GOV. Mary Fallin opened the 2012 legislative session with a bold call to reform Oklahoma's income tax code by reducing the number of brackets, eliminating tax breaks and lowering the top rate to 3.5 percent with the goal of eventual elimination. Fallin swung for the fences but struck out. The 2012 session ended with no major changes.
This year, her goals are less ambitious. Fallin wants to cut the top rate by a quarter of a percentage point, to 5 percent, and use growth revenue to offset the impact.
At the same time Fallin is lowering expectations, other governors are emulating her 2012 approach. In Louisiana, Gov. Bobby Jindal wants to eliminate that state's 3.9 percent income tax and replace lost revenue by increasing and expanding the state sales tax, which is now 4 percent. In Virginia, Gov. Bob McDonnell wants to repeal the state's gasoline tax (17.5 cents per gallon) and instead fund transportation by increasing the state sales tax to 5.8 percent. Nebraska Gov. Dave Heineman has called for eliminating personal and corporate income taxes and offsetting revenue losses by phasing out sales tax breaks. Nebraska's personal income tax rate is 6.84 percent, higher than each of its neighbors including Kansas, which last month reduced its top rate to 4.9 percent.
Kansas' tax cut is also putting pressure on Oklahoma, which has a top rate of 5.25 percent. Oklahoma is sandwiched between now lower-tax Kansas and no-income tax Texas. The competition among states is one reason Fallin is seeking a tax reduction. In making the case for lowering the tax burden, Fallin notes past Oklahoma income tax cuts were followed by strong revenue growth. A quarter-point reduction in 1998 had a two-year state government “cost” of $49.7 million, but growth from all five major general revenue sources surged $184.3 million during that time.