An agreement to cut the state's top personal income tax rate of 5.25 percent down to 4.8 percent next year was announced Thursday evening by GOP legislative leaders and Gov. Mary Fallin.
The plan, reached after two weeks of intense negotiations, also includes a one-time additional tax cut tied to a revenue growth trigger in the 2015 fiscal year.
If state revenue grows by at least 5 percent in that year, the income tax rate would be reduced further to 4.5 percent effective Jan. 1, 2015, but if revenue doesn't grow by that amount, the tax rate would not change. The 5 percent trigger is based on the growth of personal income, sales, use, motor vehicle and corporate tax collections.
The deal was announced after a day of meetings, including the governor talking to the GOP House caucus. Senate Republicans at first didn't embrace the plan, but about noon asked to resume talks. The talks continued until the agreement was announced about 6:30 p.m.
“We believe that cutting the state's income tax must be a priority and must be accomplished this year,” Fallin said. “We believe as a Republican caucus that allowing the people of Oklahoma to keep more of their hard-earned money is not the only right thing to do but also will help our Oklahoma families.
“It's the taxpayers' money, not the government's money,” she said. “We want to let more Oklahomans keep their hard-earned money.”
Fallin said it's estimated most Oklahomans will see a reduction in how much they pay in state income taxes.
House Speaker Kris Steele, R-Shawnee, and Senate President Pro Tem Brian Bingman, R-Sapulpa, said they expect legislators to approve the plan. Republicans have a 67-31 advantage in the House of Representatives and a 32-16 majority in the Senate.
With a decision on cutting the income tax rate out of the way, GOP legislative leaders and Fallin now will work on developing a $6.6 billion budget for the 2013 fiscal year, which begins July 1. They said a deal on the budget should come quickly, possibly Friday or this weekend. Lawmakers are required to adopt a budget before adjourning. They must complete their work by 5 p.m. May 25.
More about the plan
The proposal also simplifies the tax code by dropping the total number of tax brackets from seven to three. New rates will be set at 1 percent, 3.3 percent and 4.8 percent, Fallin said.
The agreement represents a tax cut of more than $218 million to taxpayers when fully implemented in the 2014 fiscal year. It would cut taxes by an additional $121.4 million in the 2015 fiscal year should the growth trigger be reached, Fallin said.
Lost revenue is partially offset by eliminating 33 tax credits, certain deductions and eliminating the personal exemption for single filers making more than $35,000 and joint filers making more than $70,000. No major economic tax credits are being eliminated; retirement and veteran tax exemptions for individual taxpayers are safe.
The plan leaves alone credits available to low-income taxpayers, such as earned income credits, child and child care credits and sales tax relief credits.
The plan will cost the state $32.7 million in the 2013 fiscal year, which will be paid for with growth revenue from this fiscal year, said Preston Doerflinger, Fallin's secretary of revenue and finance on her Cabinet. Revenue collections through April are $350 million higher than originally expected.
The plan is expected to cost the state $102 million in the 2014 fiscal year, he said.
“This is a straightforward simple approach to reduce taxes in the state of Oklahoma,” Steele said. “This approach won't jeopardize ... funding for core services of state government.”
Core services are transportation, public safety, health and human services and education, he said.
Bingman said coming up with the income tax-cutting plan was a long process.
“We were all for a tax cut, and sometimes you have different ways of getting there,” he said. “But it's all about the art of compromise and negotiations.”
House and Senate Democrats have said it's premature for the state, which is seeing a gradual economic recovery after three years of budget cuts to most agencies, to lower the income tax.
Weeks of meetings
Leaders from the Republican-controlled Legislature, along with Fallin's budget advisers, have been holding closed-door meetings the past two weeks to discuss lowering the income tax. Fallin has been imploring lawmakers in recent days to at least get the top rate of 5.25 percent below 4.9 percent after Kansas legislators approved a measure lowering that state's top personal income tax rate from 6.45 percent to 4.9 percent.
Efforts are under way in Missouri to eliminate its income tax. Texas doesn't have a personal income tax.
Senate Republicans proposed earlier this week reducing the top personal income rate of 5.25 percent by 0.25 percentage point each of the next two years. It would lower it to 5 percent next year and 4.75 percent in 2014.
House Republicans wanted to lower the rate to 4.95 percent next year. Fallin had said she would have liked to cut it to about 4.75 percent next year.
Fallin proposed at the start of this session a personal income tax-cutting plan that reduced the top rate of 5.25 percent to 3.5 percent next year and reduced the brackets from seven to three. She also proposed gradually eliminating the income tax by an additional 0.25 percentage point in any year in which the state saw 5 percent revenue growth.
Two bills, which had the backing of more than 35 lawmakers, called for cutting the income tax rate to 2.25 percent next year and gradually reducing the rate by 0.25 percentage point until it was eliminated in 10 years. Other proposals called for cutting the income tax 0.25 percentage point each of the next two years.
The deepest cuts became unrealistic when legislators refused to eliminate or reduce corporate tax credits, which were part of the formula of how the state would make up for lost revenue. Personal income tax brings in about 30 percent of funds appropriated by lawmakers.