Cutting and eventually eliminating Oklahoma's personal income taxes will not only mean less money for state services, but also could result in increasing local property taxes as state funds dry up for counties and public school districts, House Democrats warn.
“I'm convinced that when the income tax is eliminated in Oklahoma, those monies that were once used for roads and bridges and education won't be there from the general revenue fund,” said House Minority Leader Scott Inman, D-Del City. “The counties in order to fund their schools and roads will have to increase property taxes to make up the difference. An income-tax cut at the state level will invariably lead to a property tax increase at the county level.”
The state constitution forbids a statewide property tax, and lawmakers are not proposing to replace the money lost by reducing the personal income tax by increasing another tax. Personal income taxes bring in about a third of the state revenue that is appropriated by lawmakers.
Where plans stand
The Republican-controlled Legislature appears to be retreating on at least one plan to cut the personal income tax rate next year.
The boldest personal income tax-cut proposal, House Bill 3038, is a mere shadow of itself. The measure, which had more than 30 House co-authors, proposed cutting the state's top personal income tax rate of 5.25 percent by 3 percent next year down to 2.25 percent. It passed the Senate last week, but it now calls for reducing the tax rate by just 0.3 next year to 4.95 percent.
The measure, which has the support of Arthur Laffer, an economist who first gained prominence as a member of former President Ronald Reagan's economic policy advisory board, now goes to the House. It is expected to go to a conference committee, which also may take up four other income tax-cutting proposals that are progressing through this year's session.
The measure also originally called for continuing to reduce the personal income tax rate by 0.25 percent each year until the tax was eliminated in 10 years.
HB 3038 now calls for the additional reductions of 0.25 percentage points only if the state experienced 5 percent revenue growth in sales, use, motor vehicle and corporate income taxes.
Inman said the triggers provide some comfort that the income tax rate won't be cut in years the state sees an economic downturn or little economic growth. But the triggers are still risky.
“Make no mistake about it, any bill that has a trigger in it because of the way the triggers are established, it's a mathematical certainty that over a period of years the Oklahoma income tax will be abolished,” he said.
Speaker is confident
House Speaker Kris Steele, R-Shawnee, said he remains confident lawmakers will come up with a cut next year in the personal income tax rate. House and Senate budget talks are under way, and the governor's office is expected to join the discussion this week.
“I still believe we're going to be able to protect those core services of government that we think are important,” he said.
Core services have been identified as roads and bridges, public safety, education, human services and health. Those make up nearly 90 percent of the budget appropriated by lawmakers.
“We are serious about reducing the personal income tax rate and the overall tax burden on working Oklahomans,” Steele said. “I am committed to that. ... Income tax reform and reducing the personal income should be a very measured, a very logical and methodical approach.”
An income tax proposal and a budget for the 2013 fiscal year remain on track to be developed in a couple weeks, he said.
The House of Representatives and the Senate will take up the other four income tax-cutting proposals this week. Thursday is the deadline for both chambers to act on measures that originated in the other chamber.
• Senate Bill 1437 would reduce the top personal income tax rate of 5.25 percent by half a percent to 4.75, a quarter percent in 2013 and a quarter percent the following year. It also includes a trigger to further reduce the rate to 4.5 percent if the state sees revenue growth of 4 percent over and above fiscal year 2011 tax collections.
• SB 1623 would reduce the top personal income tax rate to 4.75 percent over a two-year period, a quarter percent in 2013 and a quarter percent the following year. It also would reduce corporate income taxes from 6 percent to 5 percent next year. It calls for eliminating 46 tax credits and the personal exemption deductions.
• HB 3061, which contains Gov. Mary Fallin's proposal, calls for reducing the number of brackets in the personal income tax code from seven to three. It calls for couples making up to $30,000 a year to pay nothing in state income taxes. Those making $30,000 to $70,000 a year would have a personal income tax rate of 2.25 percent. Families making more than $70,000 a year would see their rate drop from 5.25 percent to 3.5 percent. After the personal income tax cuts take effect in 2013, income tax rates would be cut by an additional quarter percent in any year in which the state sees 5 percent revenue growth.
• SB 1571 would reduce the top personal income tax rate of 5.25 percent to 2.5 percent in tax year 2013. Income tax rates would be cut by an additional quarter percent in any year in which the state sees 2.5 percent revenue growth.
House Democrats continue to oppose reducing and gradually eliminating the personal income tax, which brings in about 30 percent of the money legislators appropriate. This fiscal year personal income taxes are expected to bring in about $1.9 billion of the $6.4 billion appropriated by lawmakers. That doesn't count nearly $800 million generated by personal income taxes that go to transportation, education and teacher retirement funds before personal income tax collections go into the general revenue fund, the main funding source for state government operations.
Democrats 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. Reducing the income tax would result in less funding for public schools, which already are hard-hit by years of budget cuts. They also said it would result in a reduction of vital services, such as health care and upkeep of roads and bridges.
Backers of reducing the income tax say the lower rate will stimulate the state's economy by attracting businesses and allowing most residents to have more money per paycheck to spend.
Rep. Jeannie McDaniel, D-Tulsa, said her constituents have told her they don't want to see the income tax cut. She said she will be among several speakers at a rally scheduled for 6:30 p.m. Thursday at the field house at Edison Preparatory School. Public schools across Oklahoma are continuing to cut teaching positions as federal stimulus funds that were made available the past couple years are expiring and state funding for schools isn't being restored.
“The class sizes are bigger in Jenks, the class sizes are bigger in Tulsa and parents are really upset,” McDaniel said. “I have not had one person ask me to support any sort of tax cut at all.”
We are serious about reducing the personal income tax rate and the overall tax burden on working Oklahomans. I am committed to that. ... Income tax reform and reducing the personal income should be a very measured, a very logical and methodical approach.”