OKPOLICY.ORG
As Oklahoma’s 2023 legislative session begins, the perennial push for tax cuts that would shrink state revenue will likely return. In 2022, leaders of the Oklahoma House of Representatives championed tax cuts – primarily focusing on reducing the personal income tax, the corporate income tax, and the sales tax on groceries. Ultimately, the legislative session ended without any major tax cuts, but many of these proposals may be back this session, despite impending economic uncertainties both in Oklahoma and around the nation.
State lawmakers should refrain from making tax changes that will significantly reduce state revenue collections. Doing so would ensure the state can continue to provide vital public services like public education and health care, now and in future years. Because of State Question 640’s supermajority requirements, revenue cuts are virtually impossible to recapture in times of need. Similarly, because low- and moderate-income households are hardest hit by inflation and other economic pressures, any tax reform efforts should be targeted towards Oklahomans who most need the assistance.
We must protect vital state revenue.
Together, the taxes we pay create revenue that funds state services on which every Oklahoman relies. Public schools and universities, shared roads and transportation systems, fire protection, and public health efforts all rely on tax revenue. Lawmakers must ensure the state has adequate, stable revenue in order to maintain the current level of services for a growing and aging population, which will require expanded elder care and a larger public school population. They must also account for costs that inevitably increase with inflation.
Additionally, cutting revenue when the economy is doing well will inevitably hurt the state’s ability to provide necessary services in future, leaner years. Oklahoma leaders have been forced to declare revenue failure nine times since the year 2000 because we failed to plan for leaner years. Each time led to immediate and hurtful budget cuts to state agencies and the Oklahoma residents they serve. State leaders would do well to learn from these past mistakes.
The individual income tax is the largest revenue source for the state’s General Revenue Fund, yet it is often a target for reduction or repeal. Reducing the revenue that comes from the individual income tax directly reduces funding for public education (through the Education Revolving Fund), teachers’ retirement, and the ad valorem reimbursement fund. Further, the individual income tax contributed nearly $4 in every $10 (37 percent) of the General Revenue Fund in Fiscal Year 2022. Cutting any of that revenue almost certainly means cuts to services.
Similarly, the revenue from the corporate income tax is distributed between the General Revenue Fund, the Education Revolving Fund, and other critical state priorities. In FY 2022, $134 million of the corporate income tax revenue went directly to public common education; for reference, that’s just slightly less than the entire budget for the Department of Career and Technology Education.
When lawmakers choose to reduce state revenue – as they have consciously and consistently done over the last two decades – they must create alternative funding sources, or forego the revenue altogether. As noted above, SQ 640 makes this a near impossibility because of requirements for a legislative supermajority or a majority vote of the people. In fact, legislative approval for new revenue has only occurred once in the last three decades, which was the result of 2018’s education rallies. Therefore, it is much more likely that any major tax cuts would leave the state without adequate revenue to provide the public services on which all Oklahomans rely.
Any efforts to cut taxes must be targeted.
As state lawmakers consider tax reforms, they must ensure that those efforts provide relief for the Oklahomans who most need the help. Inflation and other economic uncertainties impact lower-income folks the most, primarily because low-income households spend a larger portion of their income than wealthier individuals on necessities like food and housing.
Low- and middle-income households also already pay higher taxes as a percentage of their income than their wealthier counterparts. This is primarily due to Oklahoma’s heavy reliance on sales taxes, the state’s low corporate tax rate, and the absence of a truly graduated state income tax.
If lawmakers choose to further cut the corporate income tax this year, they will be sending the majority of that tax benefit to wealthy, out-of-state corporations. Similarly, further reducing the personal income tax would send about two-thirds of the benefit to the richest 20 percent of Oklahomans.
Instead of making the tax system even more unfair with tax cuts that benefit the rich and out-of-state companies, lawmakers can update existing tax law to deliver relief and lower taxes for low- and middle-income Oklahomans:
- Modernizing the Sales Tax Relief Credit – which was created to help offset the cost of groceries for those who need it – will provide much needed relief to 576,000 Oklahoma households. Lawmakers can reduce or eliminate the state and local grocery tax for families making less than $40,000 annually by increasing the credit from $40 to $200 per person and updating the qualifying income requirements.
- Expanding the Earned Income Tax Credit – Oklahoma’s EITC for low-income workers is one of the smallest in the country. Re-coupling the state credit to the federal credit will incentivize work, improve educational outcomes, help Oklahomans pay for necessities like housing and child care, and boost health outcomes.
Providing tax relief through tax credits like these will put money directly into the hands of low- and moderate-income people who will spend most or all of it locally, which stimulates local economies across the state. Further, in the case of future revenue shortfalls, lawmakers can raise revenue without having to overcome the supermajority requirements of SQ640, simply by changing tax credits like these. Finally, broad tax cuts would likely make inflation worse, so targeted relief as outlined here represents the most economically responsible way to help Oklahomans weather the current economic storm.
Moving forward, Oklahoma needs common sense tax reform.
In the 2023 legislative session, state lawmakers have an opportunity to use tax policy to help low- and middle-income Oklahomans. Expanding and modernizing the Sales Tax Relief Credit and the Earned Income Tax Credit will provide significant, targeted tax relief for those who need it most. Doing so would also balance current and long-term state revenue needs, thus ensuring that the state can deliver essential programs and services upon which all Oklahomans depend — today and tomorrow.
