AS it was this time last year, tax cut fever in Oklahoma is starting to register on the thermometer. This year, however, more emphasis seems to be on tying tax cuts to bona fide offsets.
Tax cut fever has centered on reducing the state's personal income tax, the top rate for which is now 5.25 percent. A year ago, Gov. Mary Fallin and Republican legislators were eager to reduce the top rate as part of a plan to eventually eliminate the income tax.
What started as a hot rush to enact change, with a Republican governor and solidly GOP Legislature, melted down into disagreement in the 2012 session. Nothing happened. The income tax cut ran headlong into a resistance to specific revenue offsets.
We urged caution in cutting the income tax without offsets. While we think the top rate should be below 5 percent, we also know that offsets will safeguard priority spending areas.
The quest to reform Oklahoma's tax credit system continues apace. Reformers must convince a majority of lawmakers that the people taking advantage of targeted tax breaks should be given lesser weight than the population as a whole. More tax system restructuring momentum was in evidence last week when a University of Oklahoma economist said diversifying the tax code could facilitate a lower personal income tax without jeopardizing government services.
Suggested is an extension of the sales tax to a variety of services. Lawmakers know it will be tough to convince Oklahomans that they're better offer paying less in income taxes while being assessed on services that have never been subject to a sales tax. This could include doctor visits.
Sales taxes are levied at the time of purchase; income taxes are withheld from paychecks. Consumers feel the pinch of sales taxes immediately. Also, class warfare arguments will be brought to the table — the “wealthy” will get a break (lower income taxes) while everyone else will pay more (sales taxes on services). That argument is hollow because almost all working Oklahomans pay income tax and the 5.25 percent rate kicks in at a low income level.
Last year, Fallin and other Republicans, with the support of conservative special-interest groups, pushed an income tax reduction without revenue-side offsets. The argument was that a growing economy, bolstered by the appeal of a low income tax state, would offset the loss of revenue. Also, consumers would use higher net pay to make purchases that would be subject to the sales tax.
The economic growth argument got help from the latest fiscal report from state Treasurer Ken Miller. He said gross state revenue jumped 9 percent in October and posted the highest percentage increase in eight months. Miller was among the moderate voices in the tax cut debate last year, urging caution.
A key thing to remember as tax cut fever registers on the thermometer in coming months is that there was no groundswell for an income tax cut last year. Furthermore, the blowback to specific tax cut proposals was significant. Average citizens joined special-interest groups and lobbyists in protesting the proposed loss of credits and deductions to help pay for income tax reduction or elimination. Finally, a significant income tax cut in Kansas — widely cited by tax cutters in Oklahoma as an imperative for cutting taxes here — has left that state with fiscal challenges that will be hard to overcome.
If Oklahoma officials are serious about cutting the income tax, they must be equally serious about finding offsets. Citizens are in no mood for a tax cut based solely on hoped-for economic scenarios.