Harsh words criticizing the author of a plan this year to cut Oklahoma's top personal income tax rate by more than half and eventually eliminate it isn't causing a state group to shy away from the proposal.
Arthur Laffer was selling snake oil to the states in his policies that he suggested the past five years to the American Legislative Exchange Council, a nonprofit, conservative group that develops model legislation to state legislators, according to a study released last week. Some of those ideas were incorporated in the income-tax reduction plan Laffer prepared last year for the Oklahoma Council of Public Affairs, a conservative think tank.
Laffer's ideas were developed in two bills considered this year by Oklahoma lawmakers. They and three other income-tax cutting measures failed to win approval.
‘Poor piece of work'
A study by Good Jobs First, a Washington-based nonprofit aimed at promoting accountability in economic development and smart growth for families, said Laffer's proposals fail to promote stronger job creation or income growth. They actually end up worsening economic conditions, said the study's author, Peter Fisher, research director of the Iowa Policy Project.
Fisher, in a telephone interview, said he followed up on studies Laffer cited in his proposals and found that he “was grossly misrepresenting what those studies found.”
“One of them wasn't even about the individual income tax at all, it was about the corporate income tax,” Fisher said. “The other one actually found that the income tax had no effect on population growth and they didn't even look at whether it affected growth in jobs.”
Fisher called the information he prepared for the American Legislative Exchange Council “a pretty poor piece of work.”
He said Laffer, an economist who first gained prominence as a member of former President Ronald Reagan's economic policy advisory board, overstates the benefits of reducing or eliminating the personal income tax.
“There's no evidence it's going to lead to growth and there's pretty clear evidence that these kinds of policies actually if anything produce lower wages, lower incomes,” Fisher said.
Jonathan Small, fiscal policy director for the Oklahoma Council of Public Affairs, defended Laffer's policies and said that pro-growth policies work.
Michael Carnuccio, the group's president, said in October that the Oklahoma Council of Public Affairs has been preparing new research with Laffer “as we continue to build the case for Oklahoma becoming the next no-income-tax state.”
Laffer's proposal in Oklahoma sought to cut the state's top personal income tax rate of 5.25 percent by 3 percentage points next year down to 2.25 percent. Two bills that included that language passed legislative committees; one measure passed both Houses, was scaled down and then failed to advance.
Gov. Mary Fallin, who had her own plan to reduce and gradually eliminate Oklahoma's personal income tax, is staying out of the fray, but still is interested in reducing the personal income tax, a spokesman said.
“In general, she continues to believe that the lower the income tax rate is the more economic growth and job creation we'll see in Oklahoma and that in turn will lead to more revenue,” said Alex Weintz, Fallin's communications director.
“We think that the majority of House and Senate members support lower taxes so theoretically this is something that we should be able to accomplish,” he said. “I think a majority of Oklahomans support lower taxes.”
The governor is working with legislative leaders on trying to develop a personal income-tax-cutting proposal, Weintz said. She's also working with staff on a proposal.
“We expect it to be something that is our own and not necessarily a Laffer plan,” he said.
Fallin's plan she outlined earlier this year called for cutting the rate to 3.5 percent and reducing the number of brackets in the personal income tax code from seven to three. It called for couples making up to $30,000 a year to pay nothing in state income taxes and those making $30,000 to $70,000 a year having a personal income tax rate of 2.25 percent.
Both Fallin's and Laffer's proposals called for the money to be made up through spending cuts to state agencies and operations and cutting deductions, exemptions and economic tax credits. Both anticipated increased sales tax revenues and other economic activity coming to the state because of the lower income tax rate.
Tax collections are up
Personal income taxes bring in about 30 percent of the money legislators appropriate, or about $2 billion of this fiscal year's $6.8 billion budget. That amount doesn't include nearly $800 million of personal income tax revenue that goes to transportation, education and teacher retirement funds before the tax collections go into the general revenue fund, the state's main operating fund.
Small said states without a personal income tax consistently outperform the highest tax states.
“Consider the case in Oklahoma,” he said in an emailed statement.
“Thanks to bipartisan efforts, Oklahoma has, in the past 10 years, decreased its personal income taxes by 25 percent, eliminated death and estate taxes, freed citizens to move freely throughout the marketplace as they choose (right-to-work), enacted lawsuit reform and avoided harmful regulations.”
All the changes were recommended by the policy report Laffer prepared for the American Legislative Exchange Council, he said.
“During that time, Oklahoma has become one of the top performers in personal income growth, employment and other economic indicators,” Small said. “The state set an all-time high record for sales tax collections for the most recent fiscal year — and personal income tax collections grew over the prior year in a year when the personal income tax rate was cut again. According to the state Comprehensive Annual Financial Report, the number of middle-class taxpayers is growing and the number of low-income taxpayers is decreasing.”
Fisher said states shouldn't bother to look at Laffer's proposals, including his suggestions to reduce and gradually eliminate the personal income tax.
“If you're trying to devise sensible state economic policy, this is not where you should go,” he said.