When it comes to equalizing the tax burden for traditional, one-earner families where one spouse chooses to stay home, Oklahoma is a national trendsetter.

Economists sometimes speak of “horizontal equity,” meaning that households with the same economic situation should have the same tax burden. But previous OCPA research has shown clearly that, all else being equal, a two-earner household who uses institutional daycare has a lower tax bill than a one-earner household with a spouse at home.1 In other words, Oklahoma’s tax system lacks horizontal equity for stay-at-home households.

Fortunately, in 2007 Oklahoma legislators passed, and Gov. Brad Henry signed into law, a new tax credit that helps to level the playing field. The new tax credit allows taxpayers to use the child care tax credit for institutional daycare (worth 20 percent of the federal child care tax credit) or take a tax credit worth five percent of the federal child tax credit for a stay-at-home household. This does not fully restore horizontal equity, but it was an important first step.

To fully restore horizontal equity, Oklahoma’s policymakers will have to take a more holistic view of the individual income tax’s ill effects on the family. Five simple steps would more solidly put Oklahoma’s income tax in the family-friendly camp.

Step 1: Eliminate the Marriage Penalty

A couple that gets married should not have to face the specter of a higher tax bill. Yet under the current tax code, that is exactly what happens. The top two marginal tax brackets are not doubled for married filers over that of single filers. For instance, the top tax bracket for a single filer starts at $8,700 of taxable income but for married filers starts at $15,000 of taxable income. To end the marriage penalty, the top tax bracket for married filers should start at $17,400.

Step 2: Eliminate the Oklahoma Child Care Tax Credit

According to 2008 data from the Internal Revenue Service (IRS), 50,938 Oklahomans earning less than $100,000 claimed the federal Child and Dependent Care Tax Credit, worth $24.8 million. Oklahomans are allowed another 20 percent tax credit against the state income tax, worth up to another $5 million.2 Eliminating the Child Care Tax Credit would level the playing field between institutional daycare and at-home care and provide up to $5 million to expand the child tax credit (see Step 4).

Step 3: Decouple the Oklahoma Child Tax Credit from the Federal Child Tax Credit

The federal child tax credit is worth $1,000 per child through 2012, thanks to the recent extension of the tax reductions enacted under President Bush in 2001. Without another extension in 2012, the federal child tax credit will be reduced to $500. Since the Oklahoma child tax credit is based on five percent of the federal credit, the maximum value of the Oklahoma credit will be reduced from $50 to $25. This uncertainty is created by “piggybacking” the Oklahoma child tax credit on the federal child tax credit. The surest way to fix the problem is to decouple Oklahoma’s credit from the federal credit.

Step 4: Increase the Oklahoma Child Tax Credit

Using the 2008 IRS data, there were 282,509 qualified children for the child tax credit in Oklahoma in households earning less than $100,000.3 These households claimed federal child tax credits worth $342 million. If all of these children were covered under the current Oklahoma child tax credit it would cost $17.1 million.4 The estimated $5 million in savings from eliminating the child care tax credit (see Step 2) would provide the money both to expand the child tax credit to children formerly under the child care tax credit and to increase the value of the child tax credit.5 And as the nearby sidebar indicates, this is consistent with the wishes of Oklahoma voters.

Step 5: Encourage Oklahoma’s Congressional Delegation to Fix the Federal Child Tax Credit

It’s not just Oklahoma’s child tax credit that needs fixing, but the federal one as well. First, as mentioned in Step 3, the federal child tax credit needs to be made permanent at its current level of $1,000 per child.

Secondly, the federal child tax credit phases out for married taxpayers earning more than $110,000. The phase-out reduces the credit $50 for every $1,000 in income above $110,000. As a result, a single $1,000 credit would be worthless once the taxpayer has income over $130,000. In effect, the phase-out creates a “tax surcharge” of five percent above and beyond the regular income tax rates. The benefits of the tax credit, perversely, turn into a tax penalty. The phase-out should be eliminated.

Conclusion

Oklahoma’s trailblazing child tax credit for households with a stay-at-home spouse is an important first step in ensuring horizontal equity in the tax code. However, much more needs to be done. The marriage penalty needs to be fully purged, the existing child care tax credit (for institutional daycare) needs to be eliminated, and the Oklahoma child tax credit needs to be expanded and increased. These changes would create one of the most, if not the most, family-friendly tax climates in the country.6

Endnotes

1. Anderson, Steve, and Dutcher, Brandon, “Credit Where Credit’s Due,” Oklahoma Council of Public Affairs, Perspective, Vol. 14, No. 10, October, 2007.

2. Analysis assumes that all eligible taxpayers had a tax liability greater than the value of the child care tax credit.

3. This includes the refundable and nonrefundable portions of the child tax credit.

4. Taxpayers can either take the child care tax credit or the child tax credit. As such, from federal data it is impossible to determine the number of Oklahoma children utilizing the child tax credit.

5. Additionally, policymakers may want to remove the $100,000 earnings cap on the child tax credit.

6. Excluding, of course, the states that do not levy an individual income tax.

Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.

---

Oklahoma Voters Want Level Playing Field

A scientific telephone survey of 1,000 likely voters registered in Oklahoma was conducted February 25 through March 8, 2010, by SoonerPoll, the same firm that conducts the “Oklahoma Poll” for the Tulsa World. The poll, which was commissioned by OCPA, has a margin of error of plus or minus 3.1 percentage points. The surveyor asked a question which correlates nicely with the subject of the nearby Moody-Warcholik article:

“Now thinking about early-childhood policy in Oklahoma, assuming the state government had a limited amount of money, which of the following do you believe should take precedence?”

• Increasing daycare subsidies for families when professional childcare is used for their young child(ren): 25 percent
• Redirecting a portion of the daycare subsidies toward a tax break for families in which one parent stays home with young child(ren): 61 percent
• Don’t Know/Refused: 14 percent