| May 3, 2011

Oklahoma’s Small Private Sector Masks True Tax Burden

With April 15 behind us, the dreadful thoughts of taxes will soon fade from memory. Yet personal income taxes are only a small part of the tax load that all Oklahomans must bear. This means that paying taxes is really a year-round affair, which makes understanding the tax burden a difficult task.

Building on previous research we have done on Oklahoma’s tax system, in this article we will look at how long it takes the average Oklahoman to pay his or her state and local (S&L) government tax bill. To fully answer that question we must first delve into determining the proper measure of the “tax burden.”*

Under standard tax burden calculations, Oklahoma’s S&L tax burden as a percent of personal income was 9 percent in 2008. Relative to all other states, Oklahoma has only the 43rd highest S&L tax burden in the country, and is below the national average of 10.5 percent. Regionally, Oklahoma ranks on par with Colorado (44th), Missouri (45th), and Texas (46th) and better than Arkansas (31st), Kansas (21st), and New Mexico (8th).

However, this standard methodology is imperfect because personal income includes both private and public sector sources of income. Yet the distinction between the two sectors is important because only the private sector creates new income. The public sector can only redistribute income through taxes and spending. More specifically, public sector spending consists of personal current transfer receipts (Medicare, Medicaid, Social Security, etc.) and government employee compensation (federal, state, and local).

As our previous research has shown, Oklahoma’s private sector as a percent of personal income was a dismal 63.5 percent in 2010—the 12th smallest private sector in the country. Oklahoma’s private sector is also well below the national average of 68.7 percent. In the long run, this affects overall economic well-being since, on average, a 1 percentage point increase in the size of the private sector yields an increase in household income of $2,617.

Therefore, a more appropriate measure of Oklahoma’s tax burden is as a percent of private sector personal income. Under this measure, Oklahoma’s tax burden soars to 13.3 percent of private sector personal income. In fact, Oklahoma’s tax burden as a percent of private sector income is 48 percent higher than when measured as a percent of personal income—the 11th highest differential in the country.

Additionally, the gap between the two measures has been growing steadily over time. In 1951 the S&L tax burden as a percent of personal income was 8.2 percent while as a percent of private sector income it was 10.5 percent—a difference of 28 percent. Clearly the standard calculations make Oklahoma’s tax burden appear smaller than it really is.

Therefore, with a clearer method of accounting for Oklahoma’s S&L tax burden, we can turn our attention to examining how long it takes to pay off this tax bill. Taking the S&L tax burden as a percent of the calendar year shows that the average Oklahoman, in 2008, worked until February 17 to pay off his or her tax bill. This is significantly higher than back in 1951 when Oklahomans were done on February 7—a full 10 days earlier—but lower than the record date of February 22, which was last set in 1995.

What would policymakers have to do to reduce the S&L tax burden on Oklahomans back to 1951 levels? In 2008, S&L governments collected $12.1 billion. Adjusting that figure to equate to 10.5 percent of private sector income would mean a reduction in spending of $2.6 billion to $9.5 billion. Then Oklahomans could once again celebrate paying off their tax bill 10 days earlier, just as previous generations have done.

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

*The state and local tax collection data are from the U.S. Department of Commerce’s Census Bureau. Due to data constraints at the local level, the authors have made various estimates for years prior to 1958. The data have been adjusted into calendar years. The personal income data are from the U.S. Department of Commerce’s Bureau of Economic Analysis.

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