COVID-19 Policy Analysis: As our nation confronts the COVID-19 pandemic, OK Policy will be analyzing state and federal policies that impact our state and its residents during this national health emergency. These posts reflect the most current information available at publication, and we will update or publish follow-ups as new information becomes available.
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Today is the traditional deadline to file and pay federal and state income taxes. Many of us will take advantage of the three-month delay granted as part of COVID-19 relief. The filing delay until July 15, however, does nothing to help those who need it most: low-income Oklahomans. Contrary to talking points from state boosters, Oklahoma is not a low tax state for all Oklahomans. Our regressive tax system ensures that low-income Oklahomans pay more in taxes, as a share of their income, than high-income taxpayers. In fact, the share paid by the lowest 20 percent of earners is more than double the share paid by the highest 1 percent. As a result, Oklahoma’s is the ninth most regressive tax system in the nation, according to the Institute for Tax and Economic Policy (ITEP). The Legislature has an opportunity to start addressing this imbalance now, and Oklahomans should demand that they do just that.
Low-income families in neighboring states are better off
Oklahomans with the lowest incomes are paying 13.2 percent of their income in state and local income, sales, and property taxes, while the wealthiest Oklahomans are only paying 6.2 percent, according to a 2018 report from ITEP. Not only are low-income Oklahoma families paying more than their wealthier counterparts, they are paying more in taxes than low-income residents of almost all of our neighboring states.
In Oklahoma, a two-person household making $12,000 a year, which is the average income in the lowest 20 percent group, pays $1,584 in taxes each year. Of the surrounding states, only families in Texas pay more. A family making $12,000 a year in Colorado pays only $1,049 in taxes; that means each year, low-income Colorado families keep $535 more than Oklahomans, which works out to a $10 weekly difference. For families surviving on $231 per week before taxes, $10 makes a huge difference.
Oklahoma has been increasing taxes on low-income households. In 1996, low-income Oklahomans paid 9.9 percent of their income in taxes. Now, they pay 13.2 percent. This increase has resulted from increasing state gasoline and tobacco taxes, as well as local sales and property taxes. This occurred at the same time the value of the standard deduction on the state income tax was reduced, and lawmakers ended refundability of the Earned Income Tax Credit (EITC). As a result, an Oklahoma family making $12,000 a year pays nearly $400 more per year now than in 1996.
Unfortunately, we haven’t learned from our neighbors. Surrounding states have lowered taxes for low-income families since 1996. New Mexico, for example, raised the income tax standard deduction from $5,500 for a single taxpayer to the federal standard deduction of $12,700. Income below the standard deduction is not taxed, so many low-income New Mexicans pay no state income tax. This compares to Oklahoma’s standard deduction of $6,300. Missouri lowered the sales tax on groceries to one percent. The average low-income family in our surrounding states has seen roughly $100 in tax cuts, while the Oklahoma family has seen a $400 increase. This difference will be wider when statistics are updated to show the impact of recent EITC increases in Louisiana and New Mexico.
The Legislature has opportunities to make our tax system fairer
One reason taxes on low-income Oklahoma families have grown is the Legislature’s decision to make the Earned Income Tax Credit non-refundable in 2016. The average low-income family lost $121 annually as a result of this decision. The decision to cut this important credit took much-needed funds from working families, while also making Oklahoma’s tax system more regressive. More importantly, this has caused harms to families in general and children in particular. Research has shown that households receiving the EITC have healthier mothers and children have fewer adverse childhood experiences. When children grow up in homes that benefit from the EITC, they are more likely to be financially stable as adults.
There’s certainly room to improve Oklahoma’s tax credit for working families. Our state’s EITC is one of the lowest in the nation, and we are one of only four states with a non-refundable EITC. The value of Oklahoma’s EITC is less than one-third of the national average. Restoring EITC refundability is an important first step in narrowing the gap between low-income and wealthier Oklahomans.
Oklahoma’s Sales Tax Relief Credit, often called the “grocery tax credit,” was created in 1990 and provided a rebate of $40 per household member for low-income families. Unfortunately, the credit amount has never been increased, and the eligibility limits haven’t been adjusted for inflation in more than 20 years. For reference, those amounts are $20,000 for a single person and $50,000 for a household with dependents or persons over 65. When considering inflation, this means the purchasing power of this credit has decreased from the original $40 in 1990 to just $26 in today’s dollars. Many cities and counties have increased sales tax rates during the same period.
Only 12 other states charge a sales tax on groceries, and 8 of these have lower state sales tax rates than Oklahoma’s. In a state where low-income Oklahomans pay a much higher share of their income in taxes (especially sales taxes), increasing the Sales Tax Relief Credit would begin to pave the way towards a more equitable tax system.
Measures being considered by the Legislature
Several bills were introduced this legislative session to address our regressive tax system. For example, SB1306 by Sen. John Michael Montgomery, R-Lawton, would have gradually restored EITC refundability, and then increased Oklahoma’s EITC from 5 to 7.5 percent of the federal EITC in 2025. This bill, which was a fiscally responsible way to put money in the pockets of Oklahomans who need it most, was never heard in the Senate Finance Committee.
HB 3385 by Rep. Carol Bush, R-Tulsa, and Rep. Jason Dunnington, D-Oklahoma City, would have doubled the Sales Tax Relief Credit from $40 to $80 per person and adjusted the income eligibility requirements. The fiscal effects of this bill would not have been felt until Fiscal Year 2022, giving the legislature ample time to prepare. Doubling this credit would provide some much-needed relief to low-income Oklahomans. This bill passed out of sub-committee, but was not heard by the House Appropriations and Budget Committee.
Neither of these bills advanced in the first half of the current legislative session. The new reality we are facing this year demands that we act. The economic impacts of COVID-19 will be felt first and hardest by our low-income friends and neighbors. We can help them through these difficult times by passing similar reductions and by making them effective right now for their 2019 income taxes. Taken together, the two bills would have increased after-tax income for a single parent of one child earning $12,000 by $289. Oklahomans should demand action on tax fairness, and this should be among the first orders of business once the Legislature has tackled the most immediate health-related needs. That’s money families like this need right now. Since it’s likely to be spent immediately and locally, urgent action will also help our communities on the path to economic recovery.
Policy intern Emma Morris co-wrote and provided data analysis for this post.