Overview of Oklahoma’s Sales Tax Relief Credit | Oklahoma House Interim Study | Oct. 23, 2024

OK Policy’s Fiscal Policy Analyst Aanahita Ervin spoke with lawmakers about the state’s Sales Tax Relief Credit, which provides targeted fiscal relief to low- and moderate-income families. The Sales Tax Relief Credit has been on the books since 1990, but hasn’t been adjusted since then. Ervin spoke during an Oct. 23, 2024, interim study in the Oklahoma House focused on the modernizing Sales Tax Relief Credit. The following is a transcript of her prepared remarks. Her closing presentation on the impact of the Sales Tax Relief Credit on Oklahoma Families can be found here. The full video of the interim study — IS-24-082, A Study on Modernizing the Sales Tax Relief Credit (Rep. Cyndi Munson) — can be viewed at the Oklahoma House website. Rep. Scott Fetgatter, Chair of the Appropriation and Budget-Finance Subcommittee, presided over the session.  NOTE: The text below has been revised to clarify the buying power of the Sales Tax Relief Credit in 2024.

Comments from Aanahita Ervin, Fiscal Policy Analyst for the Oklahoma Policy Institute:

Hello everyone, my name is Aanahita Ervin, and I am the Fiscal Policy Analyst at Oklahoma Policy Institute. At OK Policy, we use data-informed approaches to build toward an Oklahoma where all families can thrive. You will hear a lot from me today.

In this first presentation, I will start off the interim study by providing you all with an overview of the sales tax relief credit in the state of Oklahoma.

To begin, this presentation will start by covering some tax terminology to make sure we are all on the same page when discussing these ideas. Then we will jump into the history of the STRC, followed by a brief explanation of how the STRC works, and then we will talk about the monetary value of STRC and how it has not kept pace with inflation

What are tax credits? They are dollar for dollar amounts that reduce what an individual owes in taxes. These credits can be refundable or non refundable.

Refundable means any credit amount left over after a person’s taxes are paid are refunded to the taxpayer. Refundability allows low-income taxpayers to benefit from that surplus tax credit amount. Non-refundable tax credits are less useful to low-income taxpayers because they tend to have low tax liabilities.

An exemption, similar to a deduction, is a dollar amount that can be deducted from an individual’s total income to reduce their taxable income. There are two types of exemptions I want to focus on here.

A dependent exemption is when a tax filer can claim children, elderly, or people with disabilities that live with them as dependents and receive a deduction on their income.

The personal exemption is when a filer can claim themselves as an exemption. So for a family with two working adults and three children filing taxes jointly, they could claim 5 exemptions which significantly reduces a family’s taxable income

Exemptions are a tool put in place to ensure that very low-income households do not pay income tax while alleviating the administrative burden of collecting the tax on small amounts of income. But more importantly, personal exemptions also link tax liability to household size through the dependent exemption.

Lastly, regressive taxes are those that are applied uniformly to all income levels, which puts a higher burden on lower income families because they pay a larger portion of their income in those taxes.

So let me give you an example to illustrate this.

Say two people are friends. One of them makes $50,000 annually and the other makes $150,000 annually. They both decide to buy a used car each. It just so happens that their respective used cars cost $8,000. The sales tax they would pay on that $8,000 car is the same for both of them: $750. But when compared to their incomes, the $750 sales tax is 1.42% percent of $50,000, but only 0.5% of $150,000. We can see here, the lower income earner is paying a higher percentage of their income in the sales tax.

So now let’s cover the origins of the Sales Tax Relief Credit. The Oklahoma Sales Tax Relief Credit was created in 1990 when House Bill 1017 was passed. HB 1017 was one of the biggest education reform bills in the state’s history.

Well, you may be wondering how education is tied to tax credits. The bill passed several reforms to our education system including reduced class sizes, increased funding equity between schools, early childhood programs, amongst other things. As we all know, news programs cost money to implement. To fund them, the bill included a half cent increase in sales taxes across the board.

However, as we just saw, sales taxes are regressive. And low and middle income families would feel a disproportionate burden from the sales tax hike, because it would eat up a higher share of their income than it would for wealthier families. So legislators created the Sales Tax Relief Credit to offset the cost of the state sales tax paid by low and middle income families.

So, let’s look at how it works.

Firstly, the amount of the credit has not changed in over three decades, staying at $40 per exemption claimed.

It is a fully refundable tax credit, which means families get the entire value of the credit, through offsetting any tax liability and then getting refunded the remainder.

Lastly, the STRC has income eligibility requirements, allowing only individuals making under $20,000 annually to claim it. For families, elderly individuals, and people with disability, the income eligibility is expanded to $50,000 annually. The income eligibility also has not changed since 1990.

Over the past three decades, the Sales Tax Relief Credit has lost most of its value because it has not kept up with inflation. The Sales Tax Relief credit has lost 60 percent of its value.

Adjusting for inflation, the $40 credit has lost about 60 percent of its buying power between 1990 to 2024. This means it would cost about $97 today to purchase an item that cost $40 in 1990. Along those same lines, if the Sales Tax Relief Credit had simply kept up with inflation alone, today the credit would be at least $97 per person. But even this amount would barely suffice to buy one person groceries for a week.

