Budget & Tax
Ray Carter | January 30, 2023
Report: Oklahoma personal income tax bigger issue than business taxes
Oklahoma’s business taxes are not a major factor in business expansion or relocation decisions, but the state’s personal income tax remains a challenge cited by many business officials, according to a review conducted by the Oklahoma Legislative Office of Fiscal Transparency (LOFT).
“While there are several factors that contribute to a State’s overall competitiveness such as cost of living, utility costs, workforce readiness, and infrastructure, a state’s tax policy and overall tax burden plays a significant role in business decisions to open, expand, or relocate,” the LOFT report stated.
The report examined five state taxes that fall almost entirely on business entities rather than individual taxpayers, including the state’s corporate income tax, the franchise tax, withholding taxes, registered agent fees, and the gross production tax.
In meetings with a range of stakeholder groups, LOFT officials found that “although competitive corporate tax rates and tax credit programs were a component of site selection within the region,” business decisions for relocating or expanding were often driven by other factors.
Publicly available data indicate the personal income tax—rather than any of the state’s business-focused taxes—is among the significant factors driving job-creation decisions.
The report noted that the 2022 Oklahoma Business Leaders Poll conducted by The State Chamber of Oklahoma found that “54 percent of business leaders did not believe their business taxes were too high. They also responded that individual income tax should be the primary focus to be regionally competitive” [emphasis in the LOFT report].
Kaitlyn Jasper, program evaluator for LOFT, told lawmakers on the LOFT oversight committee that different businesses have different priorities, and the personal income tax may be especially important for one category of businesses.
“Businesses that wish to relocate headquarters to Oklahoma may be more concerned with personal tax burdens for employees and executives,” Jasper said.
The report comes at a time when discussion of tax reform is expected to be a focus in the 2023 legislative session. Such reform could involve significant reduction or elimination of the personal income tax, with that revenue change potentially offset by other changes in the tax code.
Neighboring Texas has long enjoyed strong economic growth thanks in part to its lack of a personal income tax. Critics often note Texas imposes higher property taxes than Oklahoma, but LOFT officials found the difference between the two states is not as severe as often portrayed.
“Texas ranks 38th, overall, in terms of how high their property taxes are,” said Mike Jackson, executive director of LOFT. “Oklahoma ranks 30th. So it’s not as big of a difference as what many people would like to believe.”
One business incentive that has been credited with boosting the state’s aerospace industry indirectly highlights the challenges created by the state’s personal income tax.
A personal income tax credit for qualified engineers employed by an Oklahoma aerospace manufacturing company provides those individuals with a tax credit of $5,000 annually for five years. That effectively exempts those individuals from the state’s personal income tax and has been described as a crucial program if officials want to lure aerospace jobs to Oklahoma.
State Question 640, a state constitutional amendment passed in 1992 that prohibits tax increases unless they receive voter approval or three-fourths supermajority support in both chambers of the Oklahoma Legislature, also makes Oklahoma more attractive to businesses, LOFT found.
“Oklahoma has the strongest taxpayer protection law in the nation, requiring the highest vote threshold for increasing taxes, applying this threshold to all taxes, and providing no exceptions in the case of an emergency,” the LOFT report stated. “This taxpayer protection provides something businesses highly value: certainty. No other state in the country can give businesses greater assurance that their tax rates will not be raised.”
The report also highlighted the need for spending restraint to build up state savings, a policy championed by Gov. Kevin Stitt and embraced by lawmakers throughout Stitt’s first term.
The LOFT report noted Oklahoma’s tax base has been ranked the ninth most volatile in the country due to heavy reliance on wildly fluctuating gross-production and corporate-income taxes.
LOFT noted that Oklahoma’s top five industries (by gross domestic product) have not changed over the last 10 years, and that oil and gas “remains Oklahoma’s largest industry.” In the last 10 years, the share of Oklahoma’s GDP made up by oil and gas rose from 13.6 to 19.35 percent.
Prudent financial planning requires the state to maintain savings sufficient to deal with future downturns that may be more severe than what other states with less volatile collections may face, officials noted.
“LOFT’s research identified that states generally require at least 15 percent of their total expenses in reserves in order to weather a recession without cutting spending or increasing taxes,” the report stated. “Research from the Pew Charitable Trust shows states that depend heavily on volatile revenue sources, like severance taxes, should consider holding more in reserves as a percentage of their budget in order to provide a budget cushion in the case of revenue failures. Based on total outlays for state services for FY 2021 ($27 billion), Oklahoma may require approximately four billion dollars in total on-hand reserves to weather a major recession.”
While state savings of $4 billion would have been considered unachievable prior to Stitt’s tenure, it is close to becoming a reality today. In August, Stitt announced that the state now has roughly $2.8 billion in savings, and state government is expected to have $1.8 billion in growth revenue in the pending legislative session.
LOFT officials noted that significant state savings can be maintained even when states do not have a personal income tax.
The states of Alaska and Wyoming have “the largest revenue stabilization funds” in the country, Jackson noted.
“The two things that they don’t have—either one of them—are corporate or personal income tax,” Jackson said.
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.