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Lawmakers are told to be careful in cutting Oklahoma's personal income tax

Robert Dauffenbach, an economist, told a state house panel that changes to Oklahoma's tax code the past 12 years helped lead to a nearly $2 billion a year reduction in tax receipts.
BY MICHAEL MCNUTT mmcnutt@opubco.com Published: November 6, 2012
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In 2001, then-Gov. Frank Keating proposed a 5.9 percent gross receipts tax on a broad base of goods and services as a substitute for the income tax and the sales tax on groceries. A task force made up of lawmakers and citizens studied the proposal, which failed to win legislative support.

Oklahoma State University-Tulsa President Howard Barnett, who was Keating's chief of staff and co-chaired the task force, said efforts failed because they couldn't communicate how the benefit of a significant income tax cut outweighed the slight cost increase from a broader sales tax on services.

Former state Rep. Forrest Claunch, who served on the task force, said state revenue should be based on a consumption tax that is as low, wide-reaching and simple as possible. He said the state income tax should be eliminated.

Tax on services?

Oklahoma Tax Commission Administrator Tony Mastin told subcommittee members he studied the services taxed in Texas and not in Oklahoma and found that if the state levied a tax on those 29 services, it could bring in about $217 million.

That would be enough to reduce Oklahoma's personal income tax rate by 0.5 percent, he said.

Even if lawmakers would accept that plan, the change couldn't be immediate, Mastin warned. It would take time to develop and implement the new taxing system, and service providers would have to learn to comply with the new law.

Texas has a 6 percent state sales tax rate. Oklahoma's state sales tax rate is 4.5 percent.

Services bringing in the most money to Texas coffers were carpentry, painting, plumbing and similar trades; construction services, such as grading and excavating; oil field services; landscaping services, which includes lawn care; and maintenance and janitorial services.

Hickman said lawmakers should look at taxing services, especially those businesses that are collecting sales taxes on goods. That would include stores that sell items but don't charge sales tax for installation or delivery, or businesses that charge sales tax on repair items but don't charge sales tax for the work.

“I'm really not interested in taxing services that a business isn't already set up to collect sales tax,” he said.

Dauffenbach said Oklahoma is one of 40 states that has a personal income tax. While Texas doesn't have a personal income tax, it has a much higher property tax rate than Oklahoma, he said.

He suggested lawmakers consider allowing local school districts and communities to have more control in determining their property tax rates to fund their services. It would demonstrate local control while freeing up state funds that could go to lowering the personal income tax rate, he said.

“If we could get over this fear of the property tax and allow local governments to generate more of their own revenue from the property tax, then we would not have to be so aggressive in terms of state tax collections, and that would in turn allow us to back off on the (income tax) rate and maybe the state sales tax,” Dauffenbach said.