OKPOLICY.ORG
One of the most important battles next year will be over how much and what kind. Of course, I’m referring to tax cuts. At a recent State Chamber public affairs event, legislative leaders signaled there will be a renewed focus on “tax reform.” Reform is in the eye of the beholder, but in today’s climate, tax reform can usually be taken as a euphemism for tax cuts.
During his first term, Gov. Stitt — lucky enough to take office in 2019 at the end of a decade-long downturn in the national and Oklahoma economies — insisted on creating state “savings” of over $2 billion while at the same time advocating for tax cuts. Oklahoma’s already conservative constitutional formula for savings has automatically produced a rainy day fund balance of $1.1 billion. The additional savings were ostensibly to avoid budget cuts during the next oil bust.
Seasoned legislators — aware of the previous hollowing out of state government and fresh off a bruising tax-increase battle to avoid a rebellion by the state’s teachers and education supporters — split the difference. They restricted the re-funding of state government, stashed cash in various accounts, and chipped away at the revenue base. Legislators know the needs. In addition to crafting a budget each year, they recently reviewed $14 billion to $18 billion in requests for $1.8 billion in American Rescue Plan Act federal funds
But flush with cash and an oil economy producing record revenues, state savings accounts now serve as an excuse for further tax cuts. Although the state is near the bottom metrics on everything from health care to education, the political leadership will likely be unable to resist the tax-cut mentality. Given that picture, it’s probably how much and what kind. Fortunately, Sen. Dave Rader, R-Tulsa, seems to be the man Senate leadership will rely on for a level-headed approach. He’s currently leading a tax reform working group to study specific policy ideas.
The state income tax seems to be a likely target. If that’s inevitable, it could provide an opportunity for more fairness in the state’s income tax code. Income taxes are generally thought of as a graduated tax, but Oklahoma’s income tax is practically a flat tax. Every individual taxpayer pays 4.5% for earnings over $7,200. This means those earning $1 million per year and those earning $60,000 per year pay the same 4.5% rate for their earnings over $7,200.
For a tax code friendlier to middle to lower middle-income earners like first responders, teachers, white collar workers, and people who make things (like manufacturing and construction workers), instead of lowering the top rate that benefits high earners the most, it would be better to leave the top rate at 4.5% and create reduced intermediate rates for those making $35,000 or $65,000 or $95,000 per year, for example. I’m not holding my breath. That would harm the bragging rights for those who like to talk about lowering the “top rate,” but it would lower taxes for families who need it most. In addition, Sen. Rader could resurrect the idea he’s introduced before — eliminating the state capital gains tax.
