AP: Curbing the Income Tax ‘A Fiscal Conservative’s Dream,’ Years in the Making

  • Joe Wertz

Pirate Johnny / Flickr

In case you missed it, the Associated Press has a great breakdown of income tax reduction and elimination efforts underway in Oklahoma and six other states.

The idea has circulated among think-tanks and academics for years, the AP reports:

But it’s moving quietly into mainstream political discourse, despite the fact that such sweeping changes would almost certainly mean a total rewiring of tax systems at a time when most states are still struggling in the aftermath of the recession.

The question in Oklahoma — as in Idaho, Kansas, Maine, Missouri, Ohio and South Carolina: How does a state make up for the lost tax revenue?

Nine states don’t have an income tax. Texas makes up the difference with “substantial” property taxes; Nevada and Florida rely on sales taxes from tourism, the AP reports.

Alaska — the most recent state to eliminate its income tax — did so in 1980 only after windfall revenues from the then-recently opened Trans-Alaska Pipeline System.

Oklahoma lawmakers hope that eliminating business tax breaks and incentives will help offset revenue lost in reducing the personal income tax, which provides about one-third of revenues for state spending.

Cutting the tax credits alone falls “woefully short” of offsetting the income tax revenue in Oklahoma, and lawmakers are looking at other credits and exemptions for elimination:

… the personal exemption for every household member, including children, as well as the child tax credit and earned income tax credit, the AP reports.

But proponents of reducing/eliminating the income tax in Oklahoma say it will encourage economic growth and help it compete with no-income tax Texas and, potentially, no-income tax Kansas and Missouri.

From the AP:

Although the personal income tax does not apply to corporate earnings, supporters say company executives and employees will prefer to live in a state that doesn’t tax personal income.

Conservatives say the lost revenue will be made up by increased economic activity — more businesses paying corporate taxes and more employees paying property taxes and spending money. But economists warn those predictions are unrealistic.