Rep. David Derby filed initial paperwork to phase out the state’s income tax over a 10-year period. The Owasso Republican said the move would not require cutting “core government services” or raising any other tax rates.
“It’s time for Oklahoma to make a transformational leap and truly become a haven for private-sector growth,” Derby said. “If we want a diversified Oklahoma economy, if we want sustained job growth, then we need to remove our greatest disincentive for individuals to work, produce and hire.”
Removing the personal income tax, he said, would bring Oklahoma’s tax burden to the second lowest in the country behind only Alaska.
Oklahoma was ranked the 14th lowest in the 2011 Tax Foundation report of state and local tax burden as a percent of state income, which used data from the 2009 fiscal year. For a comparison of the region, Kansas was ranked as the 19th highest, Arkansas was the 14th highest, Missouri was the 17th lowest and Texas was the sixth lowest.
While Texas and Oklahoma were eight spots apart in that measurement, there was only a $62 difference in the two states’ tax burden per capita. According to the Tax Foundation, the tax burden per capita in the 2009 fiscal year came out to $3,259 in Oklahoma and $3,197 in Texas.
Oklahoma has a flat corporate income tax of 6 percent, which is lower than Missouri and Arkansas for businesses with an income above $100,000 and Kansas with an income above $50,000. Texas does not have a corporate income tax but does have a gross receipts tax for businesses.
Derby said there are movements in neighboring states such as Missouri and Kansas to eliminate personal income tax, which would leave Oklahoma sandwiched between states without the tax.
“Cutting taxes works. It’s worked before, and it will work again. It sparks economic growth by encouraging increased private-sector business activity, hiring and production,” Derby said.
But local lawmakers have said they think it could be dangerous to eliminate Oklahoma’s personal income tax during a tough time for the state budget.
“My position is that any reduction in income tax — because of the tremendous needs we have for education and human services in Oklahoma — has to be offset by reductions in tax credits,” said Sen. Jim Halligan.
The Stillwater Republican said that if the lost revenue isn’t made up somewhere else, it could have a “deleterious impact.”
Any tax increase requires a three-quarters vote by the House and Senate with gubernatorial approval or a public vote, which makes any tax increases highly unlikely. Halligan and other area lawmakers said that means if the lost revenue isn’t made up by increased investment or tax credit cuts, it would be difficult if not impossible to reinstate the personal income tax.
While Texas has no income tax, Halligan has said it has ad valorem taxes three to four times those in Oklahoma.
At the November Third Friday Forum, Rep. Lee Denney, R-Cushing, said she’s been told eliminating personal income tax could stimulate the economy, but the state should ensure it is revenue-neutral before eliminating the tax.
“Before we vote out the income tax, we’re going to have to have an overarching plan for how we move forward,” she said.
At the forum, Rep. Cory Williams, D-Stillwater, echoed that sentiment and said the state needs to have a solid plan in place because reinstating the income tax would be difficult.
“Once it’s gone, it’s gone,” he said. “It could be the best plan ever, or it could cripple us.”