GOV. Mary Fallin and legislative leaders have touted income tax cuts by saying previous cuts led to higher revenues, not reductions. A countering view is that tax cuts can never lead to higher revenues but growth that would have happened anyway can make it appear that way.
These are two ways of looking at the same thing. We can never say with certainty what might have happened had some policy or another not been enacted.
State Finance Secretary Preston Doerflinger is among those echoing the lower taxes/higher revenue argument. He has some recent numbers to back him up. Despite the top state personal income tax rate dropping from 5.5 percent to 5.25 percent, income tax receipts are rising and hit a healthy $578.3 million in January.
“Income tax collections are outperforming expectations by double digits through the first seven months of fiscal year 2013,” Doerflinger said. This paints a picture of an expanding economy and forms justification for another incremental tax rate cut, to 5 percent.
After a wave of tax-cutting in the first decade of the 2000s was followed by a deep recession, tax cut opponents said state budget woes were due to tax cuts rather than the economy. It was a weak argument. High-tax states were having even more trouble balancing their budgets. Steep cuts would have taken place even if taxes hadn't been cut in Oklahoma.
Those cuts were partly justified on the basis of previous surpluses, which led conservatives to believe that taxpayers were being overtapped. For tax cut opponents, which include the dwindling number of Democrats in the Legislature, taxpayers weren't overtapped then and certainly aren't now. They warn of major problems if the income tax rate is cut again.
We've noted previously that Oklahoma is a sandwich state, the cheese between the bread of Kansas and the bread of Texas. Kansas cut income taxes last year. Texas has no income tax. Tax policy in Oklahoma can't be structured as if what happens elsewhere has no effect. California temporarily solved its budget woes with a steep tax increase, but this will motivate wealthier taxpayers to relocate.
The Kansas cut is better known now not as a victory for conservatives but as a dilemma for lawmakers. They must find ways to patch budget holes because of reduced revenues. Patches can take the form of spending cuts or raising other taxes. If it's true that cutting taxes leads to higher revenues, we should see that happen in Kansas.
It's too soon to say what will happen, but not too soon to say Oklahoma can't pretend that neighboring states don't have lower income tax burdens.
Texas has a vigorous and rebounding economy. Oklahoma can't ignore this either. After a painful paring during the recession, Texas lawmakers now have more money than they can spend because they're limited by law to maintain spending growth at no more than the rate of economic growth — now at a healthy 10.7 percent.
Those who argue that Fallin and Republican lawmakers are extremists because they want to again cut income taxes have lost perspective. What they propose is a relatively modest position for a sandwich state. It doesn't take things as far as Kansas and certainly not as far as Texas.
A key question is whether the modest tax cut is enough to incentivize population and economic growth. In other words, is the reduction in revenue — which may or may not be temporary — worth the price? We think it is, because of what's happening elsewhere.