Oklahoma Leads on Income-Tax Repeal

April 12, 2012

When Ron Paul talks about repealing the income tax and replacing it with nothing, most people think it can’t be done. But at least on the state level, it can. In fact, there are nine states, including Paul’s home state of Texas, that don’t levy income taxes. Those states have far outperformed high-income-tax states on every measure of economic success.

Now Oklahoma is poised to fully repeal its income tax and join the ranks of non-income-tax states. While Oklahoma is already a relatively business-friendly, low-tax state, income-tax repeal would launch it into the top tier of the most economically competitive states and the best places to live and work.

The Oklahoma income-tax repeal plan was developed by supply-side guru Art Laffer’s econometric firm, in partnership with the Oklahoma Council of Public Affairs, the state’s free-market think tank. Their study found that phasing out the state income tax would more than double personal-income growth, boost the size of Oklahoma’s economy by more than 20 percent, and create an additional 312,000 jobs over the next decade.

The record is clear. Over the past decade, non-income-tax states have seen 59 percent economic growth, versus just 38 percent for high-income-tax states. Job growth has been 4.7 percent in the non-income-tax states, while high-income-tax states actually lost 2.9 percent of their jobs. Population growth is the same story, up 12.3 percent in the non-income-tax states and just 3.8 percent in the high-income-tax states. Perhaps most interestingly, non-income-tax states are seeing more rapid growth in state and local tax revenue, as the high-income-tax states are undermining economic performance and, as a consequence, depressing revenues.

Oklahoma has been strong economically over the past decade, but has lagged behind Texas in every measure. And while Oklahoma is business-friendly, Texas—with no income tax—is an attractive option for Oklahoma companies looking to relocate.

The Laffer-OCPA plan starts by replacing the existing Oklahoma income tax, a progressive tax with a top rate of 5.25 percent, with a flat tax that eliminates all deductions, credits, and loopholes. According to the Oklahoma Tax Commission, such a flat tax would have to be set at 3 percent to replace current income-tax revenue levels, but the Laffer-OCPA plan cuts it to 2.25 percent in 2013, and then cuts it by an additional 0.25 percentage points each year, until the income tax is fully repealed in 2022.

These tax cuts would trigger an economic boom that would offset about half the lost revenue from the plan. It would also significantly increase local-government revenues and decrease spending pressures by reducing the number of people enrolled in state-run welfare programs, including Medicaid. While additional spending restraint would be needed to balance the budget during the phaseout period, overall state spending could continue to grow.

The plan already has broad legislative support. It was introduced with 23 cosponsors in the state House as HB 3038. “In the past decade, states without a personal income tax outpaced Oklahoma in economic growth and job creation,” said state representative David Brumbaugh, a principal author of the bill.

Companion legislation in the state Senate, SB 1587, has four initial sponsors. State senator David Holt explained: “We are committed to making sure Oklahoma’s government delivers on its core missions, but we also cannot ignore the economic growth happening in states without income tax.”

State representative Leslie Osborn, another principal author of the bill, added: “Our goal is to transform Oklahoma into the best place to do business, the best place to live, find a quality job, raise a family, and retire in all of the United States. Not just better than average, but the very best.”

Isn’t that what all our elected officials should be focused on? Wouldn’t it be great if all of our state governments competed with each other with pro-growth tax, spending, and regulatory policies to attract as much investment and create as much economic growth as possible? Oklahoma legislators are leading the way by putting this aggressive pro-growth proposal on the table. We hope they succeed.

Phil Kerpen is vice president for policy at Americans for Prosperity and the author of Democracy Denied (BenBella Books, 2011).

Stuart Jolly is state director for Americans for Prosperity-Oklahoma.