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Counterpoint: Bad tax model


Kurt Hochenauer November 2nd, 2011

For years, Republicans have touted the idea of eliminating the state income tax to create a better business climate, and they have at least a fair chance to start the process during the next legislative session.

But is eliminating the income tax here really the panacea some state leaders think it is, and can Oklahoma really emulate Texas, which is often cited as a tax model? No.

On the surface, the proposal seems tempting. Most people don’t like paycheck taxes, state or otherwise, even though they enjoy and often take for granted the benefits such taxes bring, such as roads, schools and public safety.

But shifting the tax burden elsewhere by raising property, business franchise or sales taxes will disproportionately hurt lower-income families, probably be a neutral sum gain for many middle-class families and benefit the state’s wealthiest residents the most. It also would place the state’s finances in constant peril during economic downturns.

One recent proposal to gradually eliminate the state income tax over 10 years is based at least partially on the premise that it would spur economic activity by bringing more businesses and professionals to the state. This added economic activity would then generate more tax revenue. More often than not, Texas, which doesn’t have a state income tax, gets cited as an example where this premise has been proven, but there are problems with this assessment.

The so-called “Texas Miracle” has been debunked by noted economist Paul Krugman, a New York Times columnist, who pointed out Texas’ relatively high unemployment rate, which was reported at 8.5 percent in August. By contrast, Oklahoma’s unemployment rate stood at 5.6 percent in August. Who should be modeling whom?

Should Oklahoma even compare itself to Texas beyond college athletics? The two states share some economic attributes, such as energy and agricultural sectors, but the comparisons can only go so far. Texas is home to two of the nation’s largest cities, Houston and Dallas. Its population is more than 25 million, second largest in the country. Its geographical land size ranks only behind Alaska.

This is not to put down Oklahoma, which has a population of 3.7 million and ranks 20th in land size, but its economic output and government finances are much smaller than Texas’ and thus more immediately vulnerable to economic slowdowns or sudden drops in energy prices. Oklahoma also has a history of poverty, a dilapidated infrastructure and underfunded schools. State agencies have faced severe budget cuts recently. It would be irresponsible to change the taxation system on wishful thinking.

David Blatt, director of the Oklahoma Policy Institute, opposes eliminating the tax cut for many reasons and has been critical of a recent report by a 45-member state task force, which studied the issue. “It would be a tax shift that provides the greatest benefit to the wealthiest Oklahomans by increasing taxes on those already struggling most to get by,” he said in a recent media release.

But even if one agrees with the growing wealth disparity between the rich and everyone else, eliminating the income tax or further income tax reductions could be problematic.

“Further cuts risk serious damage to Oklahoma’s economic growth, because businesses depend on the public sector for healthy and educated workers, infrastructure and public safety,” Blatt said.

Hochenauer is an English professor at the University of Central Oklahoma.

 
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