Oklahoma Considers Pro-Growth Tax Reform

Last year, Oklahoma legislators voted on a tax reduction package to the state’s personal income tax. The measure passed the legislature and was signed by Governor Fallin. Ultimately, however, Oklahoma’s State Supreme Court struck down the tax cut measure. This is a topic that we have discussed in more detail previously.

Pro-growth tax reform is again being considered in Oklahoma and the new measure, being considered in both houses, is even bolder than the tax cut package from last session. The 2013 tax cut package would have reduced the state’s personal income tax from 5.25 percent to 5 percent starting January 1, 2015. There was also a provision to lower the income tax further to 4.85 percent in 2016 if certain revenue targets were met. The new measure working its way through the legislature in the form of twin bills would gradually phase down the income tax from its current top rate of 5.25 percent to 4 percent by 2018. The phase down schedule would be as follows:

–       Lower the income tax from 5.25 percent to 4.75 percent in 2015
–       Lower the income tax from 4.75 percent to 4.5 percent in 2016
–       Lower the income tax from 4.5 percent to 4.25 percent in 2017
–       Lower the income tax from 4.25 percent to 4 percent in 2018

If passed, the tax cut package would keep Oklahoma competitive with neighbor state Kansas, which has scheduled its top personal income tax rate to fall to 3.9 percent by 2018.

The strong link between lower taxes and economic growth is well documented. ALEC’s Rich States, Poor States Economic Outlook Index measures and ranks a state’s future economic growth prospects by measuring 15 economic policy variables that are related to economic growth, including income tax rates. The 6th Edition of Rich States, Poor States ranked Oklahoma’s economic outlook as 19th best in the country. We have recalculated the results of the 6th Edition index to measure the effect of the income tax cut proposals that are now being considered. Under the final phase-in of the proposed tax cuts, Oklahoma would jump 6 spots in the right direction to become the 13th best state in the nation regarding economic growth outlook.

To re-calculate Oklahoma’s theoretical score, we modified the personal income tax factor, one of the 15 policy variables that contribute to the final economic outlook score. The income tax progressivity variable was also changed to reflect the fully implemented tax plan. The recently legislated tax changes variable would also change (further improving Oklahoma’s ranking) but was omitted for our purposes since the data is not sufficient to facilitate a fair measure. We also calculated the final proposal (which will not fully phase in until 2018) as taking effect as of January 1, 2013 (when the data was collected to produce economic outlook scores for the 6th edition of Rich States, Poor States). For the sake of proper comparison, these projections also assume a static world in terms of state policy, meaning that the other recently enacted policy changes of states since the index was published (January 1, 2013) are ignored.

Moving up 6 places—from 19th to 13th—in the Rich States, Poor States economic outlook ranking would reflect a significant step towards economic growth for Oklahoma. Tax Myths Debunked, a recent publication of ALEC that addresses common misconceptions about tax and fiscal policy, details how states that rank well in the Rich States, Poor States economic outlook index are correlated with higher rates of economic growth, employment growth, and population growth.

Making sure that Oklahomans can keep more of the money they earn translates into more growth and more opportunities in the state of Oklahoma.

In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure…

+ Cronyism In Depth