Personal income tax cuts won’t deliver relief to low- and middle-class Oklahomans

Editor’s note: This piece was published during the 2022 regular session and references a specific bill number that lawmakers considered before legislative deadlines. While this bill did not pass the final legislative deadlines, the core principles of the bill — and even specific language from the bill — could appear in future legislative discussions and bills.

Cuts to the individual income tax rate are unfair to low- and middle-class families since they return the largest benefit to the wealthiest Oklahomans. Tax cuts now can devastate state revenue and funding for services like public education in future years. Despite its impacts on everyday Oklahomans, state lawmakers are considering a significant personal income tax cut this year. House Bill 3350, authored by House Speaker Charles McCall, R-Atoka, would reduce all individual income tax rates by 0.25 percent, dropping the state’s top income tax rate to 4.5 percent. The majority of the benefit would go to the richest Oklahomans and leave the state scrounging for revenue to provide services that support us all. 

The proposed tax cuts are unfair to low- and middle-class Oklahomans

If passed, the individual income tax cut outlined in HB 3350 will overwhelmingly benefit wealthy people at the expense of low- and middle-class Oklahomans. Nearly two-thirds (65 percent) of the benefit will go to the top 20 percent of earners. That leaves only about one-third of the total tax cut for Oklahomans making less than $100,000 annually, according to an analysis by the Institute on Taxation and Economic Policy. While Oklahoma’s tax system overall is considered unfair and regressive, the individual income taxes are one of its fairest aspects because the amount paid is dependent on individuals’ ability to pay. To compensate for lost revenue via individual income tax cuts, lawmakers will likely need to “force regressive sales and other tax increases that fall more heavily on low-income households,” which will make our system even more unfair. 

 

HB 3350 would return an average of $4 per year to the poorest Oklahomans, as shown below. Middle-class Oklahomans would get an average tax cut of $61. In contrast, the wealthiest one percent of Oklahomans — those who make more than $500,000 annually — will receive an average tax cut of $2,043. Collectively, our tax dollars fund necessities like public education and mental health treatment. Individually, the tax cut will buy a cup of coffee for the poorest Oklahomans, a nightstand from IKEA for the middle-class, and two round-trip flights to Budapest for the wealthiest.

In fact, this tax cut would provide more money per day to the top one percent of earners than it would to the lowest 20 percent of earners in an entire year. The benefit is lopsided and unfair to everyone except those at the very top. 

Reducing revenue will harm future Oklahomans 

The high state revenues Oklahoma is enjoying this year won’t last forever. Credit rating agencies have warned that cutting taxes now — amidst the recent influx of federal pandemic relief — could have “negative long-term credit implications” if the state’s revenue growth is not sustained. Long-term revenue impacts will leave Oklahomans without sufficient resources to provide vital services like public education and high-quality infrastructure in the coming years. 

HB 3350 is estimated to cost $89 million in Fiscal Year 2023, $227 million in Fiscal Year 2024, and $238 million in Fiscal Year 2025. The proposed cuts from HB 3350 would be in addition to the significant personal income tax cut approved by state lawmakers during the 2021 Legislative session. The costs of the 2021 tax cuts and 2022 proposed cuts (if enacted) will continue to grow with normal economic growth and inflation. The graph below shows the impacts per capita of both rounds of personal income taxes, accounting for estimated economic and population growth.

Further, government operating costs are subject to many of the same forces that increase day-to-day costs for companies and families. High and unpredictable rates of inflation may raise costs even faster in current and future years. If lawmakers enact HB 3350’s proposed personal income tax cuts, the state’s revenue from individual income tax would likely grow at about 1.5 percent, which is lower than the Federal Reserve’s annual inflation target of two percent and much lower than this year’s high rates of inflation. This means that the state will not be able to maintain current services and may need to enact deep cuts to public necessities. 

Indeed, this proposed tax cut would take money directly from public education, which in Oklahoma is primarily funded by the General Revenue Fund (GRF) and the 1017 Fund. In 2025, this cut will mean $204 million less in the GRF and $20 million less in the 1017 Fund. While the cut to the GRF would be spread out across agencies (many of which are already underfunded and cannot afford further budget cuts), Oklahoma’s schools would be directly impacted by this lost revenue because the 1017 Fund is directly appropriated to public education.

This loss is especially notable after the historic education protests in 2018, which resulted in Oklahoma’s first major revenue-raising bill since the passage of State Question 640 in 1992. SQ 640 requires a three-fourths majority of both legislative chambers — or a majority vote of the people — to raise revenue. Passing HB 3350, or any significant tax cut this year, will undo much of the progress made in 2018. 

Let’s provide tax relief for those who need it 

Most Oklahomans want a fair tax system, but HB 3350 is a step in the wrong direction. If HB 3350’s tax cuts are enacted, lower- and middle-class Oklahomans would receive little if any relief while the inequities of our state’s tax system would grow wider. Additionally, the state’s structural deficit and historic propensity toward reducing revenue mean that Oklahoma cannot afford the future impact of this tax cut. Rather than universally cutting taxes, state lawmakers should consider providing targeted tax relief to those who need it by expanding tax credits like the Sales Tax Relief Credit and the state’s Earned Income Tax Credit.

HB 3350 awaits consideration by the Senate. (As of 4/20/2022.)

CALL TO ACTION

Contact your legislators to ask them to reject HB 3350, which would worsen the inequities of Oklahoma’s tax system and cut much-needed revenue for state programs and services. Ask them to choose solutions, like the expansion of the Sales Tax Relief Credit and the Earned Income Tax Credit that would provide targeted tax relief to Oklahomans who need it most.

 

ABOUT THE AUTHOR

Emma Morris joined Oklahoma Policy Institute as the Health Care and Revenue Policy Analyst in April 2021, and she previously worked as an OK Policy intern and as the Health Care Policy Fellow. She has worked as a case manager with justice-involved individuals and volunteered as a mentor for youth in her community. Emma holds dual bachelor’s degrees in Women’s and Gender Studies and Public and Nonprofit Administration from the University of Oklahoma, and is currently working on a Master of Public Administration degree from OU-Tulsa. She is an alumna of OK Policy’s 2019 Summer Policy Institute and The Mine, a social entrepreneurship fellowship.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.