sell. Rural families are some of the highest uninsured individuals and have other high risk/poverty prone situations that to take away this exemption would/could further harm them.

  5. I have to disagree completely with this. I am came here because I was googling for information on Oklahoma tax systems. Why? I am evaluating investment in Oklahoma. Oklahoma’s higher tax rates on income, capital gains and corporate income means that my investment dollars and the jobs and economic activity that will go along with that will more likely stay in Texas instead of Oklahoma. having to pay 4% on cap gains and about 5% on income, whether corporate or personal, puts Oklahoma at an instant disadvantage. I need a rate of return higher by 5% or more just to make it match the opportunity in Texas. You are fooling yourselves and others if you think only the ‘rich’ pay these taxes.

    The analysis that compares short-term changes in GDP with rates is misleading because its the long-range impacts over many years and on the whole cost of doing business that matter. Oklahoma rates 33 out of 50 states. Texas is number 10. Businesses DO makes decisions based on this factor – I am about to – and so many more people get negatively impacted by onerous tax rates than business owners.

  6. We are below the average across the board on taxes. Everybody keeps saying our taxes are high. Took me 2 minutes to find that out. Tax cuts over the past 10yrs have put us in this mess, along with misappropriated funds. You get what you pay for.

  7. I agree with Patrick’s comment. I’m looking at moving. Tax rates, climate, and real estate prices are major factors, along with local culture. Oklahoma looks okay 😉 except for taxes. I don’t like working and risking all to send money to the dead hole that most government represents.

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