Oklahoma Income-Tax Phaseout Would Boost Growth

April 12, 2012

As policymakers across America look for ways to bolster economic growth, they are increasingly considering changes in tax policy. Lawmakers in Oklahoma are on the right track. Eliminating Oklahoma’s personal income tax would provide a breath of fresh air to the state’s competitiveness and economic development efforts.

It has long been said that taxpayers vote with their feet towards more favorable locations. Our research in Rich States, Poor States confirms this long-known fact, and additionally shows that Americans are voting very strongly towards states without income taxes. When tax rates are too high, taxpayers move from the high-tax states to low-tax states. Businesses also vote with their feet—and dollars—from state to state. With the abolition of Oklahoma’s anti-growth personal income tax, small businesses, many of which pay the highest state personal income tax rate, will be able to focus on creating better products and services for their customers—and in the process, create jobs.

Our research outlines the inverse relationship between high income taxes and state economic performance. We compare the economic performance of the nine states with no personal income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) with the nine states that have the highest personal income taxes. In fact, the research from Rich States, Poor States leads us to believe that personal and corporate income taxes are some of the worst taxes for state growth.

Many critics of eliminating the personal income tax argue that states will lose revenue and need to make up the difference with drastic spending cuts or tax increases in different areas. However, having a broader tax base of taxpayers will help offset the revenue costs associated with eliminating the personal income tax. Therefore, states that want to eliminate their personal income taxes do not need to raise other taxes, or drastically cut spending in order to do so. Using surplus dollars to phase out the income tax will allow Oklahoma to eliminate the income tax while its tax base expands and economy grows.

The nine states without personal income taxes saw total state revenue growth double the revenue growth in the nine states with the highest personal income tax rates. This may be counterintuitive, but it shows how states that avoid income taxes attract more people, thereby broadening the base from which other taxes are collected. Population growth over the past decade was almost 14 percent in no-income-tax states, compared to roughly 6.5 percent in states with the highest personal income taxes.

Finally, the no-personal-income-tax states have been havens to Americans seeking better opportunities, with almost eight percent job growth over the past decade, while the highest-personal-income-tax states haven’t even seen a half a percent in job growth over that same decade.

Oklahoma legislators are not alone in trying to eliminate the income tax. The Kansas House of Representatives and Gov. Sam Brownback have both put forth plans to lower, and ultimately eliminate, the state’s personal income tax. Another geographic neighbor, Missouri, may see a ballot initiative in November to eliminate its personal income tax and replace it with a broader sales tax.

Now more than ever, states must find ways to attract businesses and people to foster economic growth and job creation. Oklahoma’s plan to phase out its personal income tax is an important policy that would enhance Oklahoma’s economic competitiveness and create much-needed economic development.

Jonathan Williams is the director of the tax and fiscal policy task force at the American Legislative Exchange Council (ALEC). He is the co-author (with Arthur B. Laffer and Stephen Moore) of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index.

Meaghan Archer is a research analyst for ALEC’s tax and fiscal policy task force.