OKPOLICY.ORG
While Oklahoma lawmakers introduce tax reduction measures every legislative session, this year has proven a rare opportunity for some of these bills to get serious consideration. House Bill 2083 — authored by House Speaker Charles McCall, R-Atoka, and others, and Sen. Julie Daniels, R-Bartlesville — would phase out the state’s corporate income tax and provides a particularly troubling example. Approved last week by the House of Representatives, this bill would shrink the state budget, endanger public services, benefit mostly non-Oklahomans, reduce our state’s economy, and hurt in-state businesses.
Tax cuts are not free; we pay for them by reducing government services or increasing other taxes, which thanks to State Question 640 requires supermajority support in both houses. Tax cuts often don’t help the state’s economy because they often benefit higher-income taxpayers who are more likely to save their tax cut than spend it. The state sees little impact from those out-of-state entities who benefit from tax cuts because they may not spend any of the money in our local economy. On the other hand, government spending mainly stays in Oklahoma and supports hundreds of thousands of middle-class, high-skilled jobs.
Oklahoma’s corporate income tax is fair and reasonable
Oklahoma’s corporate income tax is good public policy. Forty-four states have corporate income taxes like Oklahoma’s, and all but two of the remaining states tax business revenues. Corporations benefit greatly from government services; together we fund education and skills training for their workers, infrastructure to move their goods, and regulations and courts that keep the playing field level for their businesses. It’s only fair to expect them to fund their share of these public services.
The corporate income tax is levied only on profits, not total revenue. That means many small, startup businesses don’t pay any tax in their early years. For larger and established businesses that regularly make profits, the tax is small compared to other costs of business such as buildings, labor, utilities, and federal taxes. Across the nation, all state and local business taxes account for only 1.8 percent of average business costs, and the corporate income tax is approximately 9.5 percent of total state and local taxes on businesses. This means that the corporate local income tax is estimated to be less than one fifth of a percent of business expenses.
Oklahoma’s corporate tax isn’t burdensome. Our six percent top rate is squarely in the middle of the 2.5 to 11.5 percent top rates levied by other states. On a per-person basis, our corporate tax is 41st highest among the states, according to the Tax Foundation.
Eliminating the corporate income tax would force service cuts we can’t afford
Over the five years from budget years 2014-15 through 2018-19, the corporate income tax raised an average of $371 million a year. Tax revenue is split between the state General Revenue Fund (GRF), the Education Reform Revolving (1017) Fund, and the Teachers Retirement System. If the corporate income tax is eliminated and the revenue losses are distributed proportionally to each agency’s current allocations, public education (K-12) would stand to lose $155 million annually. Other agencies that would see cuts in this model include the Oklahoma Health Care Authority ($55 million), Department of Human Services ($34 million), higher education ($30 million) and more as shown in the chart below. (Note: All calculations and sources may be found here.)
A revenue loss of this size would require cuts in our most essential services. Here are some examples to give an idea of the size of the cuts.
- A $155 million reduction in K-12 education could require eliminating more than 2,800 teachers across the state, which would increase class sizes in most school districts.
- To absorb a reduction of $51 million, OHCA — which operates the federal/state Medicaid health insurance program — could have to cut payment rates to its medical providers. OHCA’s payments to providers are already 14 percent less than industry standards (as measured in relation to physician fees for Medicare payments). The reduction in state revenues would also cost OHCA and DHS more than $160 million in federal funds, because when the state has less to spend on the local share of Medicaid, federal funding drops as well.
- One of few possible ways for DHS to reduce its budget is by limiting home and community-based care for 26,000 aging and disabled Oklahomans, who might be forced to move away from their families and communities and into nursing homes without these services.
- A $30 million reduction to higher education would likely be passed on to students and their families through a 2.2 percent ($200/year) tuition increase. This would deepen our state’s college affordability crisis when community colleges and four-year universities have already increased tuition by 47 and 31.8 percent respectively since 2008.
- Local governments could see $4 million in lower state reimbursements for the cost of the Ad Valorem Manufacturing Exemption tax incentives for corporations. About half the loss would affect just four counties that have 20 percent of the state’s population: Mayes, Garfield, Tulsa, and Kay.
Oklahoma can’t afford to eliminate the corporate income tax. The damage to children, workforce readiness, seniors and disabled persons, health care providers, and counties would be immediate and long-lasting.
Ending the corporate income tax will hurt our economy
Ending the corporate income tax will also gradually diminish, and permanently harm, our state’s economy. This tax break most benefits out-of-state companies; in contrast, the vast majority of state spending from the corporate income tax is invested in our local economies, most notably in the form of state and school payrolls statewide. On the other hand, state investments in health care and education, funded in part through the corporate income tax, are proven to raise families’ incomes.
Most savings from ending this tax will go to large corporations that operate in every state and many countries. If employees benefit, those advantages will be distributed across the country and the globe. In fact, it’s safe to assume that less than five percent of those who benefit from this tax cut live in our state. Eliminating the corporate income tax would benefit the rest of the nation and the world more than it would benefit Oklahomans.
Advocates for corporate tax elimination suggest that this move would improve our economy by bringing us more businesses. If this happened, we might expect income to grow in states where the tax has already been reduced or eliminated. Of the two states that have eliminated corporate income taxes since 2007, one (Texas) has enjoyed faster personal income growth since 2007 than its neighbors and the nation as a whole, while the other (Ohio), is on par with its neighbors and trailing the nation. Indeed, Ohio’s average annual personal income growth of 1.5 percent, after eliminating the 8.5 percent corporate tax, is similar to neighboring Michigan’s growth rate of 1.4 percent, after raising its top corporate tax rate from 1.9 to 6.0 percent (the same as Oklahoma’s).
Contrary to popular myth, high-profile corporate location decisions also suggest the corporate income tax may not be an important factor. Amazon, for example, chose New York and Virginia for its second headquarters, regardless of their corporate income tax rates (6.5 and 6.0 percent, respectively) and progressive individual income taxes. Foxconn chose Wisconsin (7.9 percent top rate) for its $10 billion investment. Boeing moved its headquarters from Washington (no corporate tax) to Illinois (9.5 percent top rate).
Data like this about individual states and companies can show mixed results on the impacts of corporate tax cuts on state economies. However, more rigorous empirical evidence shows that states with higher taxes on businesses tend to have higher rates of total employment, hourly wages, and median household incomes. Higher business taxes might not specifically cause a stronger economy, but they clearly don’t hurt it.
Eliminating the corporate income tax disadvantages Oklahoma-based businesses
By cutting taxes for large corporations, Oklahoma will be providing them an advantage over smaller, Oklahoma-based businesses. Most Oklahoma-based businesses are limited liability companies, sole proprietorships, or subchapter S corporations. They pay taxes on their business profits in their individual income tax, at a top rate of five percent. If HB 2083 passes, their taxes will be higher than their larger competitors, while today they are lower.
Eliminating the corporate tax creates real problems for Oklahoma, but no solutions
Oklahoma is already a low-tax state, and our taxes have been falling. These repeated tax cuts, however, haven’t made our economy better; they’ve just shrunk the services we need. Our lawmakers need to stop tax cuts that hurt our economy and our communities and commit to evidence-driven investments (public education, workforce training, infrastructure, health care, etc.) that help our families and business owners.
Josie Phillips, policy intern, assisted in research and writing this article.
Additional data sources and calculations can be found here.
Advocacy actions:
- Contact your legislator to urge them to vote NO on HB 2083, which is now being considered by the Senate. [Find Your Legislator]
- Sign up for alerts and communications from OK Policy and Together Oklahoma
