Budget & Tax
Jonathan Small | July 2, 2014
It's Time to Phase Out Oklahoma's Personal Income Tax
Oklahoma is moving forward with a plan, Gov. Mary Fallin wrote in 2012, which will “chart a course toward the gradual elimination of the state income tax.” Progress has been slow on that front, but now is no time for policymakers to abandon this worthy goal.
Oklahoma Secretary of Commerce Larry Parman is one leader who has called for phasing out the tax. He says the absence of an income tax is one tool that would be extremely beneficial to him and to the state in the fierce competition among states to attract entrepreneurs and job creators of all sizes in all industries.
Liberals and tax consumers often predict that personal income tax cuts will only help “the rich” and will lead to sharp declines in government revenue and a decimation of government services. But those predictions have proven to be false.
Oklahoma’s Office of Management and Enterprise Services (OMES) is responsible for preparing the state’s Comprehensive Annual Financial Report (CAFR). The FY-2011 and FY-2013 CAFRs reveal that personal income tax cuts in Oklahoma have benefited state government and Oklahoma taxpayers from 2004 to 2011 (the latest available data).
Over this period, the number of tax filers with adjusted gross income (AGI) of more than $50,000 has increased by 152,029, or 39 percent. These filers paid 76 percent of total personal income taxes in 2004 but paid 84 percent in 2011.
Tax filers with AGI of $25,000 or less paid 6 percent of total personal income taxes in 2004 but paid 3 percent in 2011. Total personal income tax liability for these filers declined 55 percent — from $167 million in 2004 to $75 million in 2011.
Even though there were more filers in 2011 than in 2004 with AGI of $25,001 to $50,000, those filers paid $133 million less in personal income tax.
Tax cuts didn’t just help taxpayers. State government officials regularly report that Oklahoma total net state tax collections are at all-time highs.
Total net state personal income tax collections set a record the last two years and are on pace for a record for FY-2014.
State sales tax collections soared over the last decade. Net state sales tax collections were $1.4 billion in FY-2003. In FY-2013, the most recent fiscal year, net state sales tax collections were $2.2 billion, an increase of $871 million. That’s 62 percent in just 10 years. (Inflation over this same period was 27 percent, state population growth was 9 percent, and state personal income growth 39 percent.) Total net state sales tax collections set a record the last two years and are on pace for a record for FY-2014.
Moreover, according to the CAFR, Oklahoma’s total state spending set a record high every year for at least the last decade and is on pace for yet another record high.
Total available revenues for common education are at all-time highs, according to the Oklahoma State Department of Education, with local revenues surging more than $300 million from FY-2008 to FY-2013.
Some continue to deny the reality of a dynamic economy and continue to argue that personal income tax cuts cannot be credited for any amount of growth in other revenue sources. But it is undeniable that their predictions that tax cuts would lead to doom, gloom, and despair have proven false.
Research and human action demonstrate that taxes on productivity are the most damaging. The personal income tax is a direct penalty on work, entrepreneurship, and job creation.
Oklahoma has made significant strides over the last decade but cannot afford to be complacent. It’s simply a fact that the states with no personal income tax outperform the nine highest-taxed states, the national average for states, and even Oklahoma.
According to the U.S. Census Bureau, from 1992 to 2011 Oklahoma lost nearly $1 billion in AGI as a result of Oklahomans choosing to relocate to other states. It’s no coincidence that over that time period Oklahoma lost $1.3 billion to Texas and $296.9 million to Florida, both no-income-tax states.
Oklahoma now is in the “income-tax sandwich” that governor Mary Fallin feared. Of the six states surrounding Oklahoma, four penalize work less than Oklahoma does, completely surrounding Oklahoma’s north, south, and west borders.
To be sure, more must be done to unleash human potential in Oklahoma. Oklahoma must implement strong K-12 school choice alternatives, expand and embrace the national free market health care movement taking place in Oklahoma, and desperately needs corrections reform.
But achieving the goal of phasing out Oklahoma’s personal income tax is the one economic policy change which will expand economic opportunity for the majority of Oklahomans.
Jonathan Small, C.P.A., is the vice president for policy at OCPA. He previously served as a budget analyst for the Oklahoma Office of State Finance, a fiscal policy analyst and research analyst for the Oklahoma House of Representatives, and as director of government affairs for the Oklahoma Insurance Department.
Jonathan Small, C.P.A., serves as President and joined the staff in December of 2010. Previously, Jonathan served as a budget analyst for the Oklahoma Office of State Finance, as a fiscal policy analyst and research analyst for the Oklahoma House of Representatives, and as director of government affairs for the Oklahoma Insurance Department. Small’s work includes co-authoring “Economics 101” with Dr. Arthur Laffer and Dr. Wayne Winegarden, and his policy expertise has been referenced by The Oklahoman, the Tulsa World, National Review, the L.A. Times, The Hill, the Wall Street Journal and the Huffington Post. His weekly column “Free Market Friday” is published by the Journal Record and syndicated in 27 markets. A recipient of the American Legislative Exchange Council’s prestigious Private Sector Member of the Year award, Small is nationally recognized for his work to promote free markets, limited government and innovative public policy reforms. Jonathan holds a B.A. in Accounting from the University of Central Oklahoma and is a Certified Public Accountant.