Revenue Options for Closing the Fiscal Gap
Oklahoma’s low taxes and low spending make revenue the best option for closing the structural deficit. Because Oklahoma’s tax levels are among the lowest in the nation, ranking 47th per person and 47th as a share of personal income, we can reduce the structural deficit through raising revenues. These should not, of course, be the only solutions. We should use existing revenue more effectively and, as discussed in the next section, make better long-term spending decisions.
Raising revenue is not always a popular option but it is one that will be necessary to solve the structural deficit. Many options are available.
- Restore taxes that have been cut or that have not kept pace. Deep cuts to the personal income tax have contributed to chronic budget shortfalls while making the tax system less fair. The tax on oil and gas was cut from 7 percent to 2 percent for the first three years of production on all wells drilled after July 2015. This reduction was partly restored in 2018 when the rate for new wells increased from two to five percent. The top rate of the individual income tax has been cut from seven to five percent over 20 years. This cut is not compatible with fair and effective government and must be re-examined.
- Apply the sales tax to a greater range of services. Oklahoma taxes fewer services than most other states. In a service-based economy, this contributes to the growing fiscal gap and serves to distort economic behavior.
- Eliminate corporate tax avoidance strategies. A 2015 analysis estimated Oklahoma loses $40 to $80 million (ten to twenty percent of what could have been collected) in corporate taxes annually. This results from shifting transactions outside the United States and from tax sheltering techniques within the United States. One way to reduce corporate tax avoidance is to adopt “combined reporting,” which treats parent corporations and their subsidiaries as one unit for the purposes of paying state income taxes. Read the latest update on combined reporting from Multistate Associates.
- Eliminate ineffective tax breaks.
- The Legislature should take action to eliminate or curb tax incentives that the Incentive Evaluation Commission has deemed to be inefficient or overly costly. Findings in the first four years of reviews included:
- The state liability for the Investment/New Jobs Credit is $500 million and the Oklahoma Tax Commission cannot provide data to estimate its economic impact.
- The Quick Action Closing Fund spent an average of $6,500 per job but many jobs were below Oklahoma’s low average wage.
- Most credits under the New Products Development Incentive are claimed by only two companies.
- Reduce revenue restrictions. Available revenues could be used more efficiently for the greatest need if their use was not restricted. Restricted or “earmarked” funds favor some government functions at the expense of those that are funded from the General Revenue Fund. Earmarking also increases the chances that programs will be funded at a higher level than they would be without earmarks, reduces the chances that program performance is reviewed, and freezes priorities in a world where they should be changing.
Regardless of what action is taken, we should preserve a balanced tax structure. We should not rely too much on a single tax stream (as cities are currently too dependent on sales taxes). We must continue to emphasize the income tax, which is our fairest tax and the one ablest to keep up with economic growth. Sales taxes remain an important part of the revenue structure since Oklahoma voters have supported many state and local sales tax measures. At the same time, the property tax is the one least likely to lose revenue in the changing economy, so it too must be part of the revenue solution.