POSTED ON OCTOBER 12, 2011:
To Income Tax or Not to Income Tax?
That is the question asked by Fallin and her task forces
Editor's Note: Okie Money is a new occasional series that will explore the trends, breaking stories and state budget and tax changes that affect your wallet and quality of life. Urban Tulsa Weekly is kicking off the new series with several in-depth stories on the findings of two task forces appointed by Gov. Mary Fallin to streamline the tax code and possibly eliminate the state income tax. We will focus on the case for and against the income tax, corporate loopholes in venture capital tax credits and "green" incentives for wind technology and energy efficient homes, and more.
Five months before his death, Benjamin Franklin wrote a letter to his friend and admirer, French scientist Jean-Baptiste Leroy. In fluent French, Franklin asks Leroy if he survived the revolution and updates him on the state of America.
"Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes," he wrote in the Nov. 13, 1789 letter.
Historians have argued that America was founded by tax rebels, who splashily -- as in Boston Tea Party splashily -- protested taxes imposed by their British rulers.
Today, the Constitution appears as durable as ever, and taxes -- for good or bad -- well, they're still around too. The Oklahoma tax code has evolved into a unique cultural document, as well as a tangled web of credits and loopholes that two new task forces have been charged with ferreting through, smoothing out and studying.
In recent years, state income tax has become a trending topic for debate among Oklahoma legislators. Since its establishment in 1913, Oklahoma's personal income tax has been altered and reworked almost yearly.
Despite significant budget shortfalls, Gov. Mary Fallin upheld a drop in the top income tax rate, from 5.5 percent to 5.25 percent, which will take effect Jan. 1.
Dueling Task Forces
The governor has announced two new task forces this year to address tax reform and tax credits. In a May 2011 bill, the governor empowered a 10-member Task Force for the Study of State Tax Credits and Economic Incentives, shortened to Tax Credit Task Force, to weigh the pros and cons of lesser-known tax credits.
The task force has already reviewed giveaways -- and their possible abuse and misuse -- doled out to homebuilders for new energy efficient housing, venture capitalists who invest in Oklahoma businesses and employers who create new jobs.
The Tax Credit Task Force's two co-chairs -- State Sen. Mike Mazzei, R-Tulsa, and State Rep. David Dank, R-Oklahoma City -- and eight other members, including Secretary of State Glenn Coffee and Director of the Office of State Finance Preston Doerflinger, are authorized to study state tax credits from July 1 to Jan. 1.
On Aug. 23, Fallin appointed panel members to the Task Force on Comprehensive Tax Reform, which will recommend measures designed to simplify the Oklahoma tax code and hopefully reduce the overall tax rate.
Mazzei and Dank are among the panel members on this task force, too.
The panel is considering changes in the budget and tax structures that could make it possible to eliminate the state's income tax. By Jan. 1, the task force will report their recommendations to the Legislature.
In a Sept. 21 editorial in The Oklahoman, Dank wrote about the critical importance of taming tax credits, "Imagine the havoc on your household budget if someone could arbitrarily drain a big chunk of cash from your checking account with no notice."
Before the income tax is put on the chopping block, let's discuss the case for and against this as-sure-as-death tax.
Who's For and Against?
In the tradition of her predecessor, former Gov. Frank Keating, Fallin also supports a dismantling of the state income tax.
The two co-chairs on both task forces, Mazzei and Dank, also want to get rid of the income tax.
In the first meeting of the tax reform task force on Sept. 15, Mazzei said he encouraged a "structural alignment of our tax code to make Oklahoma a no-income tax state."
Mazzei also said Oklahoma's tax code was designed for a 20th century manufacturing-based economy, which now operates clumsily with our 21st century service-oriented businesses.
Mazzei's co-chair, Dank, also supports an ax on the income tax.
Meanwhile, Oklahoma Policy Institute Director David Blatt said he's an avid supporter of the income tax.
"Oklahoma is a low-tax state," Blatt said during his presentation to the Sept. 15 tax reform task force meeting. Oklahoma's combined state and local government spending is 18 percent less than the national average, he said.
Blatt said the wealthiest fifth of Oklahoma households received 50 percent of the tax cut benefits.
A February 2011 poll, conducted by SoonerPoll and commissioned by Oklahoma Council of Public Affairs (OCPA), a conservative think tank, found that nearly half of all Oklahomans, 49.8 percent, would support a proposal to lower state income tax.
Results from SoonerPolls conducted over the past year show a population proud of its Red State status, the majority yearning for smaller government and more tax cuts even if it means fewer services.
The Devil You Know
Currently, personal income tax comprises about 35 percent of Oklahoma's General Revenue Fund, which makes it the state's largest single source of cash.
If the income tax is eliminated or significantly reduced, a new configuration for Oklahoma's budget will need to be puzzle-pieced together.
