ONE of the selling points of an immediate cut in the state personal income tax is that people would buy more goods with the money not being withheld from their paychecks. This means sales tax revenue would increase and offset the loss in revenues from income taxes, right?
Also, local governments — which don't directly benefit from the income tax — would get more revenue from the source of tax upon which they so heavily depend, particularly cities and towns.
But the argument that an income tax reduction to, say, a 3 percent top rate could be “paid for” by increased consumer spending is problematic.
First, not all of the saved money would be spent. Some would be saved and draw interest (on which the federal and state governments will collect income taxes). Some would be spent out of state with retailers who don't collect sales taxes for the state and its cities. Some would be given to tax-exempt churches and charities and further reduce income tax receipts because such giving is deductible.
Still, it's not unreasonable to say that an income tax cut would lead to increased spending and therefore boost sales tax receipts, perhaps significantly. The question is whether the spending and resultant sales tax take would cover the cost of cutting the income tax, as some supporters have claimed.
Perhaps the mere talk of an income tax cut has had an effect: Oklahomans have been on a buying spree of late, leading to a record month for sales tax collections. The February state revenue report, released Tuesday by state Finance Director Preston Doerflinger, shows that spending was robust in late December and early January, which dovetails with shopping in the days leading up to and just after Christmas.
We would never argue that the spending surge was related to the primacy of an income tax cut in the 2012 legislative session's agenda. For months, legislative leaders, think tanks and the governor have debated the merits and demerits of reducing or eliminating the personal income tax cuts. But that's no reason to conclude Oklahomans reacted to this by spending more.
They spent more because they could and, yes, they would spend even more if less money were withheld from their paychecks for the personal income tax. But they wouldn't spend 100 percent of the savings.
Another talking point of the tax debate is that an income tax cut or elimination could be partly offset by ending loopholes and exemptions. We doubt the people will see the taxation of previously untaxed items — even if it means lower income taxes — as anything other than an increase in sales taxes.
Which, by the way, would continue to be assessed on groceries in this state.