Budget & Tax

What drives income tax revenues: Tax rates or economic growth?

July 10, 2017

Curtis Shelton

Oklahoma’s marginal personal income tax rate has been reduced to 5% from 5.65% in 2007. Over those ten years, revenue from the personal income tax has fluctuated. The state collected $166,981,275 more from this tax in 2016 than in 2007, a 6.02% increase in tax collections. Examining the data suggests that employment level seem to have driven changes in income tax collections more than tax rates over the last decade in Oklahoma.

• 2008 – 5.65% to 5.5%

For the next two years, until 2010, there was a dip in revenue. This coincided with the great recession as the state suffered a surge in unemployment that peaked at an annual rate of 6.8% in 2010.

• 2012 - 5.5% to 5.25%

This cut came amid a 19% increase in income tax revenue from 2011-2013. After a small dip in 2014, revenue increased to a peak of $3,152,729,993 in 2015. That fiscal year also saw the highest level of employment over this time period.

• 2016 - 5.25% to 5%

After this cut, the state lost 6.69% in income tax revenue from the prior year, but this also came amid a massive decline in oil prices, an increase in unemployment, and declines in revenue from other taxes.

As the charts show, unemployment has had a much higher correlation with income tax revenue than the tax rate over the last decade. When the state began to recover from the financial crisis and the oil and gas economy took off, revenue climbed to a high in 2015. That happened even after two income tax cuts, which dropped the marginal rate by 0.65% over the preceding seven years.