Budget & Tax
It’s (still) time for tax reform
January 20, 2023
Oklahoma’s state government is trending towards another surplus year in revenue collection. This increase in revenue has created an environment where significant tax reform is being seriously discussed at the state Capitol.
The idea that tax cuts lead to a more prosperous state has gained steam over the last few years with more than 10 states enacting some form of tax reform. And while the idea is popular, it’s not new. OCPA has been calling for tax reform for nearly three decades.
In articles appearing in newspapers large and small across the state as far back as 1995, OCPA’s Brandon Dutcher has been calling for tax cuts and fiscal discipline.
In an OCPA article in 2004, one economist recommended that Oklahoma’s “income tax should be cut in half, and a 10-year plan should be put into effect to eliminate the income tax altogether by dedicating some portion of the natural growth in tax revenues to phasing down the tax rate to zero. In other words, use the growth dividend to cut taxes rather than to increase spending. The effect would be like putting steroids into the Oklahoma economy.”
Later that year, OCPA released a proposal for an Oklahoma Taxpayer Bill of Rights (TABOR) similar to what Colorado has enacted. A TABOR limits government spending to the rate of inflation plus population growth while returning any surplus revenue to taxpayers. If Oklahoma would have enacted a TABOR in 2004, state spending would be nearly $4 billion less than it is today.
In 2008, OCPA released an analysis of Oklahoma’s tax system that showed Oklahoma was at a competitive disadvantage to neighboring states and proposed various reforms to close the gap. Those reforms included lowering Oklahoma’s individual and corporate income tax, introducing a flat-rate income tax, and reducing the capital gains tax.
In 2011, OCPA released a study proposing the complete phaseout of the state’s income tax. The plan would have reduced the income tax to 2.25 percent immediately and then cut a quarter percent each year thereafter. Had the proposal been adopted, the state would have completed the phaseout last year. Instead, Oklahoma has an income tax rate of 4.75 percent just a half percentage point lower than when the study was produced.
In 2022, OCPA published a tax reform proposal advocating for the immediate elimination of the income tax while making adjustments to the sales tax rate and tax base.
Oklahoma has made progress when it comes to the state’s income tax. Since 2004 the state’s income tax has fallen from 7 percent to 4.75 percent. However, neighboring states like Texas and Tennessee continue to see more net migration and economic growth than Oklahoma—in large part thanks to the competitive advantage of not having a state income tax. What makes matters more pressing is that Oklahoma’s current rate is no longer as competitive as it used to be, with 11 states having reduced their individual income tax rates last year. Nearby states like Mississippi and Missouri have already passed plans that are set to bring their income tax rates below Oklahoma’s.
Oklahoma has a chance to stay ahead of the curve this legislative session and lawmakers should make an effort to do so.