While legislators may ultimately squash the income tax, they also admit new taxes will be levied or services will be slashed.
The discussion of eliminating income taxes in favor of higher sales or property taxes isn't appetizing. Ultimately, it may boil down to a choice between the devil you know versus the devil you don't. Legislators are weighing the consequences and benefits of more point-of-sale taxes, which by nature are flat and not progressive.
Another possibility is adding an online sales tax or enacting an "Amazon Law," already enacted in Arkansas and four other states.
In the Sept. 15 task force meeting, Dank said he thinks a switch to more consumption-based taxes would help Oklahoma prosper. Others have proposed following Texas' lead, a state without an income tax, by adding tax to services like haircuts and labor for automotive repairs.
Adding flat taxes in lieu of a progressive income tax brings to light questions of fairness. Since sales and consumption taxes are flat, people with lower income will shell out a greater percentage of their earnings when they buy something.
A recent report ordered by Fallin offered recommendations to correct Oklahoma's complex tax situation. The report suggests further cuts in the top tax rate, from an already reduced 5.5 percent to three percent.
The report was generated by yet another task force of 45 panelists, who were mostly businesspeople. So how does this task force suggest we make up for the lost revenue of a significant tax break to the wealthiest Oklahomans in the top tax bracket?
The report proposes cutting four tax credits used mostly by low- and moderate-income families: the child tax credit, low income property tax credit, sales tax relief credit and earned income tax credit.
Income taxes are the one source of tax revenue that is economically fair to all income levels, since those with higher income pay progressively more than those with the lowest.
On the other hand, corporations pay a flat rate of six percent on their taxable income made in Oklahoma. The corporate income tax also closes a loophole that wealthy citizens can use to avoid paying personal income tax by "incorporating" themselves.
A Necessary Evil?
"As it turns out, a number of people have concluded that income tax is the worst tax except for all the others," Blatt deadpanned in a recent phone interview with UTW.
Oklahoma's income tax is based on your federal adjusted gross income (AGI), which many other states also use as a jumping-off point. The lowest possible rate is 0.5 percent, just $5, on the first $1,000 you make each year. And as noted, the maximum rate will be 5.25 percent starting in 2012.
For the fiscal year 2011, 86 percent of income tax revenue went to the General Revenue Fund, while eight percent went to an education reform fund, five percent to a teachers' retirement fund and one percent to reimbursements for local governments (to make up revenue lost to economic incentives).
Mandy Rafool, who represented the National Conference of State Legislatures at the Sept. 15 tax reform task force meeting said, "The most important tax to states as a whole is personal income taxes."
In 1970, personal income tax contributed about 24 percent to the overall budget, while it's grown to generating nearly 35 percent of revenue now, Rafool explained.
She also said that when all factors are added in, Oklahoma has the seventh highest sales tax in the nation.
Oklahoma generates money by taxing your income, your spending and your accrued money. The big three taxes -- property, sales and income -- contribute to more than 10 percent of all tax revenue.
Oklahoma ranks 41st -- in the bottom ten of states -- in state and local taxes collected as a share of personal income, according to the Center on Budget and Policy Priorities statistics for 2008. Oklahoma taxes were $1.29 below the national average per $100 of income.
About a dime out of every Oklahomans' dollar goes to taxes to provide local and statewide services.
Nine states have no traditional income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. However, New Hampshire and Tennessee both tax its residents on income generated through interest and dividends.
New York and California have some of the highest individual income tax rates.
Some legislators believe Oklahoma should follow in Texas' no-income tax footsteps. However, "Texas makes up for it in three ways," Blatt said. Texas earns revenue "with a much higher property tax, almost 2.5 times higher, and a much broader sales tax. They tax more things, various services we don't [tax] like haircuts, auto repairs, the labor for auto repairs. And third, they have even larger budget shortfalls and more serious chronic underfunding for public services.
"It's not like they've found a solution to how to fund core services without an income tax. They've struggled," Blatt said.
Budget Shortfalls Continue
Since 2006, the percentage of state income tax collections has dropped dramatically, from about 6.7 percent to 5.2 percent in 2010, according to numbers from the Bureau of Economic Analysis and the Annual Executive Budget.
Beginning in 2009, Oklahoma has faced significant budget deficits as state revenues declined. For the fiscal year 2010, more than $800 million of the budget was paid for by federal relief while another nearly $225 million was pulled from the state's rainy day fund.
For 2011, federal stimulus money is expected to cover another $550 million of the state's budget while $270 million may be culled from the Rainy Day Fund. Currently, revenue collections for the state are running ahead of its certified estimate.
Projections for 2012 anticipate an increase in state revenue, despite a new drop in the top income tax rate and slow recovery from recession.
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