Regressive Features of the Tax System
Oklahoma’s tax system is regressive because we rely on sales and excise taxes for much of our revenue. The lowest 20 percent of Oklahomans, measured by income, paid 8 percent of their income, $1 of every $12 they earned, in sales and excise taxes in 2015. The highest 20 percent, on the other hand, paid just 2.9 percent, or $1 of every $34 they earned.
The sales tax hurts low- and middle-income Oklahomans more than any other feature of the tax system, because there is not a wide difference in spending for many taxed items such as groceries and household supplies between low- and high-income households. Further, lower income families tend to spend all they earn, or more, while higher income families save and invest more of their income. Higher income households are also more likely to spend more on services, which are mostly untaxed in Oklahoma, and are more able to avoid sales tax by purchasing goods online than are low-income households, which may not have credit cards or reliable Internet access.
Excise taxes on sales of specific products also contribute to a regressive tax system. The very lowest income Oklahomans pay more than one percent (1.2 percent) of their income just in these relatively small taxes.
- Motor fuels taxes fall more heavily on low income families because they may be able to afford only larger, older vehicles that get poor gas mileage. Further, the amount of driving is not related to income, so the tax takes a higher share of income for low-income taxpayers.
- Motor vehicle taxes fall more heavily on low-income taxpayers. Purchasing a vehicle, even used, takes a larger share of income for most low-income households.
Tobacco taxes and alcoholic beverage taxes fall heavily on low-income households, as do all consumption-based excise taxes.
Gambling, an important non-tax revenue source, also contributes to the regressivity of the state’s overall revenue structure. A Brookings Institution study shows that all income groups pay approximately the same dollar amount each year for lottery tickets. As a result, the lottery costs more as a share of income to lower-income participants.
Oklahoma’s tax system has become more regressive over the past few years. Several events have worked together to make lower income taxpayers face a larger share of the tax mix, but the most dramatic effect has been from individual income tax rate reductions. Middle and upper income taxpayers benefited from reductions in the highest income tax rate. The highest rate, applying to taxable 2016 income (after subtracting the standard or itemized deductions and personal exemptions) of $7,200 and over, has been gradually lowered from 7 percent in the 1990s to 5.0 percent in 2016. Because the top tax rate applies at fairly low income levels, most Oklahoma taxpayers received some benefit from the rate cuts. However, 40 percent of households receive no benefit from cutting the top income tax rate and the benefit of cuts to the top rate is greatest for those with the highest income levels.
Increased reliance on tobacco taxes and gambling has increased the tax burden on low-income taxpayers. In 2004 voters approved an 80-cent per pack increase in the cigarette tax and comparable increases in other tobacco taxes. This tax adds $150 per year to the tax bill of even a relatively light smoker. This tax is justified by the fact that it funds health programs and it may discourage tobacco use. This amounts to 2 percent of income for the bottom 20 percent of taxpayers. The new state lottery and tribal gaming acts passed at the same time have similar regressive effects.
Elimination of the state estate tax has helped only the wealthiest taxpayers. In 2006 the Legislature approved a phase-out for deaths after January 1, 2010. Because $950,000 of the value of most estates was exempt from the tax in 2005, the elimination of the tax benefits only those with significant accumulated wealth. The revenue from this tax, which peaked at $111 million in 2004, is lost to the state. Resulting budget cuts or tax increases place more costs on lower- and middle-income Oklahomans than did the estate.
The Legislature in 2016 did take one step to make the tax system less regressive. Beginning in 2017, taxpayers who claim itemized deductions on their state tax return can no longer effectively deduct their state income taxes from state income taxes, a quirk of the tax system commonly labelled the “double deduction.”. According to the Institute on Taxation and Economic Policy, more than half of the benefit of this deduction went to the top five percent of taxpayers.