With Republicans firmly in control of state government, reducing and possibly eliminating Oklahoma's personal income tax is moving toward reality.
A gubernatorial task force is proposing a 10-year program to significantly reduce then ultimately eliminate the tax. A legislative task force also is looking at ways to simplify the state's tax code and lower overall rates.
“In the last election cycle you had Republicans ... swept into office and the unifying message that came from that ... was to reduce the tax burden and ... size of government,” said Mike Carnuccio, president of the Oklahoma Council of Public Affairs, a conservative think tank.
He said next year some legislators will be up for re-election and voters will be asking: “did you have an effect on what you said you were going to do?”
State Treasurer Ken Miller, an economics professor and former state House budget chair, said GOP legislators and the governor need to be cautious. “We have to have a conversation based on facts ... real numbers and based on reality, not ideology.”
Republicans have long advocated cutting taxes, but when they were the minority party in the Legislature they lacked the political muscle to make much progress.
“Today it's possible and so we have to approach this issue as we do all fiscal issues responsibly because we can implement a change,” Miller said. “We've got to make sure we get it right, because if we mess up, we own it.”
Miller supports revamping the tax code and says the state's current tax policy does not enhance growth. “If we were to design an equitable and efficient tax code that would encourage entrepreneurial activity, productivity and growth, we would not end up with the tax structure we have today.”
Gov. Mary Fallin “believes that lower income taxes leads to more economic growth and more job creation,” said spokesman Alex Weintz. “She supports the gradual reduction of the state income tax.”
House Speaker Kris Steele also supports the gradual reduction and eventual elimination of the personal income tax.
“We'll start down that road next session by getting ineffective tax credits off the books and redirecting those savings to taxpayers,” said Steele, R-Shawnee. “While the savings should be significant, it's doubtful to be enough for immediate elimination of the personal income tax.
“Next year's state budget will likely be flat with a lot of holes to fill, so a gradual phaseout is much more likely. Along the way, some savings may also be redirected to core government services that provide legitimate public needs, not needless government growth.”
Senate President Pro Tem Brian Bingman, R-Sapulpa, “has always believed lowering the tax burden would grow the state's economy and as a result, increase state revenues,” said spokesman Nathan Atkins. “Senate Republicans believe we must look very seriously at our options to enable more private sector individuals to be innovators, entrepreneurs, and drivers of our state economy.”
New revenue needed
The state treasurer said he doesn't think the personal income tax can be eliminated without needing a new revenue source. “I don't think you can take your single largest source of revenue and eliminate it and not replace it,” he said.
Miller also would like any tax plan submitted to voters for approval.
“About 70 percent of an economy is driven by consumer spending,” he said. “If we increase sales tax to such a degree that it curtails retail activity that could prove problematic for our economy.”
Rep. Earl Sears, R-Bartlesville, chairman of the House Appropriations and Budget Committee, said he could support eliminating the income tax, but “we've got to have a discussion (on) what we're going to do to offset the loss. I still want roads and bridges, still want quality schools.”
Republicans have succeeded in lowering the top personal income tax rate since increasing their clout in state government.
Republicans gained control of the House of Representatives after the 2004 elections, took the Senate — for the first time in state history — after the 2008 vote, and secured all statewide elected official positions — another first — after last year's elections.
Since 2005, legislation has been passed reducing the top personal income tax rate from 6.65 percent to 5.25 percent; the 5.25 percent rate will take effect in the 2012 tax year. Personal income taxes bring in about one-third of the money appropriated by legislators to pay for state services.
Opponents say the state would have to raise other taxes to replace the revenue loss if present levels of state services continue.
“Oklahoma's personal income taxes are below the national average while the state sales taxes are significantly above the national average,” said Mickey Hepner, business college dean at the University of Central Oklahoma.
Reducing the state's reliance upon the income tax while maintaining revenue neutrality would require significant increases in other taxes, he said. “One possibility is to expand the sales tax base to include more services and to increase the sales tax rate. The drawback ... this could further raise Oklahoma's sales tax burden above the national average.
“A second approach would be to raise property taxes — likely through the creation of a new statewide property tax. In each of the nine states that lack a personal income tax, the property tax burden is twice the level paid by Oklahoma families.”
Those favoring reducing the rate say the state should cut expenditures and reduce government.
Increasing the sales tax rate or establishing a statewide property tax would be difficult. In 1990, Oklahoma voters approved an initiative petition, State Question 640, which requires a statewide vote on tax increases that fail to win approval of three-fourths of both houses of the Legislature.
David Blatt, director of the Oklahoma Policy Institute, said the personal income tax is a fair tax system because it's based on the ability to pay, unlike sales tax.
Oklahomans who earn less are taxed at a lower rate than those with greater incomes. The tax rate for married joint filers with two children and standard deductions is 1.79 percent with a household income of $35,000, while a similar family with a household income of $500,000 has a 5.01 percent tax rate.
Legislation from 2004 to 2006 lowered the top income tax rate from 6.65 to 5.25 percent — affecting about 56 percent of Oklahomans, Blatt said. For single taxpayers and husband/wife taxpayers filing separately, the 5.25 percent rate is applied on a taxable income of $8,701 and higher.
“We think that the income tax is the essential cornerstone for our ability to provide fair and adequate funding of public services,” Blatt said. “If we do away with or significantly reduce the income tax, we're going to be unable to meet our obligations to families, businesses and communities that depend on public services and we'll leave low-and-moderate income families with more of the tax load.”
Big share of funds
Personal income tax collections bring in nearly a third of the taxes the state collects and are deposited in the $5.2 billion general revenue fund, cornerstone of money appropriated by the legislature.
Estimates call for personal income taxes to bring in about $1.8 billion during this fiscal year, which started July 1. Before the economic downturn, revenues were more than $2.5 billion a year.
Proponents of eliminating the personal income tax call for cutting many of the tax credits and exemptions estimated about $5.6 billion annually. Another legislative task force hopes to develop a grading system that could lead to dropping ones not producing jobs or benefits to the state.
Budget cuts over three years — some as much as 20 percent — to make up revenue shortfalls have left some agencies unable to perform their core functions, Blatt said.
Carnuccio's organization released a plan last week that would get rid of the personal income tax rate in 10 years. It calls for eliminating all personal income-tax deductions, exemptions, credits and loopholes immediately, which would reduce the state's top personal income tax rate from 5.25 percent to 3 percent.
It is billed as being revenue neutral because it's estimated that getting rid of them would raise about the same amount of money as the current rate. The proposal calls for then reducing the top personal income tax rate another 0.75 percent to 2.25 percent, cutting it in 0.25 percent increments until it is eliminated by 2022. The cuts would need to be implemented with spending restraints.
Without a state personal income tax, a single person making $30,000 would have an extra $950 to spend, Carnuccio said, while a family of four with a gross income of $100,000 would see a savings of $3,651.
He said Oklahoma needs to act quickly “to make a better economic climate for business and ... individuals,” because Kansas and Missouri are looking at reducing and eliminating their personal income taxes. Texas doesn't have a personal income tax.