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Oklahoma's Missed Opportunity on Tax Reform

When it comes to tax reform, standing still means falling behind. As other states take advantage of their flush budget pictures to race toward pro-growth, economically competitive tax reform, Oklahoma’s legislature failed to advance significant tax reform during the regular legislative session, which just concluded.

When we started this legislative session, hopes for meaningful tax reform were high and prospects looked good. As we have pointed out several years in a row in The Oklahoma Scorecard, Oklahoma’s tax environment is not nearly as economically competitive as we like to think when we describe ourselves as a “low tax” state. That’s because the underlying structure of Oklahoma’s tax code is not optimized for economic growth. That is, our code makes things unnecessarily complicated and imposes outdated taxes on the drivers of economic activity.

As we’ve also pointed out, this is relatively simple to fix. Even better, doing so would be relatively painless from a state revenue perspective, even for legislators who care more about keeping taxpayer dollars to spend than returning money to the people and businesses who earned it.

We’ve laid out the road map repeatedly. We’ve pointed out that lawmakers can significantly—transformationally, even—enhance Oklahoma’s tax competitiveness through a small number of structural tweaks that require them to give up barely a drop in the overall state budget bucket.

Consider just Oklahoma’s individual income tax. Legislators could get rid of our unnecessarily complex six individual income tax brackets, collapsing the tax into a single, flat income tax rate and raising the standard deduction for those at the bottom of the income distribution. This move alone would likely move us from 30th to 10th in the competitiveness of our individual income tax. And without giving up any revenue to speak of!

HB 2285 this year would’ve done just that, but it was not enacted.

There’s more. Legislators could have repealed the throwback rule, a peculiar tax provision whereby Oklahoma pretends Oklahoma companies earned income here when they actually earned that income out of state, just so that the state can tax that income. There is a lot of evidence that this particular tax actually results in lower revenue because rather than subject themselves to such treatment, companies that would suffer from the rule just don’t come to Oklahoma in the first place. The cost of getting rid of this silly rule? Again, very close to zero. In fact, revenue would probably go up over time as more businesses move into the state.

HB 1375 would’ve accomplished throwback repeal for Oklahoma, but it was not enacted.

The list goes on.

Why is it that in such a target-rich environment, with opportunities for easy wins that cost little to no money, legislators have failed to seize the tax reform opportunity in front of them? We don’t have a crystal ball, so we won’t speculate.

It’s not lost on the business community and public, however, that when it comes to spending taxpayer money, lawmakers this session seem to have had no trouble pulling the trigger. Fresh off deploying nearly $2 billion in federal ARPA funds last year, the legislature has sent the largest spending budget in Oklahoma history to the governor for his signature.

Various parties, the governor included, have mused that a special session may be in order to tackle the tax reform the legislature failed to enact during regular session. If such a special session comes to fruition, it would be a much better look for a state that likes to brag about how business-friendly it is. It’s not too late to make up lost ground on taxes, but the clock is ticking.

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