By Constitution Staff

Legislation has been filed in both houses of the Oklahoma Legislature to phase out Oklahoma's personal income tax in such a way that the state would have the lowest overall tax burden in the continental United States. The lawmakers say their proposals would phase out the personal income tax in a responsible manner over 10 years and would not necessitate raising other tax rates or cutting funding to core services currently provided by state government.

The Legislation is based largely on a study conducted in late 2011 by the Oklahoma Council of Public Affairs (OCPA) and Arduin, Laffer & Moore (ALM), the econometrics firm co-founded by economist Dr. Arthur Laffer, once a key advisor to President Ronald Reagan. Laffer is best known as the "Father of Supply-Side Economics," and for his concept called the "Laffer Curve" which says that lower tax rates stimulate economic activity and increase tax revenue, while high tax rates lower revenue. OCPA and ALM demonstrated in the study that states without personal income tax tend to enjoy economic growth that far surpasses the states that levy a personal income tax.

Laffer discussed the phase out idea at a speech on November 29 in Oklahoma City during a joint meeting of the Downtown Rotary, Kiwanis, and Lions clubs. Laffer told the groups that while Oklahoma's economy is doing well, having an income tax is the primary deterrent to economic growth. Laffer says the two step process in the OCPA proposal would lower the income tax rate and eliminate many of the tax credits and exemptions currently built into the tax code. The lower rate would then be decreased by a quarter percentage point per year over a decade, allowing growth in the economy to offset the lost revenue. Laffer says this would result in more money coming into state and local governments through property and sales taxes without increasing those tax rates.

In the report entitled Eliminating the State Income Tax in Oklahoma: An Economic Assessment, they estimate that by phasing out the income tax over a 10-year period -- and not raising other taxes -- Oklahoma could expect a significant increase in state GDP growth, personal income growth, and employment growth. Specifically: By 2022, state GDP would be $53.4 billion, or 21.7 percent, larger than it would be without the tax reform. By 2022, personal income in Oklahoma would be $47.4 billion, or 20.6 percent, larger than it would be without the tax reform. By 2022, the proposed tax reform would create 312,000 more jobs in Oklahoma than otherwise would be created.

Laffer says Oklahoma is at a disadvantage with Texas which has no income tax. While Missouri and Kansas are considering doing the same, the OCPA proposal is better than what Kansas or Missouri are planning, because those states want to raise sales taxes to offset the income tax reduction.

Laffer said it is import to make the change in a single piece of legislation. If a business has assurance of what the tax rate will be in five years, they are more likely to move to Oklahoma than if the tax cuts must depend on action every year.

Four first-term Senators have jointly filed a bill to implement the plan proposed by Laffer. Senate Bill 1587 is authored by Senators David Holt (R-Oklahoma City), Greg Treat (R-Oklahoma City), Rob Johnson (R-Oklahoma City), and Josh Brecheen (R-Coalgate) would lower the Oklahoma income tax rate from 5.25 percent to 2.25 percent in 2013, and then gradually lower it until the rate is zero in 2022.

"We hope that by introducing the Laffer Plan, we're ensuring that its ultimate goals remain part of the debate, not just this year, but beyond," Holt said. "All four of us recognize that this bill is just the beginning of a conversation, and it's not presented as a final product. We are committed to making sure Oklahoma's government delivers on its core missions, but we also cannot ignore the economic growth happening in states without income tax."

The first reduction in the income tax rate would be paid for by cuts in nonessential spending, along with the elimination of most personal tax credits, exemptions, deductions and exclusions. Further reductions in the rate would be paid for by natural revenue growth and dynamic economic growth that would occur as a result of the initial reduction. It would not be necessary to cut core services or increase any other tax rates, including property and sales tax.

Meanwhile, a coalition of 23 House members have signed on as principal authors of House Bill 3038. The signers consist of representatives, both rural and urban, from all four quadrants of the state. "Our goal is to transform Oklahoma into the best place to do business, the best place to live, find a quality job, raise a family and retire in all of the United States. Not just better than average, but the very best," said Rep. Leslie Osborn (R-Mustang).

