What the income tax pays for

The personal income tax is Oklahoma’s largest single revenue source. In 2011, the state collected $2.412 billion from the personal income tax, or slightly less than one in three dollars (31.7 percent) of total state tax collections. With a strong movement developing to substantially cut and ultimately eliminate the personal income tax, it is important to understand the vital role of the income tax in paying for a broad array of public services.

Income tax revenues are allocated in two ways: a set amount is taken off the top for a number of specific programs, and the rest is divided up by a formula. The programs funded off-the-top include:

• The ROADS fund: In 2012, the Department of Transportation received $255.7 million from the individual income tax for maintenance and construction of roads and bridges, along with small amounts for passenger rail services and public transportation. In 2013 and each year thereafter, the ROADS fund will receive an additional $41.7 million until the fund reaches an annual cap of $435 million. Governor Fallin has proposed increasing the ROADS allocation by $56.7 million annually and raising the cap to $550 million in order to repair the state’s bridges;
• Quality Jobs: Companies that qualify for the Quality Jobs program, the state’s marquis economic development program, receive quarterly incentive payments from personal income tax receipts. In 2011, Quality Job payments totaled $61.8 million.
• Oklahoma’s Promise scholarships:  In 2012, $63.2 million in personal income tax revenues was allocated for Oklahoma’s Promise scholarships, which cover higher education expenses for qualified Oklahoma students. Because of carryover in the program’s trust fund, this amount will decrease to $57 million in 2013.

Remaining personal income tax revenues are apportioned according to statutory formula. Of these, 94 percent goes to the annual state budget, with 85.66 percent apportioned to the General Revenue fund and 8.34 percent to the HB 1017 Education Reform Fund.  This year (2012), income tax collections account for $1.95 billion, or 29.9 percent, of the total state appropriated budget . The agencies funded with the most income tax dollars are:

• Department of Education – $743.4 million from the personal income tax, or 32.6 percent of its appropriations. This amount represents the equivalent of salary and benefits for almost 17,000 public school teachers;
• Health Care Authority – $268.2 million, 27.3 percent of its appropriations, which is equivalent to the state match for the health care expenses of more than 430,000 low-income children enrolled in SoonerCare;
• Higher Education – $261.8 million, 27.8 percent of its appropriations, which is equivalent to the per-student cost of educating 23,400 full-time students at public colleges and universities;
• Human Services – $149.7 million, 27.9 percent of its appropriations, which is equivalent to the state share of funding for the services DHS provides to some 14,500 Oklahomans with developmental disabilities;
• Corrections – $141.2 million, 30.7 percent of appropriations, which is equivalent to the expense of incarcerating more than 9,300 inmates, or about 36 percent of the state’s entire prison population.

The remaining income tax collections provide $63.1 million to Mental Health and Substance Abuse Services, $44.9 million to Career and Technology Education, $33.0 million to the Office of Juvenile Affairs, $29.2 million to the Department of Public Safety, $20.5 million to the Department of Health, and $192.3 million to other agencies (click here for a spreadsheet showing income tax allocations for each agency).

Finally, the remaining income tax collections are apportioned as follows:

• Oklahoma Teachers Retirement System  – 5 percent. In 2011, the Teachers Retirement System received $119.8 million from the personal income tax. Despite recent measures to put it on more solid financial footing, OTRS remains one of the most underfunded public pension systems in the nation, with a funded ratio of just 56.7 percent;
• Ad Valorem Reimbursement Fund –  1 percent. The final portion of income tax revenues is allocated to school districts and counties as reimbursement for property tax revenues lost as a result of ad valorem exemptions granted by the state. This amounted to $24 million in 2011. Over the past decade, revenues to the fund have fallen chronically short of the state’s obligations, creating a shortfall in reimbursement to counties and other local entities of over $40 million.

Clearly, the income tax is a crucial cornerstone of our tax system, providing the revenue both for general operations of agencies and school districts and for important earmarked purposes, such as roads and bridges, economic development, and public pensions.  Some tax cut proposals attempt to maintain funding for these earmarks by shifting them over to other taxes. But ultimately, the huge scope of what is funded by the income tax would put an impossible burden on other taxes, unless they were drastically increased. This leaves us to wonder: is the idea that we can do without income tax merely a giant leap of faith, or is it a flight of pure fantasy?