Budget & Tax

The private-sector battle: Oklahoma vs. Texas

December 16, 2015

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.