[Ed note: WS+B State and Local expert John Daly stops by to provide his take on a topic of growing relevancy: is a state better off with no income tax?]
Oklahoma, if it ain’t broke, why fix it?
A question that has always weighed heavily on the minds of state legislators and politicians across the country is, “how can I make my state a more attractive place to be?” Naturally, any elected official wants a thriving economy and a happy or satisfied electorate. There is no better recipe for reelection. So how do you strike a healthy balance between meeting the needs of the state’s business community and its individual residents? Certainly one of the most effective tools government officials have at their disposal is the tax code.
The Wall Street Journal (WSJ) published an article last week titled, “The Heartland Tax Rebellion.” The article delves into the changing tax landscape in many states and tries to address the question of, which tax scheme works best? At the center of the article is Oklahoma. The governor of that state, Mary Fallin, had managed to reduce her state’s individual income tax rate last year by a quarter point, but now she is proposing a much more dramatic reduction in 2013. The governor wants to eliminate the income tax completely for those making less than $15,000 a year. That will certainly garner her a few votes come election time. She also plans to reduce the current seven bracket income tax system to three brackets, and cut the top individual rate by almost two percentage points. Ultimately, the plan is to phase out the income tax completely.
The WSJ article points out that the states bordering Oklahoma either have no income tax (e.g. Texas) or are planning to eventually eliminate their income tax (e.g. Missouri and Kansas). South Carolina also plans to abolish its income tax and a host of other states are looking to dramatically reduce their tax rates as well. The question for Oklahoma (or any state for that matter) is, does it really matter what type of tax structure a state has? An even bigger question given today’s global debt crisis might be, how do you make up for the loss of revenue once the income tax is reduced or removed?
On the surface, Texas appears to have answered these questions. They have neither an individual income tax nor a corporate income tax and the Texas economy has grown at a faster rate than the rest of the country, for years. Granted, they are geographically blessed with abundant energy producing resources and a unique climate. The state leaders do, however, deserve some credit for putting in a tax structure that is quite unlike any other tax system in the country, yet appears to be serving the state’s immediate needs.
How can you gauge Texas’ success? One way might be by looking at its healthy population growth. According to the 2010 United States Census, the state has increased its population between 2000 through 2010 by over 4 million. That growth yields an impressive percentage increase of over 20%. Something besides the promise of heat and humidity has attracted this migration. In 2011, the Texas economy grew to become the country’s second largest behind only the huge state of California.
What are the most positive attributes of the tax structure in Texas? For individuals of course, there is no income tax. For the small business, the state does not tax an entity’s earnings until annual revenue exceeds $1,000,000. That is very “attractive” to any entrepreneur looking to create something. Once that minimum revenue threshold is surpassed the tax rates are slightly higher than average, but nowhere near the country’s higher tax states. Sounds pretty good.
Oklahoma has much of the same resources as its neighbor to the south. If Fallin is intent on eliminating her state’s income tax, perhaps she might consider adopting the Texas method of “gently” taxing success, while encouraging risk taking and hard work by allowing small business people earning less than $1 million in revenue to keep more of their income.
There are some things however, that Governor Fallin might want to consider before she makes any wholesale changes to her state’s tax scheme. Oklahoma currently has a budget surplus. It also has a very low unemployment level, so the citizenry of the state presumably must be content. Further, according to US Government statistics, Oklahoma is ranked sixth in the nation in terms of its Gross State Product to Debt ratio. This fact should be viewed as extremely positive given the debt problems that currently plague the rest of the world.
Nowhere in the WSJ article is the word, “debt” mentioned, but a state’s borrowing needs must be taken into consideration prior to reducing or eliminating its income tax. While Texas has experienced the aforementioned growth, its state debt has increased at a faster rate in the last ten years than even that of the federal debt. The percentage increase is over 281%. Another fact worth noting is that some studies show that Texas has unfunded pension liabilities in the neighborhood of $150 billion. Like any other state or country, having a lot of debt is ok as long as you can service that debt.
If I were to offer my advice to Governor Fallin, I would ask her to continue to guide her state on a healthy course. Exploit your state’s natural resources and develop industry. Reduce state expenditures. Continue to earn a surplus and pay down your existing debt when possible. Don’t be distracted by the political gimmickry of your peers who think that slashing tax rates is the answer. It is not, and evidence of this fact can be seen everywhere.
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