The "tax cut" bait and switch

As they ponder plans to cut Oklahoma’s top income tax rate, most lawmakers admit the state cannot afford a cut without eliminating many other tax breaks. They emphasize that we should close loopholes for corporate “special-interests.” Yet as details of their plans emerge, we’ve discovered that the biggest cost would fall not on special-interests, but on hundreds of thousands of low- and moderate-income taxpayers, especially families with children and seniors.

These families would lose a host of broad and effective state tax credits to make way for income tax cuts that primarily benefit wealthier households. A new issue brief from Oklahoma Policy Institute explains how these broad-based credits work and why Oklahoma should preserve them.

The at-risk credits include the Earned Income Tax Credit (EITC), Sales Tax Relief Credit, and Child Tax Credit/Child Care Tax Credit.  The state EITC and the Child Tax Credit help about one out of every four Oklahoma families, and the Sales Tax Relief Credit goes to one-third of all Oklahomans.

You can see a breakdown of state EITC benefits by legislative district here. In most districts, between 1 in 5 to 1 in 3 families are helped by the state EITC. Even in Representative Randy Grau’s and Senator Clark Jolley’s districts in Edmond, which have the lowest percentage of EITC recipients in the state, about 1 out of every 9 families benefit from this credit.

Among the brief’s findings:

• Ending broad-based credits would shift taxes onto the most vulnerable. Under all of the tax plans making their way through the legislative process, between one-third and one-half of the citizens in Oklahoma would actually pay more taxes next year. Analysis by the Institute on Taxation and Economic Policy has found that a bill following OCPA/Laffer recommendations (SB 1587, which is no longer active but is very similar to other still alive bills) would raise taxes on 55 percent of Oklahomans in the first year. A bill based on Governor Fallin’s plan (HB 3061) would raise taxes on 31 percent of Oklahomans in the first year. A bill based on the tax reform task force plan (SB 1623) would raise taxes on 50 percent of Oklahomans. In all three variations, those harmed the most would be low- and moderate-income Oklahomans, especially seniors and families with children.
• Broad-based credits are important for a balanced tax system. Those seeking to do away with broad-based credits have claimed that it is not fair for a taxpayer to “profit” from filing an income tax return, since some of the credits allow low-income households that have limited or no tax liability to receive a tax “refund.” However, that argument ignores the impact of other taxes paid by these households. All Oklahomans help support schools, roads and other core public services. They pay sales taxes, property taxes on their homes or indirectly when they rent, and motor vehicle taxes. As the above chart shows, Oklahoma’s state and local taxes actually take a higher share of income from poor families than from middle-class families, and they take a higher share from middle class families than from the wealthiest households. Without the broad-based credits, this imbalance would be even greater.
• Broad-based credits encourage work, strengthen families, and boost the economy. Oklahoma’s most important credits are designed specifically to encourage work (EITC), support basic nutrition (Sales Tax Relief Credit), and strengthen families with children (Child Tax Credit). These types of credits have lifted millions out of poverty nationwide. They provide just enough breathing room in a family budget to ensure that basic needs are met and that other forms of assistance aren’t necessary. The families receiving these credits are the most likely to spend locally on food, clothing, and other necessities, each dollar spent on them multiplies throughout the economy.

A decades-long bipartisan effort has gone into developing these important tools for Oklahoma families. President Ronald Reagan once described the federal EITC, on which the Oklahoma credit is based, as “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress.” Eliminating these credits to pay for cuts at the highest income levels would be bad for average Oklahomans and bad for the economy as a whole.