The increased competition for taxpayers could truly place Oklahoma in the Texas-Kansas “tax sandwich” that Gov. Mary Fallin noted last year, Brown said.
Jonathan Small, fiscal policy director for the Oklahoma Council of Public Affairs, notes Oklahoma's personal income tax collections “never declined” after rate cuts until the Great Recession hit. Meantime, sales tax collections boomed. From fiscal year 2005 to 2012, state sales tax collections increased $694 million. In the seven years prior to major income tax cuts in Oklahoma, sales tax collections grew 3.97 percent, but surged 5.8 percent after income tax cuts.
If lawmakers want a dependable source of government funding, Small notes that income taxes have been less stable than sales taxes. Income tax collections declined 9.7 percent in the recession of the early 2000s; sales tax collections fell just 3.7 percent. During the Great Recession, Oklahoma income tax collections declined 14 percent while sales tax collections fell 9 percent.
Lawmakers must fund core functions of government, but Brown's research suggests cutting income taxes ultimately can make that funding process easier as income relocates to (or remains in) the state. Reviewing Oklahoma's recent tax-cutting experience, Brown says “a lot of evidence” indicates “what you are doing has been working.”
An open question is whether the relatively modest income tax cut being debated for Oklahomans will do more good than harm. Still, as the cheese on a tax sandwich, the state can't afford to disregard the bread or the condiments.