| March 21, 2013
Continue growing Oklahoma's economy: pursue real workers' comp reform and true tax relief
As Oklahoma policymakers work in 2013 to accelerate the state’s upward economic trajectory, the state Senate’s effort to replace our adversarial workers’ compensation system with a more desirable administrative system appropriately takes center stage.
Also on the table are income tax cuts. Gov. Mary Fallin and House Speaker T.W. Shannon are promoting a reduction that would continue Oklahoma’s trend of pro-growth tax cuts—good news for hardworking Oklahomans.
The objective of tax cuts should be to let people keep more of the money they earn, leaving more capital in the private sector and fostering a more attractive climate for employers and individuals. However, as demonstrated during the fiscal cliff negotiations, efforts at tax “reform” don’t always result in tax relief for moms, dads, entrepreneurs, and job creators. President Obama and the liberals in Congress showed how to manipulate the tax code to recapture the “revenue” some fear losing when taxes are cut. The final product was deemed tax “reform,” even though many citizens actually saw an increase in the amount they’ll pay in taxes.
Gov. Fallin has proposed cutting the state’s personal income tax rate from 5.25 percent to 5.00 percent. The plan resembles rate reductions experienced in Oklahoma regularly since 2005 and would not reduce or eliminate credits, exemptions, or deductions. It would be a genuine cut for more than 60 percent of taxpayers and would not increase any Oklahomans’ tax payments. Speaker Shannon has embraced the Governor’s proposal, and his legislation to enact it passed the state House of Representatives last week. Senate leader Brian Bingman is listed as the bill’s Senate author.
But a renewed push to have a tax cut "cost" less may again prevent Oklahoma families from seeing real tax relief. In contrast to the Fallin/Shannon plan is an alternate proposal passed by the state Senate. This year’s Senate plan would cut the personal income tax rate from 5.25 percent to 4.75 percent. Sounds attractive. But the details are concerning.
The Senate proposal doesn’t lower the income tax until January 1, 2015.
The plan would take effect January 1, 2015—two years away—meaning Oklahomans would see no benefit until then. The Fallin/Shannon plan would cut the tax rate in 2014.
Oklahoma’s total net tax collections have grown over the prior year by $883 million, and licenses, fees and permits have increased by $194 million over the prior year. Net state sales tax collections are at a record high and growing 40 percent faster than before tax cuts began in 2006. Total net tax collections are also at record highs, as is total state spending. Oklahomans have earned another tax cut. The state’s last round of income tax cuts were signed into law in 2007 and ran through 2012.
The Senate proposal increases taxable income for many Oklahomans, which will result in many Oklahomans paying higher taxes.
The Senate proposal targets the personal exemption. (The personal exemption is a $1,000 reduction in taxable income for every person in a household.) The new proposal would no longer allow individual tax filers with more than $35,000 in income and fewer than four people in the household to utilize the exemption. Married couples, filing their taxes jointly who have more than $70,000 in income and fewer than four people in the household also will be restricted from utilizing the exemption. People in these categories will see an increase in taxable income as a result of the change, meaning more of the money they earn will be subject to taxation.
These changes would make Oklahoma’s tax code unnecessarily more progressive and complex. In this case, it’s bad news for working, single moms or widowed, taxpaying spouses with children. It’s also bad news for one-child families who tithe to their church and deduct the interest they pay on their home mortgages. The proposal also arbitrarily prohibits the use of the child tax credit for anyone whose income exceeds $50,000 a year, as well as removes the ability to itemize state and local taxes paid.
If a major rate cut and across-the-board reform of the tax code were the goals of the proposal, eliminating tax breaks would be sound policy. But arbitrarily eliminating certain universal deductions for some filers and not others is punitive. The goal of the Senate proposal appears to be to cut the tax rate while remaining “revenue neutral.”
The Senate proposal targets the “rich” to pay for the tax cut.
The proposal reduces itemized deductions by 20 percent for single persons with income above $100,000 and married couples with income above $200,000. A major portion of itemized deductions for people in these income brackets is charitable giving. But the Senate proposal would penalize Oklahomans above certain income levels by limiting them to 80 percent of the charitable deductions they claim on their federal tax returns, apparently because they’re not already paying their fair share.
In effect, the proposal sets new, arbitrary thresholds labeling certain entrepreneurial, job-creating Oklahomans as “rich” and increasing the amount of taxes they have to pay. These are below federal thresholds of $200,000 for individuals and $250,000 for married couples set by President Obama and Congress.
Based on an analysis of Oklahoma Tax Commission data, in total, the Senate proposal will increase taxes on more than 165,000 tax filers, which equates to more than 351,000 Oklahomans. The average tax increase per filer will range from $2 to $3,844, depending on the filer’s household income.
Remember, these ideas have consequences.
Oklahoma’s 2012 session featured a major initiative by Gov. Fallin and dozens of state lawmakers to significantly cut the state’s personal income tax, provide true tax relief, and lock in a plan to phase out the tax completely. But when session ended, no cut had been achieved. Instead, due in part to a desire to spend every dollar of growth revenue and increase appropriations by $330 million, lawmakers hastily announced at the end of the 2012 session a tax “reform” measure that would have increased tax payments on 100,000 middle-income Oklahoma families.
The Oklahoman, in a May 23, 2012, editorial entitled “Republican base takes a hit with GOP-backed tax cut,” noted that the proposal, generated in the state Senate and advertised as a reduction, actually would have increased taxes on a quarter of state tax filers. The Senate proposal accomplished this by limiting use of the personal exemption and other deductions in the personal income tax code. The resulting increase in taxable income—and, for many, the amount they would pay in taxes—fell particularly hard on middle-income families with children. Fortunately, the plan didn’t garner enough support to pass the Legislature.
[Note: OCPA released a proposal prior to the 2012 legislative session to phase out Oklahoma’s personal income tax and eliminate all credits, deductions, and exemptions in the personal code. However, the OCPA proposal recommended cutting the income tax rate three full percentage points—from 5.25 percent to 2.25 percent—in year one, gradually phasing out the tax from there.]
Bottom line: The Senate is leading the conversation on pro-growth workers’ compensation reform; the Governor and the House are leading on pro-growth tax relief.
Some lawmakers may believe Oklahoma’s tax rate is low enough and state spending is not high enough. Taxpayers have a vested interest in this conversation and should be warned that tax “reform” does not always result in true tax relief.
OCPA’s forthcoming state budget blueprint will show how Oklahoma could achieve a half-percent income tax cut right away, without raising anyone’s taxes or cutting one dollar in state funding for education, transportation, or public safety.
The Senate has been a pro-growth champion in 2013 on reforming Oklahoma’s workers’ compensation system. Sen. Bingman’s proposal to move Oklahoma to an administrative system for processing comp claims would make the state exponentially more attractive to job creators. Individual senators have also introduced multiple plans to bring about true tax relief. In 2013, the Fallin/Shannon plan is the vehicle for pro-growth tax cuts.
Other states are moving quickly to reduce their citizens’ tax burdens and become more attractive to employers—and most states already boast administrative systems for workers’ compensation claims. Oklahoma must make strides in both areas to remain competitive.