A money thing happened on the way to seriously cutting or eliminating the state personal income tax. What happened was an inability to find the money to pay for it.
More precisely, it was the inability to agree on what source of money would be tapped. Ending tax credits and deductions was the favored choice to offset an immediate 2 percentage point reduction in the top income tax rate. But those credits and deductions have friends in diverse places, from high-income developers down to modest-income retirees.
Gov. Mary Fallin's tax code reform, announced with great fanfare in January, is said to be on life support. It's not clear whether the 2012 legislative session will end with any tax cut, much less the significant one that Fallin and many Republican lawmakers wanted. At this point, the push for tax cuts is driven by politicians and advocacy groups rather than by a grassroots groundswell.
The people, voting with either their opposition or their indifference, seem to be saying this: No major tax cuts are justified this year.
Tax cutters got no help with their position from two veteran economists who said Tuesday that Oklahomans are already enjoying a tremendous tax savings from previous income tax cuts and the state's inability to collect sales taxes on many purchases made over the Internet. Another bit of bad news for tax cutters came Tuesday from state Treasurer Ken Miller, who said Oklahoma's two-year revenue growth streak ground to a halt because of declines in gross production tax collections.
Oklahoma's top personal income tax rate of 5.25 percent is too high, but caution is advised in cutting the rate too much, too fast. The state's tax credits and incentives were overdue for a thorough review. That effort has resulted in many recommendations but not many changes.
Incentives should primarily be structured to moti-vate behavior such as jobs creation and investment. Cutting incentives should be motivated by assessing how effective they are rather than the need to find money for tax cuts.
Somewhere in this mix of cutting taxes and cutting incentives is a balance that preserves funding for essential services, removes ineffective and/or politically motivated incentives and stimulates growth.
Fallin hopes to stimulate growth with a better tax climate, but she and other tax cutters have encountered fierce resistance from everyday Oklahomans as well as from tax consumers such as public school systems. Larkin Warner, one of the two economists issuing the state revenue/taxation report this week, says he respects tax cutters and tax cut resisters but “the one group I have trouble with is what I call the ‘starve-the-beast' caucus ... You can't run a government that way.”
Indeed you can't. What Republicans are discovering is that platitudes won't pay the bills and the people don't always embrace tax cuts if they can't see the benefits. A lower tax rate would help Fallin recruit new businesses, a primary function of the governor's office, but the folks who already live here must be convinced that it's good for them as well.
Reforming the tax code may take longer than we thought. That's not a bad thing.