Memorandum July 26, 2013
1401 N. Lincoln Blvd. | Oklahoma City, OK 73104 | 405.602.1667 | ocpathink.org
Oklahoma’s history with income tax cuts: A story of growth From 2004 through 2009, Oklahoma’s personal income tax — the amount the state penalizes citizens and job creators for the right to earn a living — was lowered more than 20 percent. Over this period of time, the top marginal rate dropped, in a series of four reductions, from 7.00 percent to 5.50 percent. With each drop in the rate, many individuals and organizations in favor of higher government spending worked against the income tax cuts. They claimed income tax cuts would result in less revenue for state government programs. Even the Oklahoma Tax Commission estimated, with each new income tax cut, that the state would see a loss in revenue. What actually transpired was that Oklahoma saw an increase, both in economic activity and tax revenues, with each of the income tax cuts implemented between 2004 and 2009. Beginning in 2009, Oklahoma did see revenue declines in connection with the national recession, but a stronger reliance on sales tax revenues — due to income tax cuts — helped stabilize revenues compared with many other states. Tax Cuts in 2005 In 2005, the Oklahoma Legislature passed what was, at that time, the largest personal income tax cut package in state history. The Oklahoma Tax Commission’s official estimate (a static analysis, projecting no economic growth due to cutting tax rates) was that, by fiscal year 2007, the tax cuts would cost the state $150 million. The reality was that, in that time period, individual income tax collections actually grew by $305 million, and state sales tax collections grew by $243 million. So, what the Tax Commission estimated, using static analysis, would be a $150 million hole turned into a $548 million surplus for the state. Had the Tax Commission used dynamic analysis in their estimates, those estimates likely would have ended up much closer to what transpired.
Tax Cuts in 2006 In 2006, the Oklahoma Legislature passed the largest personal income tax cut package in state history, to be phased in over a four-year period. The Tax Commission’s official estimate (again, a static analysis) was that, by fiscal year 2007, the tax cuts would cost the state $94 million in lost income tax revenue. Yet state personal income tax collections were over $111 million more in 2007 than the cost estimates by the Tax Commission. Total personal income tax collections for the year actually exceeded by $17 million, the tax collections of the baseline year used to calculate the static reduction. Also, state sales tax collections increased by $112 million. The Tax Commission’s official estimate was that, by fiscal year 2008, the income tax cuts would cost the state $339 million in lost revenue. Yet, state personal income tax collections were over $356 million more in fiscal 2008 than the Tax Commission’s estimates. Total personal income tax collections for the year actually exceeded by $17 million the tax collections of the baseline year used to calculate the static reduction. And state sales tax collections increased again, this time by $235 million. Consistently higher revenues Despite cutting the Oklahoma’s personal income tax rate by over 20 percent — from a top marginal rate of 7 percent down to 5.5 percent from 2004 through 2009 — state personal income tax collections were never less than the prior year until the recession which took effect in 2009. Some may have forgotten the latter part of 2010, and the first couple months of 2011. The final quarter-percent reduction in the state’s personal income tax rate, which dropped the rate from 5.50 percent to 5.25 percent, was scheduled to begin for fiscal year 2012, and receive formal notification by the state Board of Equalization. At that time, a significant amount of concern was raised about the fact that revenue growth out of the low-revenue years had triggered the re-