Budget & Tax

Limit local taxing power

January 30, 2018

Trent England

This article was published in OCPA's Perspective magazine View Issue

Because taxing income means disincentivizing paid work, OCPA advocates shifting the state of Oklahoma away from reliance on income taxes. Moreover, state lawmakers should eliminate the possibility of local income taxes within Oklahoma—while allowing city governments to access available and stable sources of revenue to support the legitimate ends of local government.

A collection of liberal officials and tax-consumer groups spent the fall working to get a municipal income tax on the Oklahoma City ballot. Failure to follow signature-gathering rules and questionable ballot-language construction halted, or at least delayed, the effort. Of course, ballot measure signature drives sometimes are used by political activists simply to create lists of voters for future organizing. But the Oklahoma City effort deserves to be taken seriously because it raises two important questions.

First, what are (or should be) the limits of local governments’ power to tax? And second, what are the guiding principles of good tax policy?

Before addressing those questions, it is important to remember that local governments are all creations of state governments. American federalism is not just a system of local control or subsidiarity, but a structure where the states are the foundational level of government. “We the people,” through our states, joined the federal union. And we also, again acting through our states, establish local governments. This means state legislators (or all those with power to modify a state constitution, including the voters) have a duty to decide what are the limits of municipal power.

Those limits should recognize that the purpose of government is not simply to “do what people want.” That would be mob rule. The entire Bill of Rights is about foiling majorities that want to use government for illegitimate ends. The purpose of government is to protect individual rights and, in so doing, to secure our “Safety and Happiness.”

The foundation of good tax policy is the understanding that all taxes impose a cost on individuals by taking from them some of their property and thus infringing on their liberty. This is the cost of government, but it is a real cost. If taxes are too high or the money is not well spent (or both), taxes destroy the very reason for government in the first place. In other words, the first principle of good tax policy is that taxes should be as low as possible to provide for the basic services that are necessary and within government’s legitimate powers.

Second, taxes should be as uniform as possible. The “rule of law” means that the law should apply the same way to everyone. From this proposition comes the idea of civil rights, that governments should not discriminate against particular citizens or groups of citizens. As a practical matter, as soon as this principle is violated politicians have tremendous power to pervert justice in order to benefit their friends and punish their enemies.

Taxes should be low and uniform, but they also should be predictable. This is true for those who pay, spend, and benefit from taxes, but especially for the first and last of these groups. When tax policies change too much, this instability makes it hard for taxpayers to plan. Economically speaking, this uncertainty increases the cost of a tax even without increasing how much government receives. On the other hand, when taxes are attached to volatile economic activities, those who spend and benefit from tax dollars will have a hard time planning. Again, in economic terms, this kind of uncertainty decreases the value of future taxes. It also leads to “fiscal cliffs” and often to big tax hikes at the very worst times. Good tax policy aims for stability and predictability.

Finally, good tax policy recognizes that the laws of economics—really just reflections of human nature—apply to taxes just like they do to everything else. Taxes create incentives and disincentives that affect the choices people make and, consequently, the economy overall. A high tax on a certain kind of investment will mean people make fewer of those investments than they would have without the high tax. If the price of gasoline goes up by 50 cents, people will drive less, whether the price hike is the result of tax hikes or market changes. Good tax policy considers these disincentives and other economic effects.

In Oklahoma, the largest source of city revenues is sales taxes. Other revenue sources include fees and excise taxes. These are relatively broad and reliable taxes. Sales tax revenues do fluctuate with economic conditions, but not as much as income, capital, or commodity-based severance taxes. The only tax that is clearly more stable than a broad sales tax is a property tax, and many other states make property taxes the primary revenue source for cities and other local governments.

Income taxes are narrower and often more volatile than sales taxes. For Oklahoma City to begin relying on income taxes would be a step in the wrong direction (especially given our fierce competition with Texas, which levies no income tax). And if other cities within Oklahoma determined to set up their own income taxes, each with different rates and rules, the resulting patchwork would create uncertainty and instability for taxpayers. Taxing income also means disincentivizing paid work—the principled reason why OCPA advocates shifting the state of Oklahoma away from reliance on income taxes.

Should Oklahoma allow cities to create their own income taxes? Local communities often are the best places to make policy decisions. But local control is an idea about how government should work, not what government is for. It would be foolish for state lawmakers to allow cities to undermine the state’s economic future. Legislators should eliminate the possibility of local income taxes within Oklahoma. At the same time, they should take seriously the concerns of city leaders and allow city governments to access available and stable sources of revenue to support the legitimate ends of local government.