House Examines Strategic Tax Reform Proposals

OKLAHOMA CITY – A tax on service transactions would be a more reliable revenue stream for the state and could potentially replace the corporate income tax and possibly the individual income tax, state Rep. Mark McCullough told colleagues in the House Appropriations & Budget Subcommittee on Revenue and Taxation during an interim study at the state Capitol today.

McCullough said a service tax would levy a tax on transactions between service providers and customers, including everything from oil changes and legal services to air conditioning installations and medical care.

“This is not a tax increase proposal; this is a dollar for dollar swap that I am suggesting,” said McCullough, R-Sapulpa. “We live in a service-based economy. The benefit is that services would be a much more reliable revenue stream for the state than corporate taxes or income taxes, which have proven to be unstable.”

McCullough said the corporate tax simply doesn’t work and that personal income taxes are too reliant on the energy sector, which can be unstable. Tony Mastin, Director of the Oklahoma Tax Commission, told the committee that two-thirds of Oklahoma corporations don’t even pay the tax because of exemptions and profit requirements in law, and that revenue from the tax has fluctuated from as much as $550 million some years to $150 million in other years.

“The corporate tax is a joke and any effort to repeal corporate tax credits is extremely difficult,” said McCullough. “We can’t win because the corporations send armies of lobbyists to the Capitol if you even suggest repealing a tax credit. So let’s beat them at their own game and just repeal the corporate tax altogether.”

McCullough said his primary goal is to build a tax structure for the state that is more competitive, predictable and more in line with a modern economy that is service based and digitally driven.

“It seems like every year we have a budget crisis, and that is primarily because we have unstable revenue streams. We rely too heavily on the energy sector for revenue, which is a roller coaster. And those ups-and-downs not only affect oil and gas tax revenues, but they also affect personal income tax revenues. Our corporate tax structure is completely ineffective and unreliable. Sales taxes have increased from year to year, but we are unable to capture revenue from online transactions.”

McCullough said a service tax would be more fair and predictable.

“The idea is that everybody pays – no carve outs, no exemptions,” said McCullough. “Tax all services at a very low rate, across the board. Conservative economists say the key to increasing revenue and maximizing economic activity is a flatter rate, a broader base and fewer exemptions. This plan answers all of those requirements.”

Similarly, McCullough proposed replacing the state’s neither high nor low income tax with either a flat three percent rate with no exemptions or an outright reduction of the rate to zero. He added that going to zero would be difficult to accomplish.

“Look, we’re not Texas, and personal income tax is an important revenue stream for us in Oklahoma,” he said. “A flat three percent rate with no exemptions would still give us that revenue stream while also making us extremely competitive with other states.”

The ideas for the reforms emerged from the House Tax Policy Working Group, established in 2014, which included state Representatives McCullough, Charles McCall (R-Atoka), Tom Newell (R-Seminole), David Derby (R-Owasso) and Earl Sears (R-Bartlesville).

McCullough said he would like the citizens of Oklahoma to make the decision by placing a question on the state ballot.

“Our current tax structure is badly broken and cannot be relied on to provide the level of revenue the state needs from year to year,” he said. “In my time serving in the Legislature, there has been very little thought put into determining whether our current system is effective and, if not, whether it can be improved. Part of our job is to identify long-term problems and to think critically about those problems. The truth is, we don’t really have a tax strategy in Oklahoma. We have an ad hoc tax policy that is reactive and backward looking. We need a forward-looking tax strategy that accounts for the modern world that we live and work in.”