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Economists debate cutting the state's personal income tax rate

BY MICHAEL MCNUTT Published: May 10, 2012

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.

California initiative

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.

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