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.
- Index the income levels at each tax rate. Inflation affects all 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. More aggressive tax reform yet would broaden the individual tax brackets so that the top income tax rate applies only to higher incomes. Revenue impacts could be significant, but less than from recent cuts in the top tax rate. Currently, taxpayers hit the top income rate of 5 percent at $24,900 of total income for married households and single parents, and at $13,550 for single individuals. The chart below shows most of most of Oklahoma’s neighbors have higher thresholds for the top rate and have increased those thresholds while Oklahoma’s has been nearly constant.
- Raise the top income tax rate. Oklahoma’s top rate of 5.0 percent is lower than four of the six surrounding states with an income tax. Oklahoma should explore a higher top rate that applies at higher income levels than the current top 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 are tax exemptions, deductions, and credits designed to encourage certain behaviors. While some, like the personal exemption for income tax and exemptions to the sales tax, are available to all Oklahomans, many 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 (IEC) to review selected tax incentives over a four-year period. While the IEC has overseen several dozen evaluations, many tax incentives cannot be evaluated due to lack of data on their impact. Others have been found to be ineffective or poorly administered, yet the Legislature has acted on only a few of the IEC’s recommendations.
Oklahoma’s tax system also lacks horizontal equity, meaning those with similar ability to pay may have significantly different tax payments. Tax expenditures often 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). Oklahoma should make a thorough review of all tax expenditures that favor one group over another and redesign them so that those with equal incomes make equal tax contributions.
Tax fairness must be balanced with revenue adequacy. It would be counterproductive to make the tax system fairer by making the fiscal gap worse. 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.