Oklahoma Income-Tax Phaseout Would Benefit Families

March 6, 2012

As the country slowly puts the “Great Recession” behind it, American families are still struggling with financial difficulties. Some financial decisions, such as credit-card usage, can be changed. Other financial decisions, such as taxes, cannot be changed.

The cumulative effect of financial insecurity on families can be devastating, with one casualty being the institution of marriage itself. Unfortunately, marriage is on the decline both nationally and in Oklahoma. One interesting way to measure this decline is to look at state-level tax return data from the Internal Revenue Service (IRS).

Why the IRS? Because it has some of the best data available to researchers since we are all required by law to comply—or else face criminal penalties. So, any trend that shows up in the IRS data is worth careful examination.

Chart 1 shows the percentage of tax returns that were filed under the “married filing jointly” tax status in 1997 and in 2009. Nationally, married returns represented 40.2 percent of all tax returns in 1997. By 2009, the share of married returns had fallen by 5.4 percent to 38 percent.

Thankfully, marriage is holding up a bit better in Oklahoma than it is nationally. In Oklahoma, married returns represented 45.8 percent of all tax returns in 1997. By 2009, the share of married returns had fallen by 6.6 percent to 42.8 percent.

Overall, the good news is that Oklahoma has a higher percentage of married returns, although the drop between 1997 and 2009 was slightly higher than the national average. The bad news is that married returns are still mimicking the national downward trend.

Of course, since taxes affect everybody the decline in the number of married taxpayers may be due to other factors. However, one tax in particular—the personal income tax—disproportionately affects married taxpayers because higher income levels are taxed at higher marginal income tax rates, at both the federal and state levels.

Turning again to data from the IRS, Chart 2 shows two important characteristics of Oklahoma taxpayers by income group. For clarity, keep in mind that a “tax return” equals a household and “exemptions” equal the number of people in that household.

As the chart clearly shows, as income grows so does the percentage of households that file under “married filing jointly” and the number of people per household. In fact, those at the very top—households earning more than $200,000—have the second-highest married percentage (87.3 percent) and the largest number of people (2.84).

So the next time you hear someone say we should tax the rich (which President Obama identifies as anyone earning more than $250,000 a year), remind them that those folks are overwhelmingly families—and the largest ones at that. Why would anyone want to tax large families—whose expenses on food, clothing, and shelter are also higher—at higher marginal tax rates?

The Tax Foundation has published a book, Putting a Face on America’s Tax Returns, that further explores the differences in taxpayers across the income spectrum. In short, the research shows that “the vast majority of taxpayers who face the highest marginal tax rates [meaning high-income earners] tend to be married couples. But aside from being married, they also tend to be dual-income, residents of high-cost urban areas, older, college educated, and engaged in business activities.”

Overall, Oklahoma’s policymakers should be concerned about how the state’s personal income tax is, in part, responsible for the slow decline of Oklahoma’s families. In April 2011 we outlined in these pages some family-friendly tax reforms for Oklahoma, but perhaps no reform would be better than the outright elimination of the personal income tax.

This would be a financial boon to Oklahoma’s families. For instance, according to a recent study published by OCPA and Arduin, Laffer & Moore Econometrics, a family of four earning $75,000 would have saved $2,748 in 2010. This does not even include the positive impact on the economy, which would also mean more and better-paying jobs. The study concluded:

Based on this evidence, it is clear that Oklahoma’s economy would soar if the proposed economic plan were implemented. Oklahoma has the opportunity to establish itself as the premier destination for economic freedom, through a complete phaseout of the state’s personal income tax. This would be a historic choice for Oklahoma, one that would create an enduring economic boom benefiting generations to come.

Not only would the elimination of the personal income tax “benefit generations to come,” but it would also help to ensure the creation of those future generations.

Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.