While Oklahoma has moved up in recent years from being one of the poorest states in the nation to now beating the national average in many economic indicators, the authors of the bill believe it is important to continue lowering Oklahoma's tax burden.

"The personal income tax is still our biggest dis-incentive in Oklahoma to work and produce at a higher level, to relocate a company to Oklahoma or start up a new one here, to create jobs, to pursue a better job, and to save and invest," said Rep. Tom Newell (R-Seminole). "When we remove the barriers preventing people from engaging in these kinds of activities, we empower individual Oklahomans of all income levels to pursue a new level of prosperity for themselves and their families, which leads to increased prosperity for our state as a whole."

Without the state personal income tax, the average Oklahoma family of four would save over $1,300 a year, and the average individual filer would save nearly $1,000 annually. "That's a pretty decent pay raise for most Oklahomans," said Rep. Charles Ortega. "That extra income will give Oklahomans greater economic freedom, and our improved business climate and improved job market here in Oklahoma will give them a better shot at achieving the American dream."

The proposal would not require raising or expanding any other existing tax rates, such as property or sales taxes, nor would it require introducing any new forms of taxation. Should the state personal income tax be phased out in this manner, Oklahoma would have the lowest overall tax burden in the continental United States. Of the 50 states, only Alaska would have a lower tax burden. "We shouldn't raise a tax to cut a tax," said Rep. Jason Murphey (R-Guthrie). "A rising tide lifts all boats. When the government has the courage to use tax reform to allow its residents to keep their money, that money will be used to provide jobs and economic activity. This expands the tax base and makes even more tax reform possible."

Oklahoma already has a low cost of living compared to most states. By pairing this attribute with the lowest overall tax burden of the lower 48 states and other pro-growth reforms made by Oklahoma policymakers in recent years, the state would have one of the best economic climates in the nation, the sponsors said.

"Now is the time for Oklahomans to take a bold, transformational step toward increased prosperity and greater opportunity," said Rep. David Derby (R-Owasso ). "By making Oklahoma a no-income-tax state, we will have put together a winning recipe for business investment, new job opportunities and economic growth in Oklahoma."

By phasing out the personal income tax over a full 10 years, state government entities would be given ample time to make adjustments, and growth revenue from other revenue sources would support core state services such as education, transportation, public safety, and the safety net for the truly needy.

Efforts in Kansas, Missouri and elsewhere to eliminate personal income taxes in those states may serve as additional motivation for Oklahoma to do the same. "In the past decade, states without a personal income tax outpaced Oklahoma in economic growth and job creation," said Rep. David Brumbaugh (R-Broken Arrow). "Those states also doubled Oklahoma's rate of state and local tax revenue growth. Basically, as those states attracted productive individuals, those individuals gave more to state and local governments through sales and property taxes and the like."

Rep. Harold Wright (R-Weatherford) said, "Even though this bill is still a work in progress, I think all of us are united in our desire to find a way to responsibly phase out Oklahoma's income tax. For many of us, lowering the tax burden for our fellow Oklahomans was one of the key issues that inspired us to run for office in the first place. We know the benefits for our state will be significant, and that we can achieve our goal and still maintain the core services Oklahomans utilize every day."

The 23 initial primary authors of HB 3038 are: Rep. Don Armes, Faxon; Rep. Gus Blackwell, Goodwell; Rep. David Brumbaugh, Broken Arrow; Rep. Josh Cockroft, Tecumseh, Rep. Marian Cooksey, Edmond; Rep. Lee Denney, Cushing; Rep. David Derby, Owasso; Rep. George Faught, Muskogee; Rep. Randy Grau, Edmond; Rep. Elise Hall, Oklahoma City; Rep. Corey Holland, Marlow; Rep. Mike Jackson, Enid; Rep. Dan Kirby, Tulsa; Rep. Randy McDaniel, Oklahoma City; Rep. Glen Mulready, Tulsa; Rep. Jason Murphey, Guthrie; Rep. Tom Newell, Seminole; Rep. Charles Ortega, Altus; Rep. Leslie Osborn, Mustang; Rep. Mike Sanders, Kingfisher; Rep. Sue Tibbs, Tulsa; Rep. Steve Vaughan, Ponca City; and Rep. Harold Wright, Weatherford.