Over the last decade, Oklahoma has been one of the most aggressive states in the country when it comes to reducing the burden of taxes on taxpayers. Since 2002, the top marginal individual income tax rate has fallen significantly—by 22 percent—to 5.25 percent from 6.75 percent.

One of the greatest beneficiaries of lower tax rates has been Oklahoma’s small business community, since many file through the individual income tax code as sole proprietors, partnerships, LLCs, or S-corporations. The top marginal tax rate is particularly important because, based on 2012 IRS data, 85 percent of this pass-through income is claimed by taxpayers earning more than $100,000. (See also our June 2013 Perspective article titled “Who Are Oklahoma’s So-Called ‘Rich’?”)

As a result, businesses have responded by generating more income. Chart 1 clearly shows that the growth in proprietor income has outstripped the national average. Between the first quarter of 2000 and the first quarter of 2014, proprietor income in Oklahoma grew nearly twice as fast as the national average (171.2 percent vs. 81.6 percent, respectively)—even with a significant drop due to the “Great Recession.”

In fact, Oklahoma had the fastest growth rate in the country. In stark contrast, California, one of the highest-tax states in the country, had the slowest growth rate in proprietor income at only 33.4 percent. Perhaps this is partially driven by the fact that more people and/or entrepreneurs from California are moving to Oklahoma than vice versa. (See our October 2013 Perspective article titled “Money Walks.”)

This evidence shows that Oklahoma’s tax cuts (along with the implementation of other pro-growth policies) have been a boon for small businesses, enabling them to create new jobs and income for many Oklahomans. This boon is due also in part to the state’s commitment to maintain low gross production taxes on capital-intensive oil-and-gas mining activity until costs can be recovered, which has helped create the environment for significant oil-and-gas mining activity in Oklahoma.

These tax policies, in turn, create a virtuous cycle of higher government tax collections. As OCPA’s Jonathan Small continues to point out, Oklahoma tax collections are at an all-time high.

Of course, success doesn’t go unnoticed. Neighboring Kansas, under Governor Sam Brownback, has recently enacted its own sizable tax cut. Between 2012 and 2014, the top marginal individual income tax rate fell by 26 percent—to 4.8 percent from 6.45 percent. More dramatically, the tax rate for pass-through business income fell all the way to zero!

While it is still too early to see the full positive impact of these tax cuts on Kansas’s small business community, the early returns are promising. In the first full year under the tax cuts, from first quarter 2013 to first quarter 2014, the growth rate of proprietor income in Kansas exceeded the national average by 16.7 percent (6.8 percent vs. 5.8 percent, respectively), and was the 7th-fastest growth rate in the country (Oklahoma was the 3rd-fastest at 7.5 percent).

Oklahoma policymakers should cheer the fact that their neighbor to the north has decided to cut taxes. A stronger regional economy will lift all boats in both Oklahoma and Kansas. At the same time, Kansas’s bold tax cuts do swing the tax balance into its favor. Oklahoma must respond in kind with another round of tax reductions.

And, of course, both Oklahoma and Kansas still lag far behind no-income-tax Texas.

OCPA research fellow J. Scott Moody (M.A., George Mason University) has worked as a public policy economist for more than 17 years. Formerly a senior economist at the Tax Foundation and a senior economist at the Heritage Foundation, he has twice testified before the Ways and Means Committee of the U.S. House of Representatives. His work has appeared in Forbes, CNN Money, State Tax Notes, The Oklahoman, and several other publications.

OCPA research fellow Wendy P. Warcholik (Ph.D., George Mason University) formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”