Budget & Tax
Jonathan Small, J. Scott Moody & Wendy Warcholik, Ph.D. | December 16, 2015
The private-sector battle: Oklahoma vs. Texas
Jonathan Small, J. Scott Moody & Wendy Warcholik, Ph.D.
The following excerpt is from an article published in the December issue of Perspective titled Oklahoma's Shrinking Private Sector. – Editor
In terms of sheer economic size, there is no more important neighbor to Oklahoma than Texas. So it is a very useful exercise to compare and contrast the two states to see what Oklahoma policymakers can learn. Of course, it is well known that, unlike Oklahoma, Texas does not levy a broad-based individual or corporate income tax (though Texas does levy a gross receipts tax on certain industries). Has the absence of an income tax made a difference in the course of the Texas economy? The answer is a resounding yes.
Chart 4 shows the growth difference between Oklahoma and Texas for two key measures: the private-sector share of personal income and real, per-household personal income. In this analysis, the private-sector share of personal income (hereafter “private sector income”) is defined as total personal income minus personal current transfer receipts (Social Security, Medicare, Medicaid, and welfare) and government compensation (federal, state, and local).
Chart 4 shows that in the years of the Great Depression and World War II, Oklahoma and Texas had very similar private-sector shares of personal income. Relatedly, real, per-household personal incomes were also at similar levels.
However, at the same time, Oklahoma embarked on a very different policy path from the one chosen in Texas. Oklahoma enacted the individual income tax in 1915 and the corporate income tax in 1931. The additional revenue from these taxes fueled the expansion of government spending and, consequently, the crowd-out of the private sector after World War II.
The gap in the private sector between Oklahoma and Texas has only grown wider since then. By 2014, Oklahoma had only the 29th largest private sector in the country (69.4 percent) while Texas had the 7th largest private sector (75 percent). As a result, Oklahoma had the 25th highest per-household personal income ($112,233) while Texas had the 13th highest per-household personal income ($129,113).
The difference in private sectors can’t be attributed to any one component. In 2014, personal current transfer receipts, as a percent of personal income, were 18.9 percent lower in Texas than Oklahoma (14.5 percent vs. 17.8 percent, respectively). The same situation exists for government compensation, which is 17.6 percent lower in Texas than in Oklahoma (10.5 percent vs. 12.8 percent).
Overall, Oklahoma’s policymakers have failed their constituents by not paying enough attention to the economic success story that exists just south of the Red River. Consequently, Oklahoma families have less income with which to raise their children and pursue their dreams.
The path forward is clear. Oklahoma must reduce the size of government and use the savings to eliminate Oklahoma’s income tax system. This will put the state back on the path to parity with Texas.
Read the entire article here.
Jonathan Small
President
Jonathan Small, C.P.A., serves as President and joined the staff in December of 2010. Previously, Jonathan served as a budget analyst for the Oklahoma Office of State Finance, as a fiscal policy analyst and research analyst for the Oklahoma House of Representatives, and as director of government affairs for the Oklahoma Insurance Department. Small’s work includes co-authoring “Economics 101” with Dr. Arthur Laffer and Dr. Wayne Winegarden, and his policy expertise has been referenced by The Oklahoman, the Tulsa World, National Review, the L.A. Times, The Hill, the Wall Street Journal and the Huffington Post. His weekly column “Free Market Friday” is published by the Journal Record and syndicated in 27 markets. A recipient of the American Legislative Exchange Council’s prestigious Private Sector Member of the Year award, Small is nationally recognized for his work to promote free markets, limited government and innovative public policy reforms. Jonathan holds a B.A. in Accounting from the University of Central Oklahoma and is a Certified Public Accountant.
J. Scott Moody
OCPA Research Fellow
OCPA research fellow J. Scott Moody (M.A., George Mason University) serves as chief executive officer of State Budget Solutions. 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. Moody is the co-creator of the Tax Foundation’s popular “State Business Tax Climate Index.” His work has appeared in Forbes, CNN Money, State Tax Notes, The Oklahoman, and several other publications. This article is an updated version of an analysis published in 2008.
Wendy Warcholik, Ph.D.
OCPA Research Fellow
Wendy P. Warcholik (Ph.D., George Mason University) is an OCPA research fellow. She 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.”