Oklahoma's tax system is broken. A well-designed tax system should raise enough revenue to sustain core public services and fairly distribute the costs. As the Oklahoma Policy Institute explains in a new issue brief, Oklahoma's sales tax is failing on both these counts.
The sales tax is designed to be a tax on consumption, but the share of purchases covered by the tax has severely declined in the last two decades. The economy has evolved toward services and online goods that are not covered by the sales tax, and the Legislature continues to grant sales tax exemptions, many with questionable economic rationale. One report found that just 35.7 percent of all purchases in Oklahoma were covered by the sales tax in 2003, compared with 52.0 percent in 1990.
Why does it matter? For one, the sales tax is the single largest revenue source for state and local governments in Oklahoma. In fiscal 2008, it comprised more than one-fourth of all state tax dollars and almost two-fifths of local tax dollars. Cities, which cannot assess property or income taxes, are especially dependent on the sales tax.
Even apart from its importance to revenues, arbitrary sales tax exemptions distort the economy, reduce efficiency and harm Oklahoma businesses and consumers. For example, we pay sales tax when buying carpet cleaning supplies, but not when we pay a carpet cleaning service. This creates an artificial incentive to purchase untaxed services rather than taxed goods and unfairly advantages the service providers over retail stores.
In addition, since many services are purchased primarily by affluent households, the tax burden is shifted to middle- and lower-income Oklahomans. We see frequent battles over whether to exempt groceries from the sales tax, but little to no discussion of why services like horse boarding, pool cleaning and investment counseling are already exempt.