CALL it a tale of two tax bills. Gov. Mary Fallin and state House leaders want to cut Oklahoma's top income tax rate a quarter point to 5 percent. That proposal, contained in House Bill 1598, reduces the rate in 2014.
The state Senate has another approach. Senate Bill 585, by Sen. Mike Mazzei, R-Tulsa, would lower the rate to 4.75 percent, but not until 2015. While Fallin's plan is funded with existing growth revenue, the Senate bill repeals tax breaks in exchange for a lower rate.
There's definitely a pro-growth argument for repealing special breaks that reward narrow constituencies while lowering income tax rates for all. Tax breaks giving favored preference to specific business activities can cause money to be used in less-productive ways than would otherwise occur. All tax incentives should be carefully scrutinized.
However, some breaks targeted in SB 585 are available to all and appear unlikely to cause economic distortions. Most notably, the Senate bill goes after the personal exemption. The economic justification for that change is hard to fathom.
Under SB 585, a couple earning less than $70,000 would still get a personal exemption of $1,000 per exemption, but others earning more would not. This could result in a tax increase for a couple whose income increases from $69,999 to $70,001.
But it's more complicated than that. Those earning more than $70,000 keep the personal exemption if they have four or more exemptions. If they have three or fewer, they lose it. So a couple with one child and an income just above $70,000 doesn't get the personal exemption, but a similar family with greater income and two children would.
A single filer with income above $35,000 and fewer than four exemptions would also lose the personal exemption. This means a single mother with two children and modest income could lose the $3,000 write-off now granted through the personal exemption.
The argument for increasing the personal exemption with family size is that parents of young children face greater obligations than those without dependents. Yet SB 585 could financially hit some of those families. What's the economic logic behind this? The same question applies to SB 585's limit on the child tax credit, which it allows for some families but not others.
Another provision of the bill limits itemized deductions to 80 percent of value for those earning more than $100,000 (or $200,000 for couples). Critics note this means Senate Republicans are effectively defining “rich” at a lower level than even President Barack Obama, who called for raising taxes on families earning more than $250,000 during the fiscal cliff negotiations.
While Fallin's plan would ultimately save Oklahomans about $125 million per calendar year, SB 585 would save citizens just $108 million per year, even though the reduction to the top rate is twice what Fallin has proposed. This would indicate SB 585 contains roughly $140 million in offsets. While Fallin's plan would cut taxes for 63 percent of Oklahomans with no change for the remainder, SB 585 would increase taxes for 10 percent and cut them for 59 percent.
Perhaps Senate Republicans can give a reasoned economic defense of their plan. If so, they should. As it stands now, SB 585 appears to often increase tax code complexity in arbitrary ways that leave similar families facing different tax outcomes.