Something we often hear about Oklahoma’s tax system is that the top rate kicks in so low that it affects almost everyone. Most recently, a Tulsa World article stated:
The current comparable top rate is 5.25 percent, which kicks on net income over $15,000 a year. That’s correct: The state’s top tax bracket – and there are six other lower tax brackets – kicks in at $15,000 a year, about $80 a year less than the gross earning of someone working full time at the U.S. minimum wage.
Actually, that’s incorrect. It leaves out two major components of our tax system: the standard deduction and personal exemption. Because of the standard deduction, the first $5,800 of income for singles and $11,600 for married couples is not taxed. The personal exemption means an additional $1,000 for each person in the household is not taxed.
Therefore a single person working full-time at minimum wage would make $15,080, but only $8,280 of that would be taxable income. If the person had children, even less income would be taxable. In either case, they would not be affected by the top bracket, which kicks in at $8,700 taxable income for singles.
A married couple with two children would not be affected by the top bracket until they earned more than $30,600. Even then, only income above that line is taxed at the top rate. The rest stays under the lower rates.
The top bracket currently affects a little more than half (56 percent) of Oklahomans. That’s higher than most states with a graduated income tax, but it’s not as extreme as many people think. And because no one pays the top 5.25 percent rate on all of their income, Oklahomans’ effective tax rates never reach that high.
This misconception about our tax system seems to extend even to Governor Fallin. In her State of the State address and a NewsOK op-ed, the Governor said that the “first dollar” an Oklahoman makes is taxed. It’s not, and our discussion about taxes needs to reflect this important fact.
For a quick primer on how Oklahoma’s personal income tax works, check out this 2-page fact sheet.