Budget & Tax
Ray Carter | March 20, 2023
Lawmakers support income-tax cut
Legislation that would effectively impose a single personal income-tax rate for all workers, while also lowering the rate, has easily passed out of the Oklahoma House of Representatives.
The legislation was described as an opening salvo in broader budget negotiations that may result in a different tax-cut proposal before the end of session with an end goal of making Oklahoma a destination for workers and investment.
“You can do the analysis around the country, and you see the migration from states that tax income heavily to states that do not,” said state Rep. Mark Lepak, R-Claremore.
House Bill 2285, by Lepak, would cut the state’s personal income tax rate from 4.75 percent to 4.5 percent beginning in 2024. The bill would also substantially increase the standard deduction, effectively eliminating all existing tax brackets below the proposed top rate of 4.5 percent.
Under the bill, single filers would see their standard deduction increase from the current $6,350 to $10,350 while married households filing jointly would have their deduction increased from $12,700 to $20,700.
The rate-reduction and standard-deduction provisions would save Oklahomans $145.2 million annually when fully implemented.
HB 2285 would also require additional cuts to the personal income-tax rate as state revenue increases, putting the state on the path to eventually lowering the rate to 2.75 percent.
Under the bill, if total collections to the state’s General Revenue Fund increase by 1.5 percent or more compared to the prior year, the personal income tax rate would automatically be reduced by another quarter point.
Democrats objected to the bill’s passage, saying state government’s current prosperity, which includes roughly $4 billion in state savings, is the result of hundreds of millions in tax increases enacted in 2018.
“We have the $4 billion in the coffers now because we worked really hard to get the gross production tax up to a certain point,” said state Rep. Regina Goodwin, D-Tulsa. “It’s not up really where it should be, but we got it increased to 5 percent. You are aware that we also had a cigarette tax. We had a gasoline tax.”
Lepak noted the state government shortfall several years ago was strongly tied to an oil bust caused by international factors, rather than any specific action taken by state lawmakers, and said such years have been the exception and not the rule.
Since the 1990s, Oklahoma’s top personal income-tax rate has been cut from 7 percent to the current rate of 4.75, and state tax collections have steadily increased overall even as the income-tax rate has come down. Lepak said policy should be based on a long-term view, not short-term thinking based on outlier years.
“You have to take a longer view than a snapshot in time,” Lepak said. “Sure, there’s some hard times, but if you go back 21 years and look at the growth of state revenues over that time, you will see the personal income-tax rate coming down, other tax rates coming down, others going up depending on what you’re taxing, but overall the growth has been at the 1.5-to-3 percent range over that entire 21-year period.”
He also noted that tax collections increase in tandem with the economy rather than specific tax rates.
“Our tax revenues are really more a reflection of economic health and growth than they are of a specific tax of one kind or another,” Lepak said.
State Rep. Mickey Dollens, D-Oklahoma City, complained that HB 2285 effectively imposed the same tax on all workers.
“If someone makes $35,000 a year, they’re paying 4.5 percent, compared to someone who’s making $355,000, they’re paying 4.5 percent, and someone who’s making $350 million a year, they’re paying 4.5 percent,” Dollens said.
However, policy groups have long noted that increasing tax rates along with income create “cliffs” that deter individuals from earning or investing more money because the initial tax burden from earnings above a certain thresh hold exceed the amount of additional income earned because of the higher rate of taxation.
Left-wing groups have noted that problem also arises when government benefits are completely cut off at certain income levels.
Research has consistently shown that lower taxes are connected to stronger economic growth.
A recent policy paper by Tax Foundation senior policy analyst Timothy Vermeer reviewed academic literature on the topic and found that all but one of the studies compiled showed a positive correlation between lower income tax rates and GDP growth, increased chances of upward mobility, and wage growth.
Vermeer noted that a “decrease in a tax system’s progressivity is associated with an increase in the real growth rate of wages.”
One Democrat also appeared to suggest that if tax cuts cause more people to move to Oklahoma, the population growth would necessitate higher levels of taxation.
“In terms of competitiveness, presumably then the idea is to bring additional people to the state of Oklahoma, at least that’s my interpretation of that,” said state Rep. Andy Fugate, D-Oklahoma City. “… So the question I have then is about the provisions that reduce the tax rate. Do they take into account population increase and growth and the potential that we would need to spend more money to support more people?”
But state Rep. Scott Fetgatter, R-Okmulgee, said current financial conditions demonstrate the need for tax reductions.
“You’ve got $4 billion in savings in the state of Oklahoma right now,” Fetgatter said. “Oklahomans are being overtaxed. Government is making a profit. This is good policy.”
Despite tax cuts having long been shown to boost economic activity, Democrats insisted that tax cuts would lead to economic ruin.
“What we’re doing right now is repeating history,” Dollens said.
He said those who voted in support of the legislation are “sending a clear message that you don’t care about the future of this state.”
Lepak countered, saying a vote of support sent the message “that we’re open for business, we’re about economic development, come see us.”
HB 2285 passed the Oklahoma House of Representatives on a 77-19 vote that broke along party lines with Republicans in support and Democrats in opposition. The bill now proceeds to the Oklahoma Senate.
Director, Center for Independent Journalism
Ray Carter is the director of OCPA’s Center for Independent Journalism. He has two decades of experience in journalism and communications. He previously served as senior Capitol reporter for The Journal Record, media director for the Oklahoma House of Representatives, and chief editorial writer at The Oklahoman. As a reporter for The Journal Record, Carter received 12 Carl Rogan Awards in four years—including awards for investigative reporting, general news reporting, feature writing, spot news reporting, business reporting, and sports reporting. While at The Oklahoman, he was the recipient of several awards, including first place in the editorial writing category of the Associated Press/Oklahoma News Executives Carl Rogan Memorial News Excellence Competition for an editorial on the history of racism in the Oklahoma legislature.