OKPOLICY.ORG
Note: A version of this post appeared in the Journal Record
After two years of effort, Governor Fallin and legislative leaders finally succeeded in cutting Oklahoma’s top income tax rate. For those who have been actively opposing tax cuts as an unaffordable drain on our resources for schools and other vital services, the outcome, while certainly a disappointment, contains several silver linings.
First, compared to last year’s proposal to slash the income tax immediately and then phase it out entirely, the tax cut passed in HB 2032 is relatively modest. It lowers the top rate by one-quarter percent, but not until 2015, with a further cut of two-tenths of one percent in 2016 if revenues grow. By deferring the tax cut, legislators recognized the need to prioritize increased education and other core services that have been hammered by years of budget cuts and flat funding. Still, the bill’s $253 million fiscal impact, when fully implemented, will significantly hamper the state’s ability to keep up with the rising cost of public services.
Second, lawmaker support for HB 2032 was notably unenthusiastic. Seven Republicans in the House (Reps. Cox, Dewitt, Hardin, Hickman, Hulbert, Reynolds and Ritze) and two in the Senate (Sens. Allen and Anderson) joined with all legislative Democrats in voting against it, mostly out of concern that services aren’t being adequately funded and uncertainty over what the state’s fiscal situation will look like when the tax cuts kick in. Many other members of the Republican majority expressed strong public or private reservations about cutting taxes at this time but yielded to party discipline and the threat of primary challenges. This is a major shift from the last round of income tax cuts of the mid-2000s, when tax cuts sailed through a Republican-controlled House and Democratic-controlled Senate with bare handfuls of no votes.
Third, it became clear over the past two years that Oklahomans are not clamoring for tax cuts. Most legislators confirmed that few of their constituents, business owners included, were demanding a tax cut. A poll commissioned by Oklahoma Policy Institute showed that a clear majority of voters opposed the tax cut if it meant less funding for services such as education, health care and public safety. Most did not buy into the argument that lower taxes are a key to Oklahoma’s prosperity. Still, once Governor Fallin made a tax cut her top priority, Republican legislative leaders ultimately felt compelled to go along, if only to get the issue off the table.
Fourth, while Senate Republicans abandoned their insistence on revenue-neutral tax reform by agreeing to a bill that cuts taxes without eliminating tax breaks, legislative leaders continue to acknowledge the need for tax reform. Curbing oil and gas tax subsidies, adopting combined corporate reporting, limiting itemized deductions, and enhancing the collection of online sales tax are among the tax reform action items that may yet come to fruition in the next year or two. All these measures could offset the lost revenue from the income tax cut and make inroads in creating a tax system that is fairer and better able to generate the revenues needed to meet our obligations.
Finally, it is far from clear that HB 2032 will even take effect. By logrolling into a single bill the tax cut with the allocation of $120 million over the next two years into a newly-created State Capitol Building Maintenance and Repairs revolving fund, HB 2032 is highly vulnerable to a court challenge as a violation of the Constitution’s single-subject rule. If the Court does throw out HB 2032, it is far from certain that a majority can be reassembled to approve the tax cut, especially if the state’s fiscal outlooks begins to worsen.
Ultimately, the tax cut reveals as many weaknesses as strengths for tax cut boosters in Oklahoma.
