Budget & Tax

Tax reform discussion advances in Oklahoma Senate

April 11, 2023

Ray Carter

Saying passage of the bill sets the stage for discussion of broad tax reform, members of an Oklahoma Senate committee have approved legislation that would put the state on the path to eventually reduce the personal income tax to 2.75 percent.

“If there’s going to be tax reform that’s going to come about this year, we need this vehicle to do it,” said state Sen. Dave Rader, R-Tulsa.

House Bill 2285, by state Rep. Mark Lepak and Rader, would cut the state’s personal income tax rate from the current rate of 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 in future years, putting the state on the path to eventually lower 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 until it eventually falls to 2.75 percent.

Rader said the proposed triggers will ensure that tax rates are reduced in times of economic growth while ensuring that overall state revenue is sufficient to cover existing obligations.

He also said the proposal would likely change as the session progresses, but that the bill offers lawmakers the chance to discuss tax reform issues.

Even one opponent of the bill conceded that Oklahoma’s personal income-tax system needs an overhaul.

“We shouldn’t have tax brackets from the 1970s,” said state Sen. Julia Kirt, D-Oklahoma City. “They’re not relevant anymore, that’s for sure.”

She noted that the current top rate kicks in at $7,200 and praised the proposed increase in the standard deduction, noting it “means that people making $10,000 would not be paying taxes” as they do under the current system.

“We don’t want taxes on the folks that are barely getting by,” Kirt said.

However, Kirt also objected that the bill would provide “pretty huge tax cuts, potentially over multiple years,” and said lawmakers should focus more on increasing state spending.

“Rather than emphasizing heading towards lower income tax, we should first figure out what we need to run this state well,” Kirt said.

HB 2285 passed the Senate Finance Committee on a 8-2 vote that broke along party lines with Kirt and state Sen. Carri Hicks, D-Oklahoma City, in opposition. The legislation previously passed the Oklahoma House of Representatives on a 77-19 vote that also broke along party lines.

The discussion on tax reform reflects, in part, the ongoing economic competition between states. In the immediate region, Texas has no personal income tax and has enjoyed strong economic growth for years, while in neighboring Arkansas policymakers have just enacted a reduction that will lower that state’s top individual income tax rate to 4.7 percent, giving Arkansas a lower top rate than Oklahoma unless lawmakers here approve additional cuts this year.

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.

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.”