By Travis Brown & Steve Moore
Co-Authors, Wealth of States
This week, all federal taxpayers and many state taxpayers were reminded of the costly burden of government, as April 15th was the deadline for filing any personal income taxes owed. In Oklahoma, taxpayers must pay both the federal government’s penalty on work (the federal personal income tax) and Oklahoma’s penalty on work (the state personal income tax).
Presently, Oklahoma is in the middle of a low-income-tax sandwich, where its neighbor to the south, Texas, assess no income tax and its neighbor to the north, Kansas, assesses a lower rate of 4.8 percent, and has scheduled reductions to eventually eliminate the personal income tax altogether.
During our extensive studies of the economy and the movement of income and capital for our book Wealth of States, one trend we have continued to see is that entrepreneurs and job creators are looking within the states, on a national and regional scale, to locate their productive efforts where they will be penalized the least. This means that states cannot afford to stand still in the competition for their share of our changing economy. States that rest on their laurels will see their economic opportunities become stagnant while leaving their current residents and future generations with less opportunity.
Creating climates that reward work is not a partisan issue; Democrats in the state of Washington tout their state’s lack of a personal income tax in order to recruit high-tech talent, and New York Governor Andrew Cuomo heavily advertises New York’s 10-year tax exemption for new business.
Given Oklahoma’s success with gradual personal income tax reductions from 2005-2012, Oklahoma has the real-world experience needed to bolster a focus and commitment to removing the state’s penalty on work. As the Oklahoma Council of Public Affairs has noted, state revenues and spending are at all-time highs, per-capita income is at all-time highs, and all this happened while Oklahoma reduced its personal income tax by 25 percent.
Now is not the time for Oklahoma to stop and fall into the fallacious trap that government spending will drive the future.
A study by the Oklahoma Council of Public Affairs and our Wealth of States co-author Dr. Art Laffer found that if Oklahoma would reform its tax code and reduce the rate to a single flat low rate of 2.25 percent, then gradually phase out the rate by 0.25 percent per year (a total of a ten year effort), the state’s economy would expand significantly and incomes would grow. It’s important to note that this study found that this could happen without raising taxes on any other industry or bumping up any other tax rate.
Oklahoma has adopted several free-market-based reforms over the last several years that have shown success and demonstrated the economic achievements that tax reform can bring. Cutting personal income taxes, passing right-to-work legislation, eliminating death taxes, and enacting lawsuit reform and workers’ compensation reform will all better position the state for economic growth, advancing Oklahoma far beyond where it stood at the beginning of the millennium.
However, the most recent edition of the American Legislative Exchange Council’s Rich States, Poor States reveals that Oklahoma’s competitive position among the other 49 states is now stagnant, with its outlook declining. Oklahoma still trails the nation for the share of private sector income as a portion of all state income, and, as ALEC notes, Oklahoma ranks just 21st-best in income tax rankings.
Phasing out Oklahoma’s personal income tax is the best recipe for growth in the Sooner State — allowing it to remain competitive with its neighbors and diversify its economy to attract more job-seekers and businesses, as well as creating a greater opportunity for current Oklahomans. This can and should be done without raising taxes on any other industry or hiking other existing tax rates.
Some states, such as Maryland and California, are doubling down on tax increases and raising the penalty on productive behavior. Conversely, other states – especially Oklahoma’s neighboring states of Texas and Kansas — are reducing and/or eliminating their penalty on productive behavior, further giving their residents a greater opportunity while putting Oklahoma at a significant disadvantage. That being said, Oklahoma, with its strategically positioned oil and gas production expertise and low cost of living, has an opportunity to make the state the number-one location for entrepreneurs and job creators. All the Sooner State needs to do is seize it.