Income-Tax Phaseout Would Create Economic Boom

December 5, 2011

Oklahoma has the opportunity to establish itself as America’s premier destination for economic freedom by completely phasing out the state’s personal income tax.

In a new study (“Eliminating the State Income Tax in Oklahoma: An Economic Assessment”), OCPA and Arduin, Laffer & Moore Econometrics estimate that by phasing out the income tax over a 10-year period, Oklahoma could expect a significant increase in state GDP growth, personal income growth, and employment growth.

By gradually lowering personal income taxes, this proposal does slow the total growth in appropriations and in total tax collections. This is an outcome to be desired, especially considering how much the economy and state and local tax revenues would grow if the proposal were implemented.

Based on our analysis, Oklahoma could expect the following economic impacts with the proposed tax reform from 2013 through 2022 compared to a baseline scenario:

• Oklahoma’s real annual personal income growth increasing to 3.27 percent in 2013 and accelerating to 5.65 percent by 2022—compared to real annual personal income growth of 2.39 percent in the baseline scenario between 2013 and 2022. In other words, by 2022 personal income in Oklahoma would be $47.4 billion, or 20.6 percent, larger than it would be without the tax reform.
• The annual growth rate of real annual GDP increasing to 2.95 percent in 2013 and accelerating to 5.44 percent by 2022—compared to 2.03 percent in the baseline scenario. In other words, by 2022 state GDP would be $53.4 billion, or 21.7 percent, larger than it would be without the tax reform.
• By 2022, the proposed tax reform would create 312,000 more jobs in Oklahoma than the number of jobs that would be created in Oklahoma under the baseline scenario.
• Additionally, while the individual income tax currently raises more than one-third of total tax revenues in Oklahoma, the dynamic revenue benefits created by the accelerated economic growth recaptures about one-half of the static revenue losses. Thus, while appropriated revenue growth would be slower under the proposed tax reform than it would be under the baseline scenario, total appropriated revenues for the state would grow over this time period.

From a theoretical perspective, the gradual elimination of the individual income tax would simultaneously improve two separate parts of Oklahoma’s economic environment: (1) It would eliminate the tax on individual income, thereby increasing the incentive to work, produce, and save in Oklahoma; and (2) it would reduce the overall cost of government on the taxpayer, reinforcing the positive incentives to work, produce, and save. The anecdotal evidence supports the statistical conclusions of our analysis. Those states that do not levy an individual income tax and/or levy a lower overall tax and expenditure burden consistently experience greater economic growth than the nation—and Oklahoma.

Based on both the statistical and anecdotal evidence, it is clear that Oklahoma’s economy would soar if the proposed economic plan were implemented.

Overall, Oklahoma’s current economic policies are good. According to the 2011 edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, Oklahoma ranked 14th—and that was before the personal income tax rate was cut to 5.25 percent (effective January 1, 2012). But the state’s Achilles’ heel remains the progressive personal income tax. Progressive income taxes filled with special interest loopholes and exemptions are especially bad. Progressive income taxes produce disproportionately large distortions and revenue volatility, and thereby seriously damage the economy. The damage they cause to the economy always reduces other tax revenues.

Oklahoma can significantly increase its economic competitiveness by phasing out its state personal income tax. Doing so would create a long-lasting economic boom, benefiting generations to come.