OKPOLICY.ORG
by The Journal Record
Members of a tax reform task force heard from policy groups on both sides Thursday, as officials with the Oklahoma Policy Institute and Oklahoma Council of Public Affairs presented their views on what the state’s tax structure should look like.
OPI Director David Blatt said that in general Oklahoma is a low-tax state, ranking 41st in state and local taxes per capita, 40th as a share of personal income.
“Just under a dime of every dollar earned by Oklahomans goes to pay for state and local services,” he said.
In FY 10, Blatt said, tax collections amounted to 5.2 percent of state personal income and are projected to total 5.4 percent for 2011.
He addressed several issues he said relate to whether Oklahoma’s tax system is adequate.
Total per capita state and local spending is 18 percent less than the national average, he said, with spending per person lower across a full range of government functions that has consequences for both programs and people.
Blatt said that almost all Oklahoma agencies have withstood budget cuts of at least 10 percent, with some now at 20 percent below pre-economic-downturn levels.
Regarding the issue of equity, Blatt said low/moderate income Oklahomans pay a higher share of income in state and local taxes than do those in upper-income levels, mainly as a result of the regressive nature of the sales tax. He said that is only partially made up by the progressivity of the state’s personal income tax.
Blatt said that of major recent tax cuts, 21 percent of the benefits went to the top 1 percent of income categories, with 9 percent going to the bottom 40 percent.
He said the state’s corporate income tax is fair, in that it only taxes profitable businesses and is largely borne by corporate shareholders. However, since 1997, Blatt said, the corporate tax has accounted for less than 5 percent of total state taxes each year except for FY 97.
“It hasn’t been a particularly strong performing tax,” he said.
Blatt said the corporate tax could be strengthened by closing loopholes that benefit large, multi-state corporations and requiring combined reporting, which treats parent companies and subsidiaries as one entity for tax purposes.
“The personal income tax is the single largest source of state tax collections,” said Blatt.
The tax brought in $2.7 billion in 2007, $2.2 billion in 2010. Blatt said selected tax cuts in 2004-2006 cost the state $almost $777 million through FY 10.
Although some members of the task force are definitely leaning toward proposing elimination of the personal income tax, Blatt questioned whether that income could easily be replaced with some other taxation scheme, such as a gross receipts tax.
“It’s extremely difficult, if not impossible, to do so,” he said. “Over time, no other tax grows as robustly as the income tax.”
From a fairness standpoint, Blatt said the income tax is Oklahoma’s only levy whose rate increases for those with higher incomes. He said middle-income taxpayers pay about 2.8 percent of income compared with those who earn more than $500,000 per year, who pay about 5 percent.
Some panel members said that businesses favor states without an income tax. However, Blatt said there is little evidence that companies see the income tax as a top reason not to locate in a particular state. He said workforce issues, crime rates, health care, schools and other factors play greater roles.
Blatt also addressed one of the other specific reasons for which the task force was formed: How to respond to a 2009 Oklahoma Supreme Court decision that upheld taxation of intangible business personal property. Last year, lawmakers created a business activity tax in lieu of taxing intangible property in 2010-2012 and suspended the corporate franchise tax, capping the BAT tax at the 2010 franchise tax amount.
“The question is, what do we do going forward?” Blatt said.
He said that exempting intangible personal property from taxation could lead to a substantial revenue loss, while expanding the idea to locally assessed businesses could result in sizeable tax hikes on some businesses. He recommended a constitutional amendment to limit taxation of intangibles to centrally assessed entities.
Blatt ended his presentation with five recommendations:
Limiting tax incentives.
Limiting or doing away with itemized deductions while increasing the standard deduction.
Expanding the sales tax to cover selected services and pursuing collection of taxes on online sales.
Allowing higher ad valorem taxes on commercial property.
Providing broad-based income tax cuts, including increasing the personal exemption for the first time since 1982 and stretching brackets.
“A majority of Oklahomans now reach the top bracket,” Blatt said.
President Michael Carnuccio presented the case for OCPA.
He said policy-group officials believe intangible personal property should be exempt from property taxes, adding that only 10 states generally tax intangibles. If Oklahoman follows suit, Carnuccio said, that would give 39 states a competitive edge.
“We would recommend that the state do away with that,” he said.
Oklahoma should avoid taxes that penalize business activity, he added.
Carnuccio said that if it is determined that Oklahoma must have some type of business tax, it should be a levy that kicks in only after a business has made a profit, like the corporate income tax.
OCPA also believes that, over time, the personal income tax should be eliminated, he said.
However, Carnuccio said that just eliminating all tax credits would enable the state to drop the income tax rate to about 3 percent.
As to how the state could bring about an income tax reduction on a revenue-neutral basis, Carnuccio said that for FY 12 the legislature spent about $4.9 billion, which amounts to 95 percent of general revenue. At a modest growth estimate of 4 percent, he said, more than $200 million would be available to offset an income tax cut to 4.75 percent in FY 14.
According to the American Legislative Exchange Council, Carnuccio said, of nine states without an income tax, gross domestic product from 1998-2008 grew almost 50 percent faster than in the nine states with the highest top income tax rates. He said total state tax receipts in the no-income-tax states grew 30 percent faster over the same period than in the top-rate states.
If Oklahoma eliminated the personal income tax, Carnuccio said, a family of four earning $50,000 would save $1,373.
“There is a real impact,” he said.
