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.
From 2005 to 2007, Oklahoma lawmakers incrementally cut the tax rate to 5.5 percent with an expected impact of $283.1 million to state revenue over several years. Instead, general revenue collections increased $688.8 million from the 2005 to 2008 fiscal years. A quarter-point reduction in 2012 was predicted to reduce revenue $89.26 million that calendar year, yet major revenue sources increased $458.8 million (although a downturn in gross production taxes offset much of that gain).
Conservatives see these results as the logical outcome of the stimulative effect of tax cuts. Critics will disagree, but they can't deny that dire predictions about past tax cuts have not borne out, or that the financial challenges of recent years were caused by a national recession whose consequences would have been the same no matter what income tax rate prevailed in Oklahoma.
Fallin's current income tax plan is in line with previous cuts that gradually reduced Oklahoma's top rate by 25 percent since the 1990s. By making her tax reform goal more modest this year, Fallin has likely made it more attainable.
But as laboratories of democracy, the 50 states compete not only for businesses and job creation, but also in policy development and implementation. Should Louisiana and Nebraska adopt tax reforms similar to those Fallin touted in 2012 — and experience increased economic growth as a result — her 2013 tax proposal may still be seen as having fallen short, even if she does get to sign it into law.