DALLAS – A broader sales tax base in Oklahoma could provide the revenue needed to slash the state’s top income tax rate, House Speaker pro tem Jeff Hickman, R-Fairview, said Monday.
Gov. Mary Fallin and Republican leaders pushed for a cut in the tax rate at the 2012 session, but the proposal failed to pass when legislators could not agree on how to replace the lost revenue.
Lawmakers will try again next year to whittle down the income tax rate, Hickman said, but the legislative focus should be on reforming the state’s overall tax structure.
“What we’ve been talking about has been tax cuts, not really reforming the code,” he said at Monday’s special session of a House revenue and taxation subcommittee.
The first step could be a reduction in the top rate to 4% from the current 5.25% by the 2013 Legislature, he said.
Hickman called the income tax a “penalty for working hard to make a living” and said it should be eventually eliminated.
“I believe getting our income tax rate down to at least 4% is an attainable goal and is essential to changing the economy of our state,” he said.
“Further diversifying our tax base and reducing the penalty for earning an income in Oklahoma strengthens our economy and leaves more money in the pockets of Oklahoma workers.”
More than 50% of Oklahoma taxpayers are in the top tax bracket of 5.25%, which is levied on individual annual income of more than $8,700.
The hearing was called to hear the results of a study on Oklahoma’s tax structure commissioned by Hickman.
Dr. Robert Dauffenbach, director of University of Oklahoma’s Center for Economic and Management Research, told the House panel that a 4% income tax rate could be accomplished with a low, broad-based sales tax. Oklahoma currently levies a 4.5% state sales tax.
Tax rate reductions since 2000, when the top rate was 7%, and sales tax revenues lost through Internet purchases are costing the state $2 billion a year in revenue, Dauffenbach said.
Lawmakers could reduce state expenditures by allowing local governments more flexibility in setting property taxes, Dauffenbach said.
“If we could allow local governments to generate more of their own revenue from the property tax, then we would not have to be so aggressive in terms of state tax collections,” he said.
Current restrictions on local tax rates leave cities, counties, and school districts too reliant on state aid, Dauffenbach said. Greater local taxing autonomy would protect public education as state revenues fluctuate with Oklahoma’s energy-based economy.
Tony Mastin, administrator of the Oklahoma Tax Commission, said expanding the sales tax to include 29 services now taxed by surrounding states would generate $217 million a year. Mastin said the additional revenue could accommodate a cut of 0.5% in the income tax rate.
Forrest Claunch, a former state legislator who served on an earlier tax reform task force, said the income tax should be replaced with a low but wide-reaching consumption tax.
“If you are going to have a sales tax, it should be as broad and as shallow as possible,” said Claunch.
A proposal in 2001 to levy a 5.9% sales tax rate in exchange for elimination the income tax and the sales tax on groceries was rejected by the Legislature.