Gov. Fallin introduces income tax reform plan for Oklahoma
An Oklahoma House committee will hear Gov. Mary Fallin’s income tax reform plan next week, which could result in no state income taxes for low earners and reduced rates for other tax brackets.
During her Feb. 6 State of the State address, Fallin introduced her tax reform plan which aims to simplify tax brackets, reduce current state income tax rates and eventually phase out the state income tax, according to a press release from her office.
Oklahoma currently has seven tax brackets ranging from a 0.5 percent rate on salaries of $1 a year to 5.25 percent rate on those making $8,701 or more, Fallin office spokesman Alex Weintz said. The governor’s plan would create three brackets and redefine income levels.
Individuals earning up to $15,000 would not pay income taxes; those making $15,000 to $35,000 would pay a 2.25 percent rate; those earning more would pay a 3.5 percent rate, Weintz said.
The rates would decrease by 0.25 percent every year the state has a 5 percent growth in revenue, eventually phasing the income tax out if the state continues to grow, Weintz said.
“We think this will make Oklahoma more competitive, which will bring more jobs and businesses here,” Weintz said. “It will make an effect on how much money people can keep, which will be appreciated by Oklahomans and also help stimulate the economy as they put that money back in the economy and spend it.”
Income tax revenue makes up about one-third of the state’s budget, Weintz said. The plan would eliminate about $1 billion in the state’s revenue. The governor must submit a balanced budget, according to the state Constitution, and these losses are offset by eliminating $700 million in spending by cutting various tax credits and deductions.
The rest of the money would come from predicted savings by improving energy efficiency, increasing money through a two-year license plate tag system and tapping into cash reserves, Weintz said.
“In a perfect world, here’s how the governor would balance the budget, but we recognize that … the negotiations with the Legislature start, and what we arrive at is going to be different from what we propose,” Weintz said.
The idea that cutting income taxes will stimulate economic growth is credited to economist Arthur Laffer, who worked with President Ronald Reagan. However, the Institute for Taxation and Economic Policy said his ideas and research are misleading, according to a February report.
The institute’s report said Laffer distorted data because he picked numbers that showed economic growth; because population grew in states with no incomes taxes for unrelated reasons; and because states with no income tax are not better economically than states with income taxes when looking at certain economic measures.
Critics, such as the Oklahoma Policy Institute, a liberal think-tank based in Tulsa, said the state should not cut taxes at a time when education, public safety and social services organizations need funding.
By creating different tax brackets, Fallin’s plan creates strong tax rate jumps, according to a report by the institute. For example, a family earning $29,999 would owe $0, but a family earning $30,000 would owe $675.
State lawmakers in the House and Senate have also proposed similar measures, which passed committees this week. However, these plans do not all cut lower income tax rates, they phase the income tax out quicker and they do not require the state to gain money to cut the taxes.
Key author of HB3038 Rep. Leslie Osborn, R-Mustang, said she supports the governor’s income tax plan, but thinks it would take too long to phase out – almost 20 years – compared to the House and Senate’s proposed 10 years.
Rep. Mike Brown, D-Tahlequah, voted against the House’s tax measure because of questions of from where money would come to fill the budget hole, he said.