The tax shift rears its head

Last week the Oklahoma Senate Finance Committee approved SB 977, a bill that would suspend 23 tax credits for the next two years as a way to partially address the state’s massive budget shortfall. While the bill targets numerous credits, a large majority of the impact would come from ending three important tax credits for low- and moderate-income working families — Oklahoma’s Earned Income Tax Credit (EITC), Sales Tax Relief Credit, and Child Tax Credit/Child Care Tax Credit. The Senate Finance Committee has also approved SB 917 and SB 918, which would sunset the Earned Income Tax Credit and Sales Tax Relief Credit after 2017 if they are not reinstated by the Legislature.

These important tax 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. While many tax credits may be criticized for benefiting a narrow special interest, what makes these credits different is that they are extremely broad-based — going to over 40 percent of Oklahoma families — and they help alleviate some of the imbalance in our state tax system that already takes the biggest percentage of income from those who make the least.

The state’s Earned Income Tax Credit (EITC) supplements 5 percent of the federal EITC. The EITC has received praise from both the left and right as an effective way to bolster economic security for working families while encouraging work. House Speaker Paul Ryan and President Obama have proposed very similar plans for expanding the EITC in recent years. In Oklahoma, the state EITC, which was signed into law by Gov. Frank Keating in 2001, was claimed by 331,854 households for an average benefit of $118 in fiscal year 2013.

The Sales Tax Relief Credit, sometimes known as the “grocery tax credit,” is an income tax credit that provides a rebate of $40 per household member to low- and moderate-income households. Oklahoma is one of only seven states that imposes a sales tax on groceries atthe full rate. Most states have reduced or eliminated taxes on this basic necessity that eats up a substantial portion of a low-income family’s budget, so the Sales Tax Relief Credit is intended to alleviate a portion of that cost. In fiscal year 2013, this credit was claimed by 476,193 households and benefited almost 1 million Oklahomans.

The Child Tax Credit and Child Care Tax Credit help parents to pay for child care so they can work or look for work. They also reduce taxes for stay-at-home parents and those who care for dependent elders or people with disabilities. The state child care tax credit can be claimed for 20 percent of the federal credit for child care expenses, up to a maximum of $420. Families also have the option to instead receive 5 percent of the federal child tax credit of $1,000 per child, so those who don’t pay out-of-pocket for child care can still benefit. In fiscal year 2013, these credits were claimed by 378,993 Oklahoma households for an average benefit of $72.

It’s important to realize that Oklahoma lawmakers just moved ahead with a cut to the top income tax rate, which reduces state revenues by some $150 million for  the upcoming year, on the grounds that Oklahomans deserve tax relief. Eliminating these credits would make false lawmakers’ claims to be offering tax relief.  Instead they will have shifted taxes directly from those already making high incomes to poor and middle class taxpayers. The chart below shows what that looks like:

before-after-PIT-EITC-STRC-CTC

In fact, ending these credits would increase taxes for more than one-third of all Oklahomans. The average middle-income Oklahoma household would see its taxes increase by $57 — or nearly twice what these families received from this year’s income tax cut ($29). The bottom 40 percent of households in Oklahoma, making less than $33,000 a year, would see average tax increases of more than $100 while receiving little to nothing from the income tax cut. Low- and moderate-income families with children would be hit especially hard; many would see a net increase in their taxes of several hundred dollars.

tax-increase-from-eliminating-PIT-EITC-STRC-CTC

During the committee hearing, Senate Finance Chair Mike Mazzei said that he did not intend for his bill to suspend these credits to ultimately make it into law, but it would be held in reserve in case a more targeted approach to reducing tax breaks did not find success. We hope that as lawmakers move forward in their efforts to close Oklahoma’s massive budget hole, it’s not the hundreds of thousands of regular families relying on these credits who end up being targeted.

These same families suffer most when Oklahoma cuts education funding, slashes health care, and makes other deep cuts to core public services. Asking for more pain from those who are already struggling most while refusing to reconsider the income tax cuts for top earners and huge tax breaks for oil and gas companies that helped get us into this mess would be a deeply troubling path for Oklahoma lawmakers to take.

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ABOUT THE AUTHOR

Gene Perry joined OK Policy in January 2011. He is a native Oklahoman and a citizen of the Cherokee Nation. He graduated from the University of Oklahoma with a B.A. in history and an M.A. in journalism. Gene also serves on the board of the Oklahoma Sustainability Network, is a trustee of the Oklahoma Foundation for Excellence, is a member of Investigative Reporters and Editors, and has chaired the communications advisory committee for the State Priorities Partnership, a nationwide network of state fiscal policy think tanks. He lives in Tulsa with his wife Kara Joy McKee, who is a Tulsa City Councilor.

7 thoughts on “The tax shift rears its head

  1. I would like to know the total dollar amount saved by removing these tax credits compared to the amount of lost revenue for the lowering of the gross production tax on oil and gas from 7% to 2% a few years ago.

  2. I would like to know if other states have removed the tax credits and an analysis of the impact this removal has had on the larger economy. It seems that to pull this safety net away, a group of unintended consequences will unfold, creating costs which did not exist before.

    Also, I hear leading economists begin to say that tax cuts are hurting the larger economy and it is time for tax increases. That is, inequality is more expensive to our nation than equality.

  3. We should not be cutting taxes at this point period. Getting rid of the credits would be a great move, since they are not tax deductions but subsidies. They come from a fund that is supplied by our taxes. If you receive these tax credits, somebody else is paying for them and its not likely your neighborhood oil Baron.

  4. Reply to comment made by Danni Waddell:

    On my state taxes money is taken out throughout the year from my paycheck, usually resulting in a refund of taxes that I already paid in. So, I still pay a portion of money that I EARNED to the state. It’s basically an over-payment because I am not getting back more than I put in. Sorry but this doesn’t qualify as a “hand-out” in my book. Also I know for a fact that I pay more than $40 a year on taxes for food and not to mention the plethora of other taxes and fees that the state wrings out of our family every year.

  5. A large number of the sales tax credit claims are made by persons who don’t pay any income tax at all. And if they are on food stamps, they aren’t paying sales tax on their food anyway. It is just a free money give away. I don’t have a problem with giving a credit against tax to hard working families, but it should never have been a freebie to those who do not pay tax at all. If it is not eliminated, it and the EIC credit should be made as non-refundable credits against tax owed.

  6. I’d like to point out that the $40 Sales Tax Credit is so much more to those on fixed and lower incomes, especially seniors. My parents worked hard all their lives in hard labor jobs, thus, retirement and social security earnings are lower. By receiving the Sales Tax Credit, they are eligible for the reduced phone service program, Lifeline. Participating in this program saves about $25 a month in phone cost. This $25/month ($300) is then used to pay for their prescription drug coverage deductible. They are one of hundreds Oklahomans who depend/need a tax credit.

  7. I think it is a shame the only tax cuts Oklahoma could come up with is to the poorest of our state! My daughter has 3 children, is a single mom and works hard every day. She does not get food stamps as she makes too much, just not enough to barely make it… I watch her struggle every day to make it on 12.00 an hr. Then you talk about taking away some of the tax cuts she does get at the end of the year. I am on disability and would love to see some of you make it on 800.00 a month. I went to get food stamps and they were going to give me 9.00…. I told them to keep them, they must need them more than I did. It has been hard and I am so proud to say I have found a way to make it. And help my daughter when she needs it. So all of you who make 50,000.00 and on up, feel very comfortable in your cozy little houses as you discuss what taxes and cuts you can make for the poor people of this state. You do not have to live with it.

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