The Edmond Sun

April 5, 2013

BY THE NUMBERS: A tale of two tax cuts

Mickey Hepner
Special to The Sun

EDMOND — It was the best of tax cuts. It was the worst of tax cuts. It was a gain in market efficiency. It was a loss of needed state funding. It was a plan to stimulate investment in the state economy. It was a plan that weakens our economic future. It was a step forward. It was a step backward.

Two tax cuts, both being considered by the Oklahoma Legislature. One, I support; one, I oppose.

In recent weeks both Houses of the Oklahoma Legislature have approved two types of tax cuts — one the elimination of the franchise tax, one a reduction in the state’s personal income tax. The former improves the tax code. The latter, impairs the state’s ability to competitively fund education, children’s health care, roads and prisons.

From an economic perspective, the franchise tax always has been questionable in its efficacy. The Oklahoma Tax Commission described it as a tax that generated less than $50 million/year in state revenue (less than 1 percent of state general revenue) on business “for the privilege of doing business in Oklahoma.” Furthermore, the amount of the tax a business was required to pay depends upon the amount of capital invested in the state. The greater the level of capital investment, the greater the tax. Since we want firms to operate in Oklahoma (to create wealth and jobs) and we want firms to invest in our state (to increase wealth and jobs), taxing firms just for operating and investing is clearly not the strongest economic development strategy. This is why several years ago I labeled the franchise tax as one of “Oklahoma’s Worst Taxes.”

On the other hand, I’ve always thought of the state’s personal income tax as one of “Oklahoma’s Best Taxes” — its broad base, and relatively flat, low rates, make it an example of the ideal tax structure economists praise. Given that Oklahoma’s income tax burden is already well below the national average, and that some taxation is necessary to fund necessary government programs, Oklahoma’s income tax is as efficient as any to fund those services.

Eliminating the franchise tax is a step toward making our tax code more efficient, and the lost revenue (less than $50 million/year) can be offset by closing loopholes that create other distortions. In short, this is tax reform at its best — without sacrificing needed government services we can make the tax code work more efficiently.

Reducing the personal income tax (the state House proposal would lower the top state tax rate to 5 percent at an annualized cost of $130 million) doesn’t create efficiency gains. Econometric research over the past several decades repeatedly finds that state income tax cuts do not boost state economies so the benefits are minimal at best, however, the costs are not. Despite claims made by some legislators that cutting the income tax will raise state revenues, the fact is that tax cuts reduce revenues. As a result of this proposal, Oklahoma officials will have less money to support education, children’s health care, roads and prisons all of which create a more prosperous society. Given that per-pupil education funding ranks among the nation’s worst, that children’s health care outcomes are among the nation’s lowest, that our roads and bridges are routinely cited as being among the most poorly maintained and that our income tax (as well as total tax burden) is already below the national average, more income tax cuts should not have a higher priority over education, health care or roads.

It has been apparent all year that the Legislature views tax cuts, regardless of type, as their No. 1 economic development strategy. Some tax reforms clearly are good. But tax cuts that impair our ability to educate our children, to care for them when they get sick, or transport goods to market clearly aren’t good for our economy either.

The economic analysis is clear: Not all tax cuts create the same benefits or come with the same costs. In short, not all tax cuts are good for us.

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.