Changes made to Oklahoma's tax code the past 12 years have helped contribute to a nearly $2 billion annual reduction in tax receipts, a University of Oklahoma economist told a House of Representatives panel Monday.
Robert Dauffenbach, associate dean and director of the Center for Economic and Management Research at OU's Price Business College, said diversifying the tax base and further reducing the state income tax rate would improve Oklahoma's business climate.
House Speaker Pro Tempore Jeff Hickman said reducing and possibly eliminating the state's personal income tax is not a quick fix. He led an interim study on the tax that brings in about one third of the money legislators appropriate each year.
“Anything you can do to broaden the tax base to reduce or eliminate the income tax and quit penalizing the income but rather look at tax and spending is positive for the economy,” said Hickman, R-Fairview.
“If we can spread that tax burden out more widely across the state … it's a positive and will quit penalizing people who are making incomes.
“We're not going to find one magic bullet,” he said.
Hickman discussed lowering the state's income tax, which has a top rate of 5.25 percent, by levying a tax on a variety of services, with members of a House revenue and taxation subcommittee. He said reducing the rate to 4 percent is a realistic goal.
Lawmakers this year considered several proposals to cut the top personal income tax rate, from reducing it a fraction to slashing it more than half. None passed, mainly because of difficulties of finding ways to make up for the lost revenue.
“If we're serious about eliminating the income (tax) and reforming our tax code, then everything should be on the table,” Hickman said. “What we've been talking about lately at the Capitol has been tax cuts, not really reforming the code.”
Closer look urged
Dauffenbach said lawmakers who have talked of eliminating or reducing the personal income tax should step back and evaluate changes made to the state's tax code in the past 12 years.
Dauffenbach said Oklahoma's state tax receipts have been reduced nearly $2 billion annually. The changes have occurred through consumer purchasing patterns, such as buying more items on the Internet where many items are bought without sales tax being paid, and legislative changes to tax codes.
Legislation was passed and approved from 2004 to 2006 that lowered the top income tax rate from 6.65 to 5.25 percent.
The top bracket affects about 56 percent of Oklahomans. For single taxpayers and husband/wife taxpayers filing separately, the 5.25 percent rate is applied on a taxable income of $8,701 and higher.
The top personal income tax rate was 7 percent 12 years ago; reducing it to 5.25 percent has resulted in a 25 percent loss of state revenue through personal income taxes, Dauffenbach said. Personal income taxes this fiscal year are expected to bring in about $2 billion of the $6.8 billion budget appropriated by lawmakers.
In 2001, then-Gov. Frank Keating proposed a 5.9 percent gross receipts tax on a broad base of goods and services as a substitute for the income tax and the sales tax on groceries. A task force made up of lawmakers and citizens studied the proposal, which failed to win legislative support.
Oklahoma State University-Tulsa President Howard Barnett, who was Keating's chief of staff and co-chaired the task force, said efforts failed because they couldn't communicate how the benefit of a significant income tax cut outweighed the slight cost increase from a broader sales tax on services.
Former state Rep. Forrest Claunch, who served on the task force, said state revenue should be based on a consumption tax that is as low, wide-reaching and simple as possible. He said the state income tax should be eliminated.
Tax on services?
Oklahoma Tax Commission Administrator Tony Mastin told subcommittee members he studied the services taxed in Texas and not in Oklahoma and found that if the state levied a tax on those 29 services, it could bring in about $217 million.
That would be enough to reduce Oklahoma's personal income tax rate by 0.5 percent, he said.
Even if lawmakers would accept that plan, the change couldn't be immediate, Mastin warned. It would take time to develop and implement the new taxing system, and service providers would have to learn to comply with the new law.
Texas has a 6 percent state sales tax rate. Oklahoma's state sales tax rate is 4.5 percent.
Services bringing in the most money to Texas coffers were carpentry, painting, plumbing and similar trades; construction services, such as grading and excavating; oil field services; landscaping services, which includes lawn care; and maintenance and janitorial services.
Hickman said lawmakers should look at taxing services, especially those businesses that are collecting sales taxes on goods. That would include stores that sell items but don't charge sales tax for installation or delivery, or businesses that charge sales tax on repair items but don't charge sales tax for the work.
“I'm really not interested in taxing services that a business isn't already set up to collect sales tax,” he said.
Dauffenbach said Oklahoma is one of 40 states that has a personal income tax. While Texas doesn't have a personal income tax, it has a much higher property tax rate than Oklahoma, he said.
He suggested lawmakers consider allowing local school districts and communities to have more control in determining their property tax rates to fund their services. It would demonstrate local control while freeing up state funds that could go to lowering the personal income tax rate, he said.
“If we could get over this fear of the property tax and allow local governments to generate more of their own revenue from the property tax, then we would not have to be so aggressive in terms of state tax collections, and that would in turn allow us to back off on the (income tax) rate and maybe the state sales tax,” Dauffenbach said.