BY JONATHAN SMALL, CPA AND DAVE BOND
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 reduction. Tax users and their advocates loudly and publicly lamented the impending tax cut and claimed the quarter-percent income tax reduction would lower state revenues by approximately $61 million for fiscal 2012.
According to annual net collection data from the Oklahoma Tax Commission, state personal income tax collections were $2,396,668,662 for fiscal year 2011 and $2,692,968,300 for fiscal year 2012. This represents an increase of more than $296 million. State sales tax collections were $1,997,659,460 for fiscal 2011 and $2,190,600,218 for fiscal 2012. This represents an increase of more than $192 million.
In a year with the lowest top state personal income tax rate (5.25 percent) since income tax cuts began in 2005, the state set a record for net state sales tax collections and even managed to make a record deposit to the “Rainy Day Fund” — all after the state personal income tax rate had been cut yet again.
Sales tax collections increase
Since Oklahoma’s reductions in the personal income tax rate began in 2005, net state sales tax collections have increased by more than $694 million, even with periods of volatile energy prices. In the eight years preceding these state personal income tax cuts, the sales tax growth rate was 3.97 percent. In the eight years since state personal income tax cuts began, the sales tax growth rate was 5.80 percent, during a period that included both volatile energy prices and an economic decline that some have described as the worst since the Great Depression.
According to the Oklahoma’s Certified Annual Financial Report from the Office of State Finance and Tax Commission, total state tax revenues increased by $605 million from fiscal year 2010 ($6.3 billion total) to fiscal year 2011 ($6.9 billion total), and $883 million from fiscal year 2011 to fiscal year 2012 ($7.7 billion total), exceeding fiscal 2010 levels by $1.4 billion. Though state personal income taxes were cut, state tax collections grew by $883 million from fiscal years 2011 to 2012. Furthermore, this growth occurred at the same time that natural gas prices — and resulting state tax revenues from natural gas production — dropped significantly.
Pro-growth policies such as Right to Work (which Oklahoma implemented in 2001) and cutting income and death taxes work, and they are working in Oklahoma and impacting the region. Whether letting citizens have more control of the fruits of their labor has an immediate impact on revenues is not the highest priority. The highest priority is letting citizens have more control of the fruits of their labor. Period. Oklahoma has proven that when a state does so, it can result in a dependable growth effect on the state’s economy.