Budget & Tax

As tax cuts stall in Oklahoma, Arkansas moving ahead

June 13, 2024

Ray Carter

Because of state Senate opposition, no personal income-tax cuts were approved during the 2024 session of the Oklahoma Legislature. That left Oklahoma with a higher personal income-tax rate than several bordering states and at a competitive disadvantage economically.

Now, the governor of Arkansas is seeking to widen the gap between Oklahoma and Arkansas on the income tax.

This week, Arkansas Gov. Sarah Huckabee Sanders called for a special session of the Arkansas General Assembly to address several issues, including her proposal to reduce that state’s top personal income-tax rate to 3.9 percent, effective Jan. 1, 2024.

“With the state’s financial stability, increased economic growth, healthy reserve accounts, and conservative spending policies, additional tax reductions can be enacted to provide further tax relief during this period of heightened inflation under ‘Bidenomics,’” Sanders wrote in her call for a special session.

When Sanders took office the top individual tax rate in Arkansas was 4.9 percent, which was higher than Oklahoma’s current top rate of 4.75 percent. But during Sanders' tenure, Arkansas officials have already lowered that state’s top rate to 4.4 percent, beating Oklahoma. And Sanders’ push to lower the rate to 3.9 percent will make the Arkansas rate significantly lower than the tax imposed on work and investment in Oklahoma.

While Oklahoma now trails Arkansas in the income-tax realm, it’s not due to lack of trying by Gov. Kevin Stitt. In 2023, Stitt called for cutting the state personal income-tax rate to 3.99 percent and released a budget plan that outlined how to achieve that goal. Oklahoma had a $1.2 billion surplus at that time.

While members of the Oklahoma House of Representatives advanced several tax-cut measures in 2023, the Oklahoma Senate refused to give a floor vote to any of them.

In 2024, Stitt called for cutting the personal income tax to 4.5 percent and putting the tax on the path to full repeal by having automatic cuts whenever state revenue growth surges to certain levels in future years. But, once again, the Oklahoma Senate refused to take up income-tax reduction even as House lawmakers advanced several proposals.

Cutting Oklahoma’s top income-tax rate from 4.75 percent to 4.5 percent would have reduced tax collections by only around $250 million annually once fully implemented, and that does not account for revenue generated by greater economic growth.

Oklahoma lawmakers started the 2024 session with a $543 million surplus, and prior income-tax cuts have mostly been followed by increased state tax collections.

The only tax reduction that passed in 2024 was a modification of the sales tax on groceries. Lawmakers voted to shave off the 4.5-percent state sales tax from the purchase of some grocery items, although all groceries remain subject to county and municipal sales taxes.

While consumers welcome any relief, the impact of the grocery tax change is likely to be offset by continued inflation. Although the sales tax is lower, if prices continue to rise as they have throughout the Biden administration the amount Oklahomans pay for groceries will increase and slowly offset or even negate any savings generated by the elimination of the state grocery tax.

Also, sales-tax changes do not incentivize new investment and job creation, unlike income-tax changes.

Rather than enact pro-growth tax cuts, the Oklahoma Senate prioritized spending increases.

A flat state budget that maintained all prior-year recurring spending would have totaled $10.8 billion. But the budget passed at the end of this year’s legislative session instead spent $12.47 billion.

This week when Stitt signed Senate Bill 1125, the general-appropriations budget bill, the governor expressed disappointment that lawmakers did not seize the opportunity to lower the income tax.

“The state has taken a step forward today, but our work is unfinished,” Stitt said. “I will continue to fight for more tax cuts and keeping a lid on the growth in government in Oklahoma.”

House Speaker Charles McCall, R-Atoka, issued a similar statement.

“The House is proud to have championed, for a third straight year, a personal income tax cut and a path to zero as future revenues rise, in addition to the repeal of the state’s grocery tax,” McCall said. “We appreciate Governor Stitt’s support of these efforts as well, and hope to see them prioritized in the future.”

But Senate President Pro Tempore Greg Treat, R-Edmond, again attacked efforts to cut the personal income tax, bragging that his chamber forced the governor and House lawmakers to back down “from a tax cut that would have put the state on an unsustainable financial path for future legislators.”

The failure to cut the state’s personal income tax leaves Oklahoma with one of the highest income-tax rates in the region and at a competitive disadvantage with surrounding states.

Oklahoma’s current top income-tax rate of 4.75 percent is higher than several neighboring states, including Texas (which has no personal income tax), Arkansas (where the current rate is 4.4 percent), and Colorado (4.4 percent), while Missouri’s top rate of 4.8 percent is almost the same as Oklahoma’s rate. Among bordering states, only Kansas and New Mexico have significantly higher personal income-tax rates than Oklahoma.

The failure to pass pro-growth income-tax cuts this year has become an issue in political campaigns across Oklahoma, including in Treat’s own district.

While Treat repeatedly criticized income-tax cut measures this year, the Republican candidates running to succeed Treat, who is leaving office due to term limits, view the issue very differently.

At a recent forum, all three Republican candidates running in Treat’s district endorsed putting the personal income tax on the path to full repeal, according to NonDoc. And one was openly critical of the Legislature’s failure to reduce the tax this year.

“Income tax should have been lowered. The governor called for it. The legislators just didn’t produce or come forward and look at reducing it,” said Republican candidate Kelly Hines, according to NonDoc. “The grocery tax was a great move, but I would say that was a softball. That was fairly easy to hit and wasn’t going to make anybody mad. What we really need to do is attack the hard stuff like the income tax.”

As that debate continues in Oklahoma, officials in Arkansas appear ready to seize their opportunity to jump further ahead of Oklahoma on the income-tax front.

In a post on X, formerly known as Twitter, Sanders predicted that next week lawmakers in Arkansas will “cut income taxes by nearly $500 million.”

“Democrats in DC are failing,” Sanders wrote, “but we are blazing a path to greater prosperity for our people.”