Oklahoma’s tax system is broken. Despite a recovering economy, the state is unable to raise enough revenue to sustain core public services. The strains will only increase over time as we cope with a rapidly aging population, unfunded pension obligations, and decaying infrastructure.
But inadequate revenues is not the only problem. It’s just as important that the cost of supporting government is fairly distributed and does not privilege some businesses or individuals over others without good justification.
As we explain in an issue brief released today, Oklahoma’s sales tax has fallen victim to both of these problems. The economy has evolved so that services and online goods which are not covered by the sales tax make up a larger proportion of purchases. In addition, the legislature has granted a growing number of exemptions, many with questionable economic rationale. One report found that just 35.7 percent of all purchases in Oklahoma were covered by the sales tax in 2003, compared to 52.0 percent in1990. Trends in the economy make it likely that the situation has only gotten worse since then.
Why does it matter? For one, the sales tax is the single largest revenue source for state and local governments in Oklahoma. In FY ’08 the sales tax comprised more than 1/4th of all state tax dollars and almost 2/5ths of local tax dollars. Cities, which cannot assess property or income taxes, are especially dependent on the sales tax.
Even apart from its importance to revenues, arbitrary sales tax exemptions distort the economy, reduce efficiency, and harm Oklahoma businesses and consumers. To understand why, consider an example: We pay sales tax when buying carpet cleaning supplies, but not when we pay a carpet cleaning service. This creates an artificial incentive to purchase untaxed services rather than taxed goods and unfairly advantages the service providers over retail stores.
In addition, since many services are purchased primarily by affluent households, the tax burden is shifted to middle- and lower-income Oklahomans. We see frequent battles over whether to exempt groceries from the sales tax, but little to no discussion of why services like horse boarding, pool cleaning, and investment counseling are already exempt.
Another aspect to this problem is that the state can’t require tax to be collected on many Internet sales when the seller has no physical presence within the state. That means purely online retailers like Amazon can avoid charging sales tax, while Main Street businesses that directly employ Oklahomans cannot. Oklahoma is among 21 states that does not charge sales tax for online downloads, which unfairly benefits retailers like iTunes over local merchants. That also advantages wealthier Oklahomans at the expense of those who do not have access to a computer, high-speed internet, and a credit card.
For all of these reasons, expanding the base of the sales tax would be beneficial, even if done in a revenue-neutral way. For example, we could extend the sales tax to cover more purchases while simultaneously reducing the overall rate. We will continue to debate what overall level of taxation is needed to maintain core public services, but even those who favor lower taxes should realize that sales tax loopholes are unfair, inefficient, and bad for Oklahoma business.