Business Think Tank Urges Lawmakers to Adopt Flat Tax and Eliminate Anti-Business Taxes in Special Session
OKLAHOMA CITY -- The State Chamber Research Foundation (SCRF) is sharing a series of tax proposals for policymakers to consider as they work on tax policy and budget issues in future legislative sessions. The policies, which include both tax cuts for individuals and the elimination of business taxes that discourage growth and investment, are aimed at tackling inflation while promoting long term economic growth and tax relief.
“Runaway inflation, the possibility of a looming recession, and anti-growth policies from the federal government are creating a 1970s-style outlook for the American economy,” said SCRF Executive Director Ben Lepak. “Several decades ago, a period of prolonged ‘stagflation’ was defeated by supply-side economists and leaders like Ronald Reagan who understood a common-sense proposition: if you want more of something, tax it less. Like Reagan, our lawmakers should now turn their focus towards boosting private sector investment in the production of goods and services by reforming our tax code and reducing the tax burden on families and businesses.”
Included in SCRF’s policy prescriptions is a plan to eliminate Oklahoma’s six graduated income tax brackets and replace them over a number of years with a flat tax of 2.75 percent for every filer (Oklahomans making over $7,201 per individual or $12,201 per married couple are currently taxed at a rate 4.75 percent). SCRF identifies a complete, phased-in elimination of the personal income tax as the ultimate goal.
SCRF also calls for repealing taxes harmful to businesses, including the “throwback rule” and the franchise tax, and increasing tax exemptions for small businesses.
“Besides lowering personal income taxes, lawmakers should also modernize business taxes and eliminate the most economically unproductive taxes on capital investment,” said Lepak. “If we act soon to implement pro-growth tax policies, Oklahoma can become a national model for prosperity and growth during turbulent economic times. Other states, and perhaps even the federal government, will want to emulate our success.”
More information on the SCRF’s policy proposals are listed below and can also be viewed here.
The Oklahoma Flat Tax Plan: Oklahoma can eliminate its unnecessarily complicated 6 income tax brackets and replace them with a Single Bracket Flat Tax. The flat tax rate would be 4.25% in its first year, and would be reduced by .5% each year (contingent on a 1.5% revenue growth trigger), until it hits a final rate of 2.75%. By immediately raising the standard deduction from $6,350 to $10,350 when the new single bracket tax is implemented, lawmakers would ensure tax relief for all taxpayers, not just those at the top.
The proposed tax cut will provide immediate inflation relief to individuals and families while stimulating supply-side investment and growth. SCRF’s proposed income tax provisions include:
Collapsing the current 6 brackets into single 4.25% bracket (in Year One);
Increasing the standard deduction from $6,350 to $10,350;
Eliminating the marriage penalty (through elimination of brackets);
Establishing well-designed revenue triggers for future rate reductions. Revenue triggers would:
Cut the rate in half point increments as revenue collections grow – ensuring Oklahoma does not experience budget deficits related to tax cuts;
Use December Certified Collections, not February Estimates (which avoids problems with previous revenue triggers).
Reduce the income tax rate to a flat 2.75% over the next 3 years if revenue is sufficient (approx. 1.5% revenue growth rate).
Fiscal Impact: $438.5 million (to get to initial flat 4.25% rate).
End Anti-Business Tax Penalties: To grow the supply side of Oklahoma’s economy, SCRF proposes eliminating outdated tax penalties on business, investment and growth. Enacting the provisions below, as well as the personal income tax provisions above, would place Oklahoma in the Top Ten of the Tax Foundation’s State Business Tax Climate Index, a great start to a Supply Side Revival.
Repeal the Franchise Tax
Oklahoma’s franchise tax is a direct tax on capital investment. It is calculated based on the assets a business owns, not the net profit the business makes. As a result, businesses pay the franchise tax regardless of whether or not they turned a profit that year. This is an unnecessary barrier to starting a business, since new businesses often invest in assets and are not profitable in the first few years. In essence, the franchise tax is a fee imposed for the privilege of doing business in Oklahoma. Worse, the franchise tax is a double tax—it is levied in addition to corporate income tax. Eliminating the franchise tax will reduce financial burdens on business and increase the likelihood of capital investments in the state.
Fiscal impact: $57.2 million
Create a De Minimis Exemption for Tangible Personal Property (TPP):
Tangible Personal Property tax is a direct tax on capital investment. The tax is levied on property that can be touched and moved, such as machinery, equipment, and farm implements (as opposed to traditional property tax, which is assessed on land and buildings).
As a local tax, the relatively small amount of revenue raised is divided between hundreds of local government entities, making up a comparatively small amount of the revenue any individual entity relies on. The state government receives no revenue from tangible personal property tax.
Many small businesses face negligible tax liabilities but are still forced to go through a costly filing and compliance process. Exempting business machinery and equipment acquired for less than $100,000 would take these small businesses off the tax rolls with minimal revenue loss to local governments.
Fiscal impact: approx. $20 million, spread across 77 counties and hundreds of local recipients of property tax
Repeal the Throwback Rule
Oklahoma’s throwback rule punishes Oklahoma businesses that sell out of state, encouraging them to relocate to – or at least locate distribution facilities in – other states. Studies suggest that, over time, tax avoidance strategies eliminate most or all revenue gains from throwback rules.
Fiscal impact: $0 (revenue neutral)
Move to a Single Sales Factor Apportionment
Every company doing business in more than one state must allocate how much of its income was earned in each state in which it operates. This calculation is referred to as "apportionment." Generally speaking, a state's corporate income tax rate is only applied to the portion of a company's income that was earned in that state.
States can use three factors in their apportionment formulas: the share of total (1) property, (2) payroll and (3) sales that a firm has located in each state. Many states have shifted from traditional three-factor apportionment to a single factor apportionment based on sales alone. In order to compete in the changing tax landscape, Oklahoma should follow suit and adopt a single sales factor apportionment.
Fiscal impact: revenue neutral or positive
About the State Chamber Research Foundation
The State Chamber Research Foundation (SCRF) is the business community’s think tank. Through high-quality research and analysis, SCRF educates policymakers and the public about the virtues of the free enterprise system, the public policy ideas that enable free enterprise to thrive, and the positive contributions of the business community to the prosperity and welfare of the people of Oklahoma. As a non-profit research and education organization, SCRF is dedicated to the non-partisan advancement of free markets, increasing opportunity and growing prosperity.