Budget & Tax

What drives income tax revenues: Tax rates or economic growth?

March 27, 2017

Curtis Shelton

Oklahoma’s marginal personal income tax rate has been reduced to 5% from 5.65% in 2007. Over those ten years, revenue from the personal income tax has fluctuated. Collections in 2016 grew by $166,981,275 or 6.02% since 2007. Examining the data, however, shows that unemployment seems to drive changes in income tax collections more than tax rates.

For the next two years, until 2010, there was a dip in revenue. This coincided with the great recession as the state suffered a surge in unemployment that peaked at 6.8% at the beginning of 2010.

This cut came amid a 19% increase in income tax revenue from 2011-2013. After seeing a small dip in 2014, revenue increased to a peak of $3,152,729,993 in 2015.

After this cut, the state lost 6.69% in income tax revenue from the prior year, but this also came amid a massive decline in oil prices, an increase in unemployment, and declines in revenue from other taxes.

As the charts show, unemployment has had a much higher correlation with income tax revenue then the income tax rate over the last decade. When the state began to recover from economic hardship due to the financial crisis, revenue climbed to a near ten year high in 2015. As the oil industry continues to deal with low prices, Oklahoma needs to focus on diversifying its economy. A focus on policies that will encourage economic growth to help develop new industries will serve the state better than increasing the burden on the taxpayer.

Sources: Oklahoma Office of Management and Enterprise Services; 2016 CAFR

Sources: Oklahoma Office of Management and Enterprise Services; CAFR, Bureau of Labor Statistics