Individual income taxes are the topic of the Tax Foundation’s third map in a four-part series comparing state tax structures. This map shows the percentage of each state’s overall tax collections that come from individual income taxes. Oregon ranks 1st with 41.6% of its tax collections coming from individual income taxes (it has no sales tax). Tennessee, the lowest ranked state with an income tax, comes in at 43rd with only 1.4% of its tax collections made up from individual income tax. (Tennessee is in the process of phasing out its personal income tax.) There are seven states that do not collect any type of income tax: Texas, Nevada, Washington, Wyoming, Alaska, South Dakota, and Florida.
Oklahoma ranks 30th nationally with 22.5% of total tax collections coming from income taxes. This is less than Arkansas and Missouri but more than Kansas and Texas (Texas has no income tax). Oklahoma and Arkansas are near the regional average of 22.9% while Missouri and Texas are both outliers on either end of the spectrum.
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Income taxes are often more harmful to economic growth than consumption taxes and property taxes. Taxing income creates a deterrent to work and investment. For a worker, the income tax directly reduces take-home pay. For a business, it makes labor more expensive.
Income taxes are also less stable than some other revenue sources, as the Tax Foundation post points out. Economic cycles can have a substantial impact on income tax revenue because these cycles impact industry by influencing employment and pay levels. This is especially true in a commodities-driven economy such as Oklahoma. When agriculture or oil prices drop, the entire state suffers through the downturn, reducing income tax collections and so impacting the state budget. States with more diverse economies should see less volatility in income taxes. It is important that Oklahoma not assume that simply increasing the income tax rate will lead to more revenue or vice versa. As OCPA has noted before, lower income tax rates can sometimes lead to higher income tax revenue in the long run.