Budget & Tax

It’s time to modernize Oklahoma’s sales-tax structure

August 10, 2022

Curtis Shelton

Modernizing Oklahoma’s sales tax structure will help create a more well-balanced tax environment and will make it easier to end Oklahoma’s reliance on the income tax.

Oklahoma’s sales tax was first passed in 1933. The sales tax applied to tangible personal property. It exempts most services along with things like fuel and items for resell. For the economy of the 1930s and 40s this made sense. Manufacturing was the dominant industry and most consumer goods purchased were tangible, things that you could hold. Consumer preferences have changed in the last 90 years. Services now make up more than 66 percent of total personal consumption in the United States. (The number was 69 percent in 2019 before the pandemic shut down most of the service industry in 2020 and 2021.)

Oklahoma has a similar makeup with service making up 64 percent of all consumer expenses. Since 1997 that share has grown from 60 percent to 64 percent. This growing shift towards services means that Oklahoma’s current sales tax model excludes a growing portion of consumer purchases. An effective tax structure should not favor one industry or activity over another, but that is what Oklahoma’s sales tax does by favoring services over tangible goods.

Estimates have shown that if Oklahoma was to modernize its sales tax structure it could bring in an additional $700 million to $1.5 billion, depending on how broadly the sales tax base was expanded.

However, restructuring the sales tax base should not be about growing government. This additional revenue can be used to offset a reduction in or elimination of the state income tax. This would bolster Oklahoma’s competitiveness when recruiting businesses and attracting other taxpayers from surrounding states, or simply keeping fewer people from relocating to Texas, which does not have a state income tax.

This would also provide the state government a more stable revenue base. According to the Pew Charitable Trusts, sales tax revenue is a more stable revenue source than income tax revenue for Oklahoma.

This stability makes budgeting much easier and reduces the risk of massive revenue shortfalls that create a call for tax increases—or massive surpluses that inflate spending to a level that can’t be matched in future years.

In short, modernizing the state’s sales tax structure creates a more balanced tax structure that doesn’t favor one industry over another and provides a path to eliminating Oklahoma’s penalty on work.