These numbers illustrate that the STRC clearly needs to be updated.

Over the years, the state’s expenditure on the Sales Tax Relief Credit has been decreasing. From a peak of $43 million in Fiscal Year 2010 down to a low of about $29 million in Fiscal Year 2024. This decrease could be because the eligibility criteria for the Sales Tax Relief Credit has not kept up with inflation. So people who need it today, don’t qualify for it anymore even though they might have in 2010.

Along those same lines, the number of credit recipients has also been declining. This graph shows the number of exemptions, or the number of people, that claimed the Sales Tax Relief Credit from Fiscal Year 2006 to Fiscal Year 2024. The steady decline of people claiming the Sales Tax Relief Credit indicated that either fewer people are claiming the tax credit, or that perhaps fewer households that need it meet the income eligibility; $20,000 in 1990 dollars is a little under $50,000 in 2024 dollars. So, fewer people would qualify if their incomes have adjusted to inflation but the eligibility criteria has not.

This table lists all the states that have some version of a Sales Tax Relief Credit. We can clearly see that Oklahoma lags significantly behind other states with our low credit amount. So let’s dissect the Sales Tax Relief Credit policy and see what is working and what can be improved.

What’s great about the Sales Tax Relief Credit right now is that there are no phase-in income restrictions. This means people making zero or close to zero dollars can still benefit from the credit.

In this way it provides targeted relief to low income families because it is targeted to specific income groups and it is cost effective. Lastly, the credit is refundable, which increases the effectiveness of the credit.

This presentation will cover some historical data on STRC. Before I begin, I want to thank the Tax Commission for providing us with this data.

The historical data that will be covered includes information about households claiming the Sales Tax Relief Credit. We will start with data on deduction filing data. Then we will look at data by tax filing status and we will finish off with income distribution data. But before we do that I want to explain what a deduction is.

A deduction is a tax mechanism that allows people to deduct some amount from their income to reduce their taxable income. There are two types of deductions: The standard deduction and itemized deduction. The standard deduction reduces a taxpayer’s taxable income by a set amount. That set amount depends on the type of tax filing status of a household. For instance, a single filer can deduct $6,350 from their income to reduce their taxable income. Itemized deductions are when a range of items can be deducted from a person’s income up to a certain amount. In Oklahoma, the cap for itemized deductions is set to $17,000. Itemized deductions are typically used by higher income earners

The following data illustrate one key point: the Sales Tax Relief Credit benefits those that need it.

This graph has the tax year on the horizontal axis and the vertical axis has the number of returns claiming the Sales Tax Relief Credit. The dark blue part of the columns show the number of returns filed using standard deduction. We can clearly see that standard deductions are overwhelmingly used by a majority of filers. And since we know that itemized deductions tend to be used by wealthier households, this indicates that the Sales Tax Relief Credit is going to low- and middle-income families.

Jumping to our next graph, we have the same axes: number of returns claiming Sales Tax Relief Credit vs. tax year. The columns show varying tax filing statuses: in dark blue, we have single filers; in red is married people filing jointly; in yellow is heads of household; and the light blue is others including married filing separately and widowers.

In this graph, you can see that in any given tax year, single filers and heads of households are the biggest portion of filers claiming the Sales Tax Relief Credit.

This is revealing data, indicating how tremendously beneficial the Sales Tax Relief Credit is for people living alone, like elderly individuals or young adults, as well as individuals with dependents, like single parents or those taking care of a disabled or elderly sibling or parent.

Lastly, we have data on what income brackets are claiming the Sales Tax Relief Credit. So on the horizontal axis again we have tax year, but on the vertical axis, we are now talking about individuals claiming the Sales Tax Relief Credit, individual people getting that $40 each.

In the dark blue is the lowest income bracket of $0 to $10,000, and each lighter blue color, as well as the gray columns, shows income brackets increasing by $10,000 each. And what we see here is that for all the income ranges that are eligible for the Sales Tax Relief Credit, the three lowest brackets, making $30,000 and below, are the largest portion claiming the Sales Tax Relief Credit. Again, driving home the point that STRC reaches low-income households.

Even still, not everyone who needs it and qualifies for the STRC is claiming it.

Based on ITEP’s modeling using publicly available data on Oklahoman’s income, they estimate in Fiscal Year 2024, about 60 percent of Sales Tax Relief Credit-eligible filers claimed the credit. That means 40 percent of Oklahoma filers eligible for Sales Tax Relief Credit — about 260,000 filers — do not claim the STRC. And 260,000 refers to just filers, not each person who will get the Sales Tax Relief Credit. This means that the number of Oklahomans not receiving the credit is higher than 260,00, because one filer could have five exemptions. That is a huge gap.

Why is there a large eligibility gap? Well, there are likely some people that just don’t know about the Sales Tax Relief Credit. For others, they may know of the credit, but the work to apply for the credit may be too burdensome, especially if they don’t typically file their taxes, or they may not realize that they qualify.