Friday, April 06, 2012

Cutting Oklahoma's Income Tax "obviously insane"

I attended the tax forum sponsored by the Oklahoma Policy Institute yesterday. OPI enlisted an impressive group of economists and business leaders to speak against legislative proposals to eliminate the state's personal income tax. Personal income taxes comprise around 30% of state revenues. Around 50% of the state budget is allocated to education. The JRLR Insider's Report has published an outstanding summary of the presentations.

In my opinion, the most accessible and succinct arguments were provided Dr. Alexander Holmes, Regents Professor of Economics and Department Chair at the University of Oklahoma. Here is the Journal-Records summary of his presentation [with a clarification of my own within parentheses]:

OU economist Alexander Holmes, a former state finance director, said that if doing away with the income tax produced a job that paid, say, $50,000, the state would lose $2,500 in tax revenue. In order to make that up, he said, the person who got the job would have to spend all of his or her income [on items subject to sales tax] to generate enough sales taxes to make up for the lost income tax money.

“It can’t work,” Holmes said. “The math is so obviously insane.”

And if the thinking behind the tax elimination does turn out to be wrong, he said, state law throws in a complication.

“If it doesn’t work, you can’t fix it,” Holmes said. “That’s what keeps me up at night.”

He was referring to the fact that, under the Oklahoma Constitution, if lawmakers wanted to increase taxes to close the revenue-loss gap, they would have to achieve three-fourths majorities in both houses, something highly unlikely to happen.

Holmes also said that no-income-tax Texas, which tax-reduction support[er]s like to point out as a good example when advocating for eliminating the tax, has suffered massive deficits and relies heavily on a state property tax. That will not work in Oklahoma, where residents absolutely hate property taxes, he said. He also pointed out that in Oklahoma the property tax is a county levy, not a state tax, and one that cities cannot access.

“Look out cities, here it comes,” he said.

Handout materials and powerpoint presentations by other speakers at the forum have been posted online at this link.

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