Making Taxes Fairer
There are several options to improve progressivity of our tax system. A more progressive tax system would reduce the tax impacts on struggling Oklahoma families by providing them more resources to meet current needs and invest in the future. Several alternatives for making Oklahoma’s tax system fairer are listed below.
- Update the sales tax credit that low-income Oklahomans receive on their income tax. This credit is designed to repay part of the sales tax on groceries and other essential items, which hits low-income taxpayers hardest. Oklahoma is one of just 14 states that charges sales taxes on groceries and one of only seven states that tax groceries at the full rate. The amount of the credit – $40 per person – has not increased since it was created in 1990. Increasing the amount of the credit, along with increasing the income eligibility to claim the credit, would be a targeted, fiscally responsible way of helping families in need keep pace with rising food costs.
- Restore the refundable earned income tax credit. In 2016, the Legislature voted to make the state earned income tax credit (EITC) non-refundable, which means it can no longer be claimed in an amount in excess of a household’s state income tax liability. This cut to the EITC affected over 200,000 households and especially harmed those workers with the lowest incomes.
- Index the income levels at each tax rate. Inflation affects all income taxpayers due to “bracket creep,” in which modest increase in pay may require the taxpayer to pay a higher tax rate. Oklahoma’s income tax would be lower for all taxpayers and more equitable to low-income taxpayers if it was indexed so that the income level at which a taxpayer reaches a higher rate increases each year along with inflation. Revenue impacts could be significant, but less than from recent cuts in the top tax rate. Currently, taxpayers hit the top income rate at $17,000 of taxable income for married households and single parents, and at $8,500 for single individuals.
- Raise the top income tax rate. Oklahoma’s 2016 top rate of 5.0 percent is lower than three of the six surrounding states with an income tax. Oklahoma should explore a higher top rate that applies only at much higher income levels than the current 5.0 percent rate.
- Provide property tax relief to low- and moderate-income renters. Much of the property tax on renters is passed along to tenants in the form of higher rent, but tenants have no tax relief. Oklahoma should consider joining the states that offer income taxpayers a renter’s property tax credit, which could be refundable for those who do not owe income tax.
- More carefully evaluate tax expenditures. Tax expenditures favor specific groups (like seniors, veterans, individuals with disabilities, nonprofit associations) or specific activities (such as purchasing a home, manufacturing airplanes, creating certain kinds of jobs, or drilling certain kinds of wells). In most cases, the tax expenditure favors middle- and higher-income households and businesses. Oklahoma’s system to determine the cost and evaluate the effectiveness of tax expenditures should be expanded to all tax breaks. It also should review how the benefit is spread across the income scale. In 2015 the Legislature established the Oklahoma Incentive Evaluation Committee to review selected tax incentives over a four-year period.
Tax fairness must be balanced with revenue adequacy. It would be counterproductive to make the fiscal gap worse by making taxes fairer. Tax fairness should be part of an overall tax plan that keeps revenues neutral so as not to increase the challenges of providing adequate public services, while creating a tax system that treats all Oklahomans fairly.