Economy

No-income-tax states outpacing Oklahoma

August 5, 2024

Ray Carter

Since 2019, Oklahoma has experienced positive net migration as more people move into the state than leave it.

But Internal Revenue Service (IRS) data for 2022 show that states with no personal income tax are still outpacing Oklahoma, particularly when it comes to attracting higher-income individuals.

Chris Edwards, the Kilts Family Chair in Fiscal Studies at the Cato Institute, recently compiled the IRS data for 2022, ranking the states on the ratio of in-migration to out-migration of individuals with incomes of more than $200,000.

“People move because of jobs, living costs, weather, and family,” Edwards wrote. “Taxes are also an important driver of migration, particularly for higher-income households. States with lower taxes tend to have higher ratios of in-migration to out-migration.”

Oklahoma’s ratio was 20th best in the nation. For every person with income of more than $200,000 who left Oklahoma, the state gained 1.18 people in that income category.

While that shows positive momentum for Oklahoma’s economy, the state’s personal income tax remains a barrier.

In prior rankings of domestic migration among all income levels, Oklahoma has ranked in the top 10 states. For Oklahoma’s ranking to fall to 20th when measuring the ratio of incoming-to-outgoing individuals with income above $200,000, a group that is more sensitive to the personal income tax, indicates Oklahoma would attract even more higher-income individuals if the tax was repealed. And since those individuals are often job creators, their presence in a state has significant ripple effects that increase opportunity and earnings for workers at all income levels.

“We’ve governed conservatively, and Oklahomans stand to benefit from our state's strong economic position, record savings, and low unemployment,” said Gov. Kevin Stitt. “But a big problem we’re facing is staying competitive with other states who have zero income tax. If we want to be the state for investment, opportunity, and low cost of living, then we have to put Oklahoma on a path to zero income tax. Let’s guarantee Oklahoma’s place as the best state to live and work by delivering income tax relief now.”

IRS data show that 11 of the 19 states with a better ratio of high-income individuals have a lower personal income tax rate than Oklahoma with seven of those 11 states having no personal income tax at all.

The states outranking Oklahoma include neighboring Arkansas and Texas.

Texas has no income tax, and Arkansas has been steadily lowering its income-tax rate.

Oklahoma’s current top personal income-tax rate is 4.75 percent, but in Arkansas it has been 4.4 percent and policymakers in that state voted to reduce the rate even further, to 3.9 percent, this year.

For every person with income above $200,000 who left Arkansas in 2022, the state gained 1.41 individuals with that level of income, according to IRS data. In Texas, the state gained 1.47 higher earners for every one that left.

When reviewing the ratio of net migration by higher-income individuals, seven of the top 15 states have no income tax (Florida, Tennessee, South Dakota, Nevada, New Hampshire, Wyoming, and Texas).

Tax-cut opponents often dismiss arguments that the lack of an income tax explains a state’s ability to attract more residents from other states, arguing factors like warm weather explain the appeal of states like no-income-tax Texas and Florida.

But in an interview, Edwards noted the data undermine that argument.

“You take a state like South Dakota with no income tax. It’s a cold northern state. It’s not a place that you would think people would flock to like sunny and warm California or Florida, but they consistently have a net inflow of people whereas in most of the surrounding states there’s an outflow,” Edwards said. “So South Dakota’s an interesting case study.”

For every person with income above $200,000 who left South Dakota in 2022, the state gained 1.93 individuals with that level of income, according to IRS data. That’s a ratio of nearly two-to-one.

Stitt has been steadfast in his support for further reducing Oklahoma’s income tax rate and also putting the tax on the path to full repeal.

In 2023, Stitt called for cutting the state personal income-tax rate to 3.99 percent and released a budget plan outlining 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 repeal by having automatic cuts occur whenever state revenue growth surges to certain levels in future years. Oklahoma lawmakers started the 2024 session with a $543 million surplus but, once again, the Oklahoma Senate refused to take up income-tax reduction even as House lawmakers advanced several proposals.

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 (3.9 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.

Income-tax cut opponents also argue other taxes will be increased dramatically if Oklahoma eliminates its income tax.

But data from the Tax Foundation shows that states with no income tax also have lower overall tax burdens than Oklahoma.

Wyoming’s effective state-local tax rate is second lowest in the country. Tennessee’s effective combined rate is third lowest. South Dakota’s effective state-local tax rate is fourth lowest in the country. Texas ranks sixth lowest.

Edwards said the data from existing no-income-tax states show there is no reason other states cannot do the same thing.

“The thing that strikes you about looking at the nine states that don’t have an income tax is it’s a huge diversity,” Edwards said. “It’s Florida. It’s New Hampshire. It’s Tennessee, Alaska. They’re all over the country. They’re very different types of states—Wyoming (also). If those nine states can do it, any state can do it.”