While budget negotiators at the state Capitol discuss whether to cut the personal income tax, the author of a study that was the basis for a couple tax-cutting proposals clashed a couple blocks away Wednesday with an economist opposed to lowering the income tax rate.
Legislation based on Arthur Laffer's plan that called for reducing the state's top personal income tax rate from 5.25 percent to 2.25 percent next year has been scrubbed, but a smaller cut still is being studied.
“It won't work as well,” Laffer said during a forum sponsored by The State Chamber at the Oklahoma History Center.
An economist who first gained prominence as a member of former President Ronald Reagan's economic policy advisory board, Laffer said his proposal could put Oklahoma's competitive economy into a top-tier economic policy environment.
Mickey Hepner, business college dean at the University of Central Oklahoma, said Oklahoma's economy is already competitive.
He said reducing the state's personal income tax will result in either increasing other taxes, more than likely the state's sales tax rate which is already high in the region, or drastically cutting state services. More than a third of the state's 146 lawmakers attended the forum, and Hepner urged them not to cut the income tax this year; a tax cut would be a key factor in crafting the 2013 fiscal year budget, which legislators must accomplish before they are required to adjourn May 25.
“We haven't quite recovered from the previous recession and lost revenues that we had there,” Hepner said. “We should focus on restoring core services. ... I would more strongly suggest that they not impose future tax cuts in subsequent years until we get a better handle what the economy's going to look like in subsequent years.”
Hepner said he is unaware of any Oklahoma economist who supports Laffer's plan. Personal income tax collections produce nearly one-third of the budget appropriated by lawmakers. The legislative appropriated budget for the 2013 fiscal year, which begins July 1, is about $6.6 billion.
“If you eliminate the income tax, you're going to hurt us elsewhere in other spots,” he said.
Laffer, who played a key role in writing Proposition 13, the California property tax cap initiative, said Oklahoma officials would see more interest by businesses if the state eventually eliminated personal income tax. Nine states, including Texas, have no personal income tax.
Laffer said he supports eliminating all personal income-tax deductions, exemptions, credits and loopholes immediately along with spending cuts. His plan also called for gradually lowering the rate until it was eliminated in 2022.
“This wasn't a model testing on hypothesis,” he said. “This is a model projected what will happen based on other states. What I did was I took a 50-state cross section for the last 10 years and took those states that had cut taxes and what happened to them when they did it.
“If you cut tax rates, people want to bring their businesses in here and people want to move in here,” Laffer said.
“What happens to the average income, I'm not sure. ... But goodness knows total employment will increase. Goodness knows total population will increase.”
The Oklahoma Council of Public Affairs, a conservative think tank, collaborated with Laffer's economic consulting firm and came up with the income tax-cutting proposal.
Two versions were introduced, with more than 30 House of Representatives members signing on as co-authors of the House bill.
The Senate version of the bill is still alive, but it calls for cutting the personal income tax rate by 0.3 percent instead of 3 percent next year and for certain revenue indicators to be met before further reductions could take place.
Deeper cuts aren't possible because lawmakers failed to eliminate a number of individual income tax deductions and exemptions or economic tax credits.
Laffer said economic tax credits should be tossed.
“What they do is cause all this lobbying and all these expenses, and you have the revenue lost and a lot of them don't even have marginal impact,” he said. “I would really get rid of those deductions, exemptions and exclusions, a lot of the credits and just have a low rate flat tax.”
Legislative leaders and representatives from the governor's office plan to meet again Thursday for further discussions on reducing the income tax rate. Senate President Pro Tem Brian Bingman, R-Sapulpa, and Rep. Scott Martin, R-Norman, the vice chairman of the House Appropriations and Budget committee, were among about 50 lawmakers who attended Wednesday's tax forum. Secretary of State Glenn Coffee, one of Gov. Mary Fallin's top budget negotiators, also was among the approximately 200 who attended the event.
Lawmakers have varying opinions on cutting the personal income tax rate.
One Republican House member said Wednesday a half percent cut still seems possible while another GOP House member said constituents are concerned about what effect lowering the income tax rate would have on state services; he suggested legislators punt and do further study on the issue.
Hepner said Laffer's economic model is based on speculation, and that if legislators want to cut the income tax, any reduction should be matched with cutting state expenditures by the same amount.
“The Laffer plan is just plain wrong,” Hepner said. “They inflate the estimated effect ... the math just doesn't add up. I would suggest if we want to cut taxes we cut them today and the legislators step up and tell us how they're going to pay for them today and let the voters decide.”