The Edmond Sun


February 20, 2012

No free lunch with tax cuts

EDMOND — Perhaps one of the most disingenuous arguments being made in support of reducing and/or eliminating the state’s personal income tax is that somehow reducing the state income tax will pay for itself. The evidence, and common sense, tell us otherwise.

In recent months a number of state officials have argued for significant reductions in the state’s personal income tax as a means to stimulate the state economy. Since the personal income tax accounts for 35 percent of the state’s general revenue, those proposals have elicited alarm from many concerned about how the state could weather such a significant loss of revenue and still provide needed government services like education, health care, roads and prisons. In response, some tax cut proponents are arguing that cutting the income tax will not reduce revenues at all even if other taxes aren’t raised.

Their arguments go something like this: With a cut in the income tax, Oklahomans will have more disposable income, leading to higher spending. With higher spending, they reason, there will be higher sales tax collections … offsetting the lost revenue. Voila! Cutting the income tax will pay for itself!

A closer look, though, reveals that this analysis is much too simplistic. Let’s take the best case scenario — a $1,000 tax cut leads to an additional $1,000 of spending on taxable goods and services. Under current law, this additional spending is taxed by the state at a 4.5 percent rate and by the local government at (on average) a 4 percent rate. Thus, this additional $1,000 of spending would generate an additional $85 in sales taxes ($45 to the state and $40 to the local government). In short, state/local governments lose $1,000 of revenue from the tax cut and receive only $85 in additional sales tax collections.

Of course, it’s not very likely that consumers would spend all of their additional disposable income, and certainly not spend it all on taxable goods in Oklahoma. As after-tax incomes rise, consumers generally spend more … but also save more. In this case, one would expect some taxpayers to begin to pay down credit card debt, to pay off loans quicker, and to put more into savings … mitigating the increase in sales tax collections.

Furthermore, the additional spending that does occur when people have higher disposable incomes would not all be on taxable goods in Oklahoma. Any spending that leaks out of state or goes to purchase many services (including doctor’s bills, car repairs, etc.) would not generate tax revenue. This too reduces the amount of sales taxes collected in response to an income tax cut.

Finally, since the income tax cut would reduce revenue, this means that the state must cut government spending too. With less government spending, there is less income to government employees, and lower profits to firms that provide services to the government. This contracting effect further dampens sales tax collections.

One of the most fundamental rules in all of economics is that there is no such thing as a free lunch. In other words, every action, every policy, has a cost. As a result, we must remember that even tax cuts are never free.

MICKEY HEPNER is the dean of the College of Business Administration at the University of Central Oklahoma. Hepner serves on the Executive Committee of the Board of Directors for The Oklahoma Academy.

Text Only
  • New study counters pot legalization argument

    A new study raises a strong challenge to the idea that casual marijuana use isn’t associated with bad consequences, a researcher says.
    Researchers say the findings suggest recreational marijuana use may lead to previously unidentified brain changes and highlight the importance of research aimed at understanding the long-term effects of low to moderate marijuana use on the brain.

    April 15, 2014

  • Allergic asthma sufferers should take some precautions when exercising

    Spring has sprung, and in addition to welcoming the beauty and warmth of the season, many folks welcome — though maybe not with eager anticipation — seasonal allergies.
    And for some, allergies and asthma go hand in hand. More than 50 percent of the 20 million Americans with asthma have allergic asthma, according to the Allergy and Asthma Foundation of America. Over 2.5 million children under age 18 suffer from allergic asthma.

    April 15, 2014

  • brisket2.jpg Food Network show visits Guthrie for ’89er Days

    Guthrie’s annual ’89er Days Celebration provides a variety of activities for people to enjoy including a carnival, rodeo, parade and lots of food vendors.
    This year, visitors at the 84th annual event, which runs Tuesday through Saturday, will notice an added bonus when a film crew from the new television series “Carnival Eats” will be in town filming for its inaugural episode.

    April 15, 2014 1 Photo

  • OCSP-Family and Treasurer-04-15-2014.jpg Treasurer Miller awards ‘Tax Day Baby’ with college savings plan

    April 15 is commonly known as the day many will spend in line at the post office or finishing final preparations for tax returns. This year, one Oklahoma family spent April 15, tax day, welcoming their new son, born at 2:07 a.m. and was recognized as the first Tax Day Baby at Mercy Hospital Oklahoma City. 
    As the first Tax Day Baby, State Treasurer Ken Miller, R-Edmond, awarded, Quan Ta, with an Oklahoma 529 College Savings Plan worth $1,529. Miller, who serves as board chairman for the OCSP, reminds parents and grandparents that any contribution made to an OCSP account by April 15 qualified for a 2013 Oklahoma income tax deduction.

    April 15, 2014 1 Photo

  • Salads Spring is for salads, but make healthy choices of ingredients

    Whether you want to enjoy a salad at your favorite restaurant, breeze through a salad bar for a quick and nutritious lunch, or stock your fridge and pantry so you can make a bountiful salad at home, one thing is for sure: Now is the time to do it.
    While much of the U.S. is at least a few weeks away from harvesting local lettuce, our appetites — oh, really, our very souls — are ready to put the long cold winter behind us and put the stock pot in a dark closet.

    April 14, 2014 1 Photo

  • Progressive women plan annual ‘Night in White’

    The Women’s Department for the Progressive Oklahoma Baptist State Convention will present its annual Night In White gospel play production at 6:30 p.m. April 26.
    The gospel play production will be at the Evangelistic Baptist Church of Christ, 3129 N. Martin Luther King Ave., and will include gospel singing from the Night In White Mass Choir intermingled within the play titled “The Blessings of Motherhood.”

    April 14, 2014

  • New beagle triggering aggression in small pack

    The subject for today’s article is brought to us by Sarah from Santa Barbara, Calif. Sarah is the proud caretaker of a 2-year-old female beagle that has had a litter of puppies, one female of which Sarah decided to keep. The puppy is now about 8 months old and lately it appears as if the two dogs do not enjoy each other’s company.
    In fact, the mother dog will quite viciously attack the 8-month-old and sometimes inflict physical harm. Sarah is naturally quite upset about this problem as anyone might expect and would like some help.

    April 14, 2014

  • E-Cigarettes target youth with festivals, lawmakers say

    The findings, in a survey released Monday by members of Congress, should prod U.S. regulators to curb the industry, the lawmakers said. While e-cigarettes currently are unregulated, the Food and Drug Administration is working on a plan that would extend its tobacco oversight to the products.

    April 14, 2014

  • Drama troupe plans Good Friday performance

    Spirit Act Drama Troupe of First United Methodist Church, Edmond will present the passion play, “Christus” by Alison Spitz on Good Friday.

    April 14, 2014

  • Screen shot 2014-04-11 at 4.49.09 PM.png Train, entertain your pets with these 3 smartphone apps

    While they may not have thumbs to use the phone, pets can benefit from smartphone apps designed specifically for them.

    April 14, 2014 1 Photo