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Taxes got your goat?


Would eliminating the state personal income tax help or hobble the economy?

Thomas Larson February 8th, 2012

Tax reform — specifically reform of Oklahoma’s personal income tax — is shaping up to be a key issue for the 2012 legislative session. Unlike previous sessions that saw reductions in the income tax rate, moves this year could push the state toward eliminating it.

In the months leading up to this session, two separate task forces recommended reducing Oklahoma’s personal income tax beginning this session, with the goal of ultimately scrapping the tax. The panels — Gov. Mary Fallin’s Task Force on Economic Development and Job Creation and the legislative Task Force on Comprehensive Tax Reform — differed in the recommended cuts for this year, but both called for phasing out Oklahoma’s 5.25 percent personal income tax over the next seven to 10 years.

In her State of the State address earlier this week, Fallin detailed her plan to significantly reduce the tax.

Michael Carnuccio, president of the Oklahoma Council of Public Affairs, a conservative think tank, helped lead the gubernatorial task force.

right, State Treasurer Ken Miller

“When you phase out the income tax, the way the economy grows — and we’ve seen our economy grow the last 10 years as we’ve been phasing down the income tax — there’s plenty of money to fund the proper role of government,” he said.

While the state’s economy has grown over the last decade, David Blatt, director of the progressive-leaning Oklahoma Policy Institute, contends those tax cuts come with a cost.

“We’re seeing the impact this is having in more crowded classrooms, in seniors that don’t have assistance for food and utilities, in correctional facilities critically under-staffed. This is not the way we’re going to create a stronger state,” Blatt said.

“We need to be serious about figuring out what our priorities are and how we’re going to fund them. Tax reform should be on the table, but it can’t start from the premise that we need to further erode our tax base.”

Both task forces suggested that initial cuts to the income tax could be paid for by eliminating most, if not all, tax credits and exemptions. Along with many credits and exemptions that narrowly apply to a selected industry or a few individuals, many broadly used credits — the $1,000 personal exemption, the earned income tax credit, the sales tax relief credit — would be eliminated.

To further reduce and eliminate the personal income tax, the gubernatorial task force outlined several possibilities to make up the lost revenue: a sales tax on services, higher property taxes, a phaseout with no additional revenue, or a combination of several approaches.

right,
Michael Carnuccio, president, Oklahoma Council of Public Affairs

Carnuccio said he doesn’t believe implementation of a sales tax on services or a hike in property taxes is politically viable. He favors a phase-out without additional revenue, which would mean cutting more than $243 million from the state budget each year. He said savings can be found if state government focused on four core areas: public safety, education, transportation infrastructure, and health and human services.

“If our roads need more money, if our jails are overcrowded and police need more money for public safety, why are we spending money to back up museums in the far corners of the state that aren’t getting much foot traffic?” Carnuccio said.

According the Blatt, however, Oklahoma can’t do away with the income tax and still adequately fund core services.

“The income tax is our single largest revenue source and there is no way we can meet our obligations to fund core services without the income tax, without enormous increases in other taxes,” Blatt said. “You’re either raising other taxes or finding new things to tax. We’re going to be continuing to underfund services and continue to make the situation ever worse, or we’re going to have to increase property and sales taxes.”

Blatt also doubts whether elimination of the income tax will spur economic development.

right, David Blatt, director, Oklahoma Policy Institute

“Oklahomans are already doing better than most of the states without an income tax,” he said. “If you listen to economic development experts, none of them say that Oklahoma’s income tax is an impediment to investment."

Proceed with caution
State Treasurer Ken Miller, a Republican who chaired the Appropriations and Budget Committee while serving in the state House, favors tax reform, but encourages all parties to proceed with caution.

“If we were going to design an optimal and equitable tax code to encourage entrepreneurial activity and productivity and growth, we wouldn’t have the tax structure we have today,” said Miller, who is an economics professor.

“If you look at where Oklahoma is, we’ve been climbing the list of economic indicators in a pretty big way. I think that we can do even better with a well-structured tax code, but we have to be careful because policy mistakes can reverse the gains that we’ve enjoyed.”

He cautioned that any discussion of revising the tax code should be done with the intent of boosting economic development rather than scoring political points.

“We also have to be cognizant that there are other factors that contribute to a state’s success other than the income tax,” Miller said. “We don’t want to get so close to the trees that we miss the forest.”

Finally, Miller said the final say should be had not at the state Capitol, but in polling places around the state.

“Oklahomans should have the opportunity to endorse or reject that proposal at the ballot box. … It’s the taxpayers’ money and I think they need to have a direct voice in the way they are taxed.”

Photos by Mark Hancock and Shannon Cornman / David Blatt photo provided

 
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