- Ada, Oklahoma


February 13, 2012

State needs to carefully think about tax

Ada — Editor, The Ada News:

This letter is in reference to the recent debate in Oklahoma about phasing out personal income tax. The Ada News reported Lt. Governor Lamb supported the idea while our local lawmaker Sen. Susan Paddack was not in support for the phase out of this tax. While on surface elimination of personal income tax looks attractive as individuals should be able to keep additional money in their pockets and save or spend as they wish, the net effect on the state economy and individuals could be positive or negative depending on how the income tax is phased out and how the lost revenue to the state government is compensated. The state earns close to $1.9 billion out of its total appropriation of $6.4 billion state budget. Elimination of this revenue stream must be compensated with some other way so the state is not underfunded and Oklahomans do not suffer by not getting required core services from the government. Oklahoma’s roads and bridges need attention. Oklahoma education ranks low in the country and needs further attention and additional resources. It is pity our schools are short of even supplies such as books and computer papers. Substitute teachers in many schools are not available anymore due to lack of funding. Health care in Oklahoma suffers and we rank towards the bottom in overall health in the US.

Oklahoma business revenue has grown over the last several years. The unemployment in Oklahoma during this time of great recession has been lower than the national average of 9 percent. Nonetheless, based on the 2012 State Business Tax Climate Index, Oklahoma is ranked No. 33 and is among the least favorable states for business. Oklahoma is ranked 38th in the personal income tax category while its ranking is 39th in the sales tax category. It means we can certainly make improvements in both and make our state more attractive to individuals and businesses. There are several U.S. states which do not levy any personal income tax. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennesse,Texas Washington and Wyoming make this list of states with no personal income tax. However, these states have compensated their revenue streams in some other ways. Alaska collects taxes on use of its natural resources, while Florida and Nevada target sales taxes from tourists. Texas fills the gap with a substantial increase in its property tax rates.

Oklahoma lawmakers have not presented a clear plan yet on how the lost revenue as a result of phasing out of the personal income tax will be compensated. At best, they have presented vague ideas without analysis and facts. Some have argued the lost revenue will be made up with increased economic activity. This seems to be vague and a wishful thinking and should not be relied upon. Others have argued to eliminate the personal exemptions for every household member, including child tax credit and earned income tax credit. We need to think if this strategy will push additional tax burden on low income families. Gov. Fallin’s idea is eliminating tax breaks and incentives such as transferrable tax credits offered to certain businesses. The governor’s idea seems to have merit but may not be enough to fill the gap in the revenue. What about broadening the tax base by closing the loopholes in the state tax system?

Another idea could be to allow an increase in the property tax. Oklahoma ranks No. 12 in the nation for having low property tax. On the one hand, it is great that our property taxes in Oklahoma are relatively low. At the same time, we need to think if we are willing to pay higher property taxes in lieu of not having personal income tax. The top rate of personal income tax in Oklahoma is 5.25 percent. The average property tax in Oklahoma is close to 1.5 percent of the average personal income, according to the Tax Foundation, a not-for-profit Washington based group. If the personal income tax is eliminated, are we willing to pay a higher property tax up to level of 4-5 percent of our income (as a reference, Texas property tax is close to 3.7 percent of the average income of Texans)? It should be noted that having a higher property tax does not mean lack of business competitiveness. Texas is very attractive to businesses with a very high ranking, based on 2012 State Business Tax Climate Index.

The ongoing debate on phasing out the personal income tax is important and merits attention by all Oklahomans. This is an election year. The danger is a lot of insincere promises may be made by elected officials to please some of their constituents or interest groups. Oklahoma, it seems, is on the right track on business growth and improvement of living standards of its people. New and sincere ideas must be welcomed, and after careful debate and thoughts, actions must be taken so Oklahoma becomes an attractive place for new businesses and its people have a higher standard of living. If our lawmakers decide to move ahead with the phase out plan, they must do so only if they have a clear, alternate, and unbiased (bi-partisan) plan to fill the gap of lost revenues as a result of not having income from personal income tax.  They must make sure the state budget, already not very big, is not underfunded as we have so many improvements needed in the state for a good life that every Oklahoman deserves.

Ajay Kumar


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