The Edmond Sun


December 10, 2011

State income tax no simple debate

EDMOND — Just how important is it to the Oklahoma economy for policymakers to eliminate the state’s personal income tax? While some in powerful circles are arguing that such a move is crucial, the economic evidence pretty clearly indicates otherwise despite what a recent report suggests.

Currently, the anti-income tax groups are marshaling their forces to launch a repeal of the state’s personal income tax. In the past few months the Governor’s Task Force on economic development recommended a 10-year phase-out of the personal income tax. Meanwhile, all indications are that a legislative task force on comprehensive tax reform is poised to make a similar recommendation despite the warning of several state economists who were called to testify (including me). Not surprisingly, the conservative Oklahoma Council of Public Affairs recently released a report from a national (conservative) research firm — Arduin, Laffer, and Moore Econometrics — who argue that the Oklahoma economy would “soar if the proposed economic plan were implemented.”

I disagree vigorously.

The reason for my disagreement with the report’s conclusions (along with its premises, logic and methodology too) is more than a difference of opinion about a policy, but a difference in the purpose of policy research. To me, the role of that research should be to inform the policy debate. Therefore, a serious research project would identify and explain all of the benefits and all of the costs of a proposed policy. The OCPA study however, focuses mainly (almost exclusively) on the benefits while ignoring the costs of eliminating the personal income tax. Consequently, some fundamental (perhaps even elementary) concerns go unaddressed.

While my concerns about the study are too numerous to detail in full in a single op-ed, there are three main issues that highlight the study’s problems. First, the authors often compare the economic performance of states with different tax structures and infer that the cause for the difference in performance is due to the difference in tax structure. This assumes that other factors don’t affect both tax rates and performance (this is explicitly assumed in their econometric model). But tax rates and tax burdens are not determined in a vacuum. They are both shaped by a state’s culture, their history and their economic structure — all factors that also influence performance.

For example, the authors make note of the economic performance for the 11 states that have instituted a progressive income tax in the past 50 years. The authors then conclude that, “the results have not been pretty … The introduction of a progressive personal income tax in each state that has implemented it over the past 50 years has been a total failure.” Clearly, the authors are trying to make the case that the progressive income tax was a major reason for the states’ decline.

If we look at those states though we see that a different explanation is more likely. The 11 states include many Rust Belt states, like New Jersey, Ohio, Pennsylvania, Illinois, Michigan, Indiana and West Virginia. In fact, all 11 of the states are from either the north or northeast — regions that have been in decline mainly due to the pressures of globalization that have reduced domestic manufacturing employment. In other words, it’s not the fault of the income tax, but the authors do not even hint that another explanation is more plausible.

Furthermore, the authors often overlook the fact that the Oklahoma economy is already outperforming many of the states that lack a personal income tax. Even under the authors’ preferred statistics, which I would argue are not the most relevant statistics to compare, the Oklahoma economy typically fares in the middle of the no-income tax states. Meanwhile, several of the no-income tax states have performed very poorly in recent years. Clearly, eliminating the personal income tax does not guarantee prosperity.

Finally, the authors ignore the impact of government services on economic development. In the report’s favored measure of economic outlook, the quality of a state’s education system and its workforce are not even a variable considered. In the context of this debate, the omission of education is important because an elimination of the state income tax will almost certainly lead to a dramatic decline in state education spending, thus hampering our state’s educational system even further.

There is a need for serious research on the state’s optimal tax policy. Policymakers need to fully understand the consequences of different policies in order to do what is right for Oklahoma. This report from an out-of-state firm does not help our policymakers or our people.

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.

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