Policy Prescriptions to Combat Inflation, Support Long Term Growth, and Spark a Supply Side Revival in Oklahoma
Runaway inflation, the possibility of a looming recession, and anti-growth policies from the federal government are creating a 1970s-style outlook for the American economy. The remedy the last time the country faced such headwinds was an economic revolution, led by economists like Milton Friedman and Art Laffer and elected leaders like Ronald Reagan and Jack Kemp. The “supply-siders,” as they were called, understood a common-sense proposition: if you want more of something, tax it less.
Now–as back then–the thing we need more of is private sector investment in the production of goods and services—a boost to the “supply side” of the economy. We need a Supply Side Economics Revival.
Oklahoma is poised to lead the way for the rest of the country.
To help working families, grow Oklahoma’s economy, and invest in a prosperous future, Oklahoma lawmakers should:
Get on a Path to Elimination of the Personal Income Tax by starting with a 2.75% Flat Tax
Income taxes inhibit capital investment, the juice that makes the engine of the economy hum. Full elimination of the personal income tax should be the goal, but getting there while adequately funding state government will take time. That doesn’t mean we should wait to get started. As they say, the best time to plant a tree is yesterday.
As a first step—one that would spark a significant supply-side boost in its own right—we propose Going Low and Flat. Due to Oklahoma’s strong economic base and growing state revenue collections, the state can replace the current income tax structure with a 2.75% Flat Tax.
The Oklahoma Flat Tax Plan:
Oklahoma can eliminate its unnecessarily complicated 6 income tax brackets and replace them with a Single Bracket Flat Tax. The flat tax rate would be 4.25% in its first year, and would be reduced by .5% each year (contingent on a 1.5% revenue growth trigger), until it hits a final rate of 2.75%. By immediately raising the standard deduction from $6,350 to $10,350 when the new single bracket tax is implemented, lawmakers would ensure tax relief for all taxpayers, not just those at the top.
The proposed tax cut will provide immediate inflation relief to individuals and families while stimulating supply-side investment and growth. SCRF’s proposed income tax provisions include:
1. Collapsing the current 6 brackets into single 4.25% bracket (in Year One);
2. Increasing the standard deduction from $6,350 to $10,350;
3. Eliminating the marriage penalty (through elimination of brackets);
4. Establishing well-designed revenue triggers for future rate reductions. Revenue triggers would:
- Cut the rate in half point increments as revenue collections grow – ensuring Oklahoma does not experience budget deficits related to tax cuts;
- Use December Certified Collections, not February Estimates (which avoids problems with previous revenue triggers).
- Reduce the income tax rate to a flat 2.75% over the next 3 years if revenue is sufficient (approx. 1.5% revenue growth rate)
5. Fiscal Impact: $438.5 million (to get to initial flat 4.25% rate). This would return overall income tax collections to roughly what they were in FY2020, hardly a difficult budget year.
End Anti-Business Tax Penalties
To grow the supply side of Oklahoma’s economy, SCRF proposes eliminating outdated tax penalties on business, investment and growth. Enacting the provisions below, as well as the personal income tax provisions above, would place Oklahoma in the Top Ten of the Tax Foundation’s State Business Tax Climate Index, a great start to our Supply Side Revival.
1. Repeal the Franchise Tax
- Oklahoma’s franchise tax is a direct tax on capital investment. It is calculated based on the assets a business owns, not the net profit the business makes. As a result, businesses pay the franchise tax regardless of whether or not they turned a profit that year. This is an unnecessary barrier to starting a business, since new businesses often invest in assets and are not profitable in the first few years. In essence, the franchise tax is a fee imposed for the privilege of doing business in Oklahoma. Worse, the franchise tax is a double tax—it is levied in addition to corporate income tax. Eliminating the franchise tax will reduce financial burdens on business and increase the likelihood of capital investments in the state.
- Fiscal impact: $57.2 million
2. Create a De Minimis Exemption for Tangible Personal Property (TPP):
- Tangible Personal Property tax is a direct tax on capital investment. The tax is levied on property that can be touched and moved, such as machinery, equipment, and farm implements (as opposed to traditional property tax, which is assessed on land and buildings).
- As a local tax, the relatively small amount of revenue raised is divided between hundreds of local government entities, making up a comparatively small amount of the revenue any individual entity relies on. The state government receives no revenue from tangible personal property tax.
- Many small businesses face negligible tax liabilities but are still forced to go through a costly filing and compliance process. Exempting business machinery and equipment acquired for less than $100,000 would take these small businesses off the tax rolls with minimal revenue loss to local governments.
- Fiscal impact: approx. $20 million, spread across 77 counties and hundreds of local recipients of property tax
3. Repeal the Throwback Rule
- Oklahoma’s throwback rule punishes Oklahoma businesses that sell out of state, encouraging them to relocate to – or at least locate distribution facilities in – other states. Studies suggest that, over time, tax avoidance strategies eliminate most or all revenue gains from throwback rules.
- Fiscal impact: $0 (revenue neutral)
4. Move to a Single Sales Factor Apportionment
- Every company doing business in more than one state must allocate how much of its income was earned in each state in which it operates. This calculation is referred to as “apportionment.” Generally speaking, a state’s corporate income tax rate is only applied to the portion of a company’s income that was earned in that state.
- States can use three factors in their apportionment formulas: the share of total (1) property, (2) payroll and (3) sales that a firm has located in each state. Many states have shifted from traditional three-factor apportionment to a single factor apportionment based on sales alone. In order to compete in the changing tax landscape, Oklahoma should follow suit and adopt a single sales factor apportionment.
- Fiscal impact: revenue neutral or positive
