Taxes

The Oklahoma Tax Cut Massacre

Still image from The Texas Chainsaw Massacre movie

I’m going to write more about the GOP tax-cut meltdown now that the Oklahoma Legislature has adjourned, but I’ll offer some initial, brief observations this holiday weekend.

In her February state of the state speech, Gov. Mary Fallin announced a plan to cut the state income tax from the top rate of 5.25 percent to 3.5 percent, which would then be followed by further cuts. This plan was a centerpiece of her speech. It made national headlines, and the overall Oklahoma tax-cut effort was eventually vaunted by The Wall Street Journal.

Immediately after Fallin’s speech, a tax cut at that point seemed almost certain. Fallin is a popular Republican governor in an extremely conservative state. Republicans control state government. It seemed then like only a sudden financial crisis could have derailed a cut.

Her announcement was followed by a series of counter proposals from Republicans that included the so-called “Laffer” plan that would have cut the income tax immediately to 2.25 percent to a last-minute plan that would cut the tax to 4.8 percent. The 4.8 percent plan, which included a trigger for a further cut, seemed like it would pass, but at the very end of the session House leaders refused to bring it to a vote.

The House then offered up what can only be described as a last-ditch, desperate, ill-conceived plan to cut taxes based solely on future triggers tied to revenue growth, but it was dismissed by the Senate and Fallin had little enthusiasm for it.

In the end, there was no tax cut, a fairly remarkable non-occurrence given all the tax-cut hyperbole and the Republican stranglehold on state government.

The conventional wisdom, expressed here, is that the GOP met resistance with reforming the overall tax code by various vested interests, and obviously there’s some truth to that, but that only gives Republicans a lame excuse. Republicans had to know going in that changing the state's tax structure would create tension. Is there more to the story?

Here are three other points that won’t get made in the corporate media here:

  • This will seem obvious to some people, but perhaps state Republicans here simply don’t have the intellectual apparatus to create and implement sound tax policy. Certainly, Fallin, House Speaker Kris Steele and other Republican leaders are intelligent enough people. That’s not my point. But the people behind the scenes drawing up the specifics of any tax-cut plan have to be able to calculate its immediate and long-term effects. When the 4.8 percent plan was presented, Republican leaders seemed befuddled when it became apparent that many Oklahomans would actually pay more in taxes because of the loss of the personal exemption. Didn’t anyone do the math before the plan was proposed? As I wrote in the last days of the session, Fallin and other GOP leaders should at the very least know how any tax-cut plan they proposed would affect them personally. If they don’t know, then the plan is simply not vetted.

  • The tax-cut meltdown shows it’s obvious that Republicans are not unified at the state Capitol. That’s probably saying it too nicely. Fiscal conservatives, such as Steele, who are concerned about core services and education, are up against starve-the-beast social conservatives and the staffers at the Oklahoma Council of Public Affairs (OCPA), who agitate for a more slash and burn policy when it comes to government spending. It was OCPA that pushed the draconian Laffer plan, which was supposedly based on the ideas of Arthur Laffer, a former economic advisor to the late President Ronal Reagan. In the end, responsible Republicans knew that the Laffer plan was ludicrous, disingenuous and would have damaged the state for years to come. Watch for more clashes between the OCPA and Republicans next year, especially if President Barack Obama is reelected and the Obama-hysteria continues here.

  • Did Republican leaders intentionally sabotage the tax cut plans because they know state agencies and education have faced severe budget cuts since 2008? I’m just throwing that out there. Here’s how it might have worked: Once the Republican leadership realized how much any tax cut would hurt schools and other core services, they decided against a cut, especially when declining natural gas tax revenues became an issue. To save face after all the initial hyperbole, they proposed last-minute plans that would almost certainly die on the vine. The counter to this, obviously, is my first point about a lack of an intellectual apparatus. Take your pick.

That’s my first take on the issue. There were other factors, of course, that prevented any tax cut this year, including the steady opposition of the Oklahoma Policy Institute, which deserves credit for leading the way and crunching the numbers. In terms of the state’s two main think tanks, OK Policy really handed it to the better-funded OCPA this time around. But there’s next year, and, if state revenues continue to rise, Republicans will surely try to cut the income tax again to primarily benefit the state’s wealthy people.

TABOR Makes An Oklahoma Comeback?

Image of state capitol

The new Oklahoma House tax-cut plan may already be dead as I post this, but it seems modeled, in some respects, on the philosophy underlying the Taxpayer Bill of Rights (TABOR) movement.

Under the TABOR philosophy, state government spending should be capped each year under a formula based on inflation and population growth. Additional revenue is then given back to taxpayers.

Under the new House tax-cut plan, triggers are put into place to lower the top state income tax of 5.25 percent over several years if revenues grow by 5 percent in a previous year. In essence, taxpayers also get the additional revenue.

Both plans place draconian limits on government spending and ensure it’s virtually impossible or at least extremely difficult to change it. They also tie the hands of future legislators to respond to pressing needs in infrastructure, education and health services.

