September 16, 2011

Committee Cheers No Personal Income Tax

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The chairman of a tax reform task force encouraged members Thursday to recommend a structural realignment of the tax code to make Oklahoma a no-income-tax state, eliminating the state’s largest source of revenue.

“The best tax systems in this economic era are broad-based with low rates that do not favor one activity over another,” said Sen. Mike Mazzei, chairman of the Task Force on Comprehensive Tax Reform, in prepared remarks. “Our system, however, is riddled with tax subsidies, deductions for political contributions, credits for remodeling old buildings, exemptions for vitamins, and incentives for business activity which would happen anyway.”

Task force members must have the courage to say no to special interest groups and focus on what is best for the state and its citizens, he said.

Mazzei, R-Tulsa, also encouraged the panel to recommend to the Legislature and the governor a plan to eliminate millions of dollars of special interest tax subsidies to lower the income tax rate and broaden the state’s tax base.

One-third of budget

Personal income tax collections are the state’s largest source of revenue, bringing in nearly a third of the $6.5 billion budget that runs most of state government; estimates call for personal income taxes to bring in about $1.8 billion during this fiscal year, which started July 1. Before the economic downturn, the revenues were more than $2.5 billion a year.

Proponents of eliminating the personal income tax call for eliminating many of the tax credits and exemptions. It’s estimated the state loses about $5.6 billion annually through various tax credits and exemptions; eliminating all of them would be impractical, but another legislative task force reviewing the exemptions and credits hopes to come up with a grading system that could lead to ridding those not producing jobs or benefits to the state.

“I think we’re going to get rid of a lot of the credits, I really do,” said Rep. David Dank, co-chairman of the task force, and who also heads up the other legislative committee looking at tax credits.

Dank said the sales tax rate could be increased to offset the loss of personal income tax revenues. Sales taxes constitute the state’s second-largest source of revenue at $1.7 billion. Some suggest sales tax collections would increase because Oklahomans would have more money to spend with a reduced or zero income tax. More businesses would locate to the state because of the lack of a personal income tax, they said.

“It’s just been proven in other states that those states grow and prosper without that income tax,” said Dank, R-Oklahoma City, after the meeting. “We need to look at a more consumption-based tax. I think that’s something that’s going to come. I think we’re going to at least reduce the personal income tax in virtually every year from now on out.”

Change exemptions

Dank said he would like legislators to consider adding some services to be taxed as well as removing some exemptions that have been added over the years. He would like to see the sales tax on groceries eliminated, however, because food is a basic need.

Mazzei said the panel also should come up with a solution to dealing with the taxation of intangible property, the primary reason the task force was formed last year. The task force is to examine how business property — such as software and trademarks — is taxed in response to a 2009 state Supreme Court opinion saying companies should be assessed ad valorem tax on intangible property.

It was suggested Thursday legislators should ask voters to approve a constitutional amendment that would exempt all intangible property tax from the ad valorem tax.

Finish by January

The 21-member task force met for the first time Thursday. Members include state officials, members from the banking community, education officials and representatives of industries including energy and technology. The next meeting is set for Oct. 20 in Tulsa.

The panel is to come up with findings and recommendations by January; the legislative session begins in February.

The committee also heard from two fiscal policy analysts who have differing views on the personal income tax.

David Blatt, director of the Oklahoma Policy Institute, said the personal income tax is a fair tax system because it is based on the ability to pay, unlike sales tax. Oklahomans who earn less are taxed at a lower rate than Oklahomans with greater incomes.

The tax rate for married joint filers with two children and standard deductions is 1.79 percent in a household income of $35,000, while a similar family with a household income of $500,000 has a tax rate of 5.01 percent.

Legislation was passed and approved from 2004 to 2006 that lowered the top income tax rate from 6.65 to 5.25 percent. The top bracket affects about 56 percent of Oklahomans, Blatt said. For single taxpayers and husband/wife taxpayers filing separately, the 5.25 percent rate is applied on a taxable income of $8,701 and higher.

Achieving revenue-neutral tax changes while abolishing the income tax was considered in 2001 by raising property taxes, expanding the sales tax to include most services and increasing the sales tax rate, Blatt said. Then-Gov. Frank Keating proposed a 5.9 percent gross receipts tax on a broad base of goods and services as a substitute for the income tax and the sales tax on groceries.

Gone in 10 years

Michael Carnuccio, president of the Oklahoma Council of Public Affairs, suggested eliminating all income tax credits and deductions, estimated at $500 million annually, and using that revenue to help gradually reduce the income tax rate.

As the state’s economy rebounds from the recession, extra revenue could be used to reduce the personal income tax rate gradually over seven to 10 years until it was eliminated, he said.

Without a state personal income tax, a single person making $30,000 would have an extra $950 to spend, while a family of four with a gross income of $100,000 would see a savings of $3,651, Carnuccio said.