A Guide to the Great State Income Tax Debate

• Joe Wertz
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  Joe Wertz was a reporter and managing editor for StateImpact Oklahoma from 2011-2019. He reported on energy and environment issues for national NPR audiences and other national outlets. He previously worked as a managing editor, assistant editor and staff reporter at several major Oklahoma newspapers and studied journalism at the University of Central Oklahoma.

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During talks about jobs and economic growth, many Oklahoma lawmakers and policy leaders point to nine states that don't tax personal incomes.

The individual income tax is under attack in Oklahoma.

It’s the state’s largest source of tax revenue, but some groups and top lawmakers say eliminating the personal income tax would help Oklahoma grow and help the state attract and retain jobs.

StateImpact Oklahoma has assembled a guide to bring you up to date on the income tax debate.

BACKGROUND

Nine states don’t collect personal income taxes.

It’s been 31 years since a state has eliminated its individual income tax.

Flush with revenues from its recently completed Trans-Alaska Pipeline System, Alaska’s then-Governor, Jay Hammond, eliminated the tax by signing a bill in September 1980.

Today, lawmakers in Oklahoma and two of its neighboring sates, Kansas and Missouri, are talking seriously about abolishing individual income taxes all together.

THE PROPONENTS

• Gov. Mary Fallin
• Lt. Gov. Todd Lamb
• State Rep. David Dank
• The Oklahoma Council of Public Affairs

The basic argument: Without the income tax, Oklahomans would have extra money for investment and job-creation.

California, which has one of the highest income tax rates, is bleeding jobs, according to economists with the Oklahoma Council of Public Affairs, a free-market think tank and policy research organization.

There is no income tax in Texas, a fast-growing state that Oklahoma lawmakers and policy wonks often cite as a model for economic and tax policy.

The lack of an income tax brings jobs south of the Red River, proponents say.

When Phillips Petroleum Co. announced in 2001 its plans to relocate to Houston from Bartlesville after a merger with Texas-based Conoco Inc., then state Sen. Glenn Coffee argued to The Oklahoman that income tax “played a significant role.”

State Rep. David Dank, R-Oklahoma City, has made the same argument this year during meetings of the tax credit task force, which he co-chairs.

THE OPPOSITION

• Chambers of Commerce
• University Economists
• The Oklahoma Policy Institute

The basic argument: The income tax is too big to replace, and eliminating it won’t guarantee economic growth.

The personal income tax brings in about $3 of every $8 in state revenue, Robert Dauffenbach, director of the Center for Economic and Managerial Research at the University of Oklahoma, said at a November forum hosted by the Greater Oklahoma City Chamber of Commerce.

Eliminating the personal income tax could have severe fiscal consequences, Dauffenbach and other university economists said. Property taxes, which became local taxes in the 1930s, would likely increase, Dauffenbach said.

Click above to read the 2001 study on ways to replace the revenue lost by eliminating Oklahoma's income tax.

Oklahomans have a particular hatred for property taxes, he noted.

In 2001, Dauffenbach and four other university economists prepared a report on ways to replace revenues if the income tax was eliminated. One way to supplement the lost revenue, the report suggested, was to add sales taxes to more services — construction, communications and real estate, for example — or expand gross production taxes beyond the oil and gas industry.

Business leaders and chambers of commerce throughout the state are understandably wary of efforts to add taxes to businesses. The Oklahoma Policy Institute, a nonprofit research outfit that promotes “equitable, responsible, and sustainable” fiscal policies, argues that relying on other taxes is risky and burdens low- and moderate-income families.

At the November forum, Mickey Hepner, dean of the University of Central Oklahoma’s college of business administration, said over the past decade, also argued that median household income has grown faster in Oklahoma than it has in Texas and most states without income taxes.

Nix it Quickly?

Proponents aren’t suggesting immediately eliminating the personal income tax, rather a gradual reduction that would phase the tax out over a period of years.

If the income tax were to be eliminated, 65 percent of Oklahomans surveyed in an OCPA-commissioned poll favored a 7-year phase-out.

What About a Reduction?

It’s already happening.

On Jan. 1, Oklahoma’s top income tax rate will drop to 5.25 percent from more than 6 percent.

Rep. Dank told The Oklahoman he’d like to see that top rate in the 3 percent range in the next three years.

Asked if legislation to reduce the personal income tax rate could be acted on next year, Dank said, “I think we can get a good start on it.”