AS Oklahoma lawmakers debate income tax cuts, they should consider the findings of Travis H. Brown, author of “How Money Walks.” Using IRS records and data mapping, Brown has tracked population shifts from 1995 to 2010, providing an overview of where citizens with a combined $2 trillion in adjusted gross income (AGI) are relocating. His findings could have significant policy implications.
Why do citizens move from one state to another? Brown admits officials “cannot be 100 percent certain of the cause,” but notes “the data points to a very clear, very compelling correlation: over the long term, money moved to states where taxes were lower.” During the 15-year period studied, Brown determined Oklahoma lost $896.33 million in annual AGI. Oklahoma had gains from California, but lost far more to Texas and Florida, two income tax-free states.
Out-migration of Oklahoma income steadily increased from 1995 to 2005, when it reached well over $1 billion in a single year. Since then, however, income losses have declined each year. That shift coincides with implementation of income tax cuts in Oklahoma.
In contrast, Texas gained more than $22 billion from 1995 to 2010. Between one-third and one-half of Oklahoma counties are seeing incomes migrate to Texas counties, Brown said. Although Oklahoma reportedly experienced a net migration from Texas in 2010 and 2011, the data shows Oklahoma is still losing out — because the income of those leaving Oklahoma for Texas is about 10 percent greater than those leaving Texas for Oklahoma.
In neighboring Kansas, the story has been different. Out-migration cost Kansas $3 billion from 1995 to 2010, with the pace increasing each subsequent year. Once again, the top two destination states for ex-Kansans were Texas and Florida.
More than $108 million in income reportedly migrated from Kansas to Oklahoma after we cut taxes. But that dynamic may be about to change. Last year, Kansas lawmakers cut the income tax rate to 4.9 percent and, more importantly, eliminated the income tax for Subchapter S corporations, which includes most small businesses and self-employed entrepreneurs. In January, Kansas reported a record number of small-business filings.
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.