Budget & Tax

Oklahoma tax reform would enhance stability, competitiveness

March 29, 2023

Curtis Shelton

An important analysis from The Pew Charitable Trusts measures the variance of every major tax source for each state, comparing each tax type as well as overall state volatility scores. Typically a broader tax base creates a more stable revenue source than more narrow taxes.

According to the Pew analysis, severance taxes are the most volatile tax source while sales taxes are the most stable. Oklahoma had the 10th most volatile tax revenue since 2001. (This is not surprising given our heavy reliance on oil and gas.)

Comparing Oklahoma to nearby states shows that Oklahoma has the second highest volatility in tax revenue, with a score of 8.1. Only New Mexico scored higher with 10.1. (The higher the score, the greater the volatility.) Arkansas has the most stable revenue with a score of 4.1. For comparison, the national average was 6.2.

There are steps Oklahoma can take to make its tax revenue sources not only more stable but also more competitive. By eliminating the income tax, Oklahoma would remove its most economically damaging tax while making it more competitive with other states like Tennessee and Texas. Both of those no-income-tax states are able to achieve a more stable revenue base than Oklahoma without the burden of an income tax. In fact, all but two no-income-tax states have less revenue volatility than Oklahoma. Those states are Alaska and Wyoming, which both face the unique challenge of an inherently small tax base because of their relatively small populations, as well as a high reliance on severance taxes. To put it in perspective, over 10 years severance taxes in Oklahoma only made up 7 percent of total revenue. Likewise, that share was 32.6 percent in Wyoming and 55.6 percent in Alaska.

Adopting full scale tax reform like the one OCPA proposed last year would make Oklahoma much more competitive by eliminating the income tax while simultaneously creating a more stable sales tax by broadening the base to include more taxable services. This sort of tax reform would benefit all Oklahomans through increased economic activity in the long term without the risk of a severe government shortfall in the short term.