A 2006 push to make TABOR a state constitutional amendment failed here in the courtroom, and its implementation in Colorado became a disaster that voters had to later rectify so core government services could continue.

The initial House tax cutting plan, endorsed by Gov. Mary Fallin, would have cut the top income tax rate from 5.25 to 4.8 percent next year. It also would have triggered another tax cut in 2015 if revenues grew by 5 percent the previous year.

But because the plan eliminated the $1,000 personal exemption, many middle-class Oklahomans would have paid more in taxes. In other words, the tax cut was really a tax increase for many people.

As of Wednesday, House leaders had decided against hearing the Fallin-endorsed tax bill, and put forward the tax-cut trigger bill, which was not met with any special enthusiasm by either Fallin or the Senate. Legislators have until Friday to finish their work. Both plans are presumably still under some form of consideration as I post this.

Beyond the comparison of the new House plan to TABOR, here are some criticisms of the current tax-cut political debacle at the Oklahoma Legislature:

(1) It is extremely irresponsible and borderline dishonest to propose major tax cuts and tax-code adjustments in the last few days of a legislative session. This doesn’t give the number crunchers enough time to determine the fiscal impact on individuals and state government funding nor does it allow for extended public debate and media coverage.

(2) The GOP controls state government. If Republicans want to cut taxes, then they should cut taxes and specifically cite how much state government spending will be cut in the process. I’m adamantly opposed to any tax cuts right now, but at least this would be an honest and transparent approach. It would allow people to plan their lives. For example, if teachers know they’re going to lose their jobs, then at least they can take action. The frenzied, disarrayed GOP approach to the tax-cut issue in the final days of this session lacks basic integrity and human decency.

(3) Let me repeat: Most government agencies and education have faced drastic cuts in their funding in recent years because of the economic downturn that began in 2008. Teachers and other workers have lost their jobs. Cutting taxes immediately after a relatively slight rise in revenues is as irresponsible as TABOR. The recently announced standstill budget for next year, which the House has now voted down, is another classic example of ideology trumping sound fiscal policy.

The Oklahoma Legislature needs to adjourn without acting on any tax-cut proposal this year. At this point, that’s the most responsible action or non-action it can take.

What Will Fallin Pay?

Image of Mary Fallin

(Update: Is the Fallin tax-cut plan dead? NewsOK.com is reporting Oklahoma House leaders have a new plan.)

Gov. Mary Fallin and other state Republican leaders pushing for a tax cut plan that will primarily benefit millionaires by increasing taxes for many middle-class Oklahomans should announce how much less or more personally they expect to pay in state taxes next year.

It’s their plan. Surely, they know how it will affect them. If not, then it’s obvious the plan has not been vetted in any realistic manner and the Oklahoma Legislature should reject it.

We know most millionaires with high annual incomes will undoubtedly pay less under the GOP plan, which drops the top income tax rate from 5.25 to 4.8, but what about Fallin, who makes $147,000 a year as governor? (That doesn’t take into account her husband’s income.) Will she pay less? How much?

Is this governor cutting taxes for herself while raising taxes on thousands of Oklahoma families? Oklahomans deserve to know this information.

One of the main problems that has emerged since GOP leaders announced the tax plan has been the plan’s proposal to end the personal exemption of $1,000 for people making over $35,000 or couples making over $70,000. Unless there are aspects of the plan that haven’t been revealed, it’s obvious that the loss of the personal exemption for many people will mean they will pay more in taxes even though their overall rate will be dropped.

One analysis has shown that people making $14,000 to $24,000 will also have a higher tax rate so millionaires can get more take home pay.

Here’s how the Oklahoma Policy Institute breaks down the winners and losers under the tax plan. OK Policy notes, “. . . roughly one in five families earning between $17,000 and $85,000 will pay higher taxes” and “that among the top 5 percent of households, 88 percent will pay less tax, compared to just 10 percent who will pay more.”

As usual, the highly politicized plan is being rushed through at the end of the legislative session in a frantic pace and GOP leaders such as Fallin and House Speaker Kris Steele (R-Shawnee) have resorted to rote talking points about how the tax cut plan and the proposed standstill state budget is responsible and conservative.

But here’s how state Rep. Joe Dorman, a Rush Springs Democrat, described the plan:

According to our most recent information, those in the income range of $16,000 to $24,000 will be hit particularly hard, with the average liability to the state rising by anywhere from 2.3% to 13.2% in that income range. We have requested more recent information from the Oklahoma Tax Commission as it has come to our attention that the impact could be even worse for the upper middle class.

It’s arguable whether a family of four with an income of $100,000 is really “upper middle class” or just middle class in Oklahoma, but most rational people wouldn’t consider that family rich by any means. What does Fallin think about this hypothetical family, which will pay more in taxes, according to one analysis? Does she think her family should pay less and this family should pay more? Why?

As Dorman also pointed out the tax increase proposal is probably unconstitutional anyway because of State Question 640. which places restrictions of how you can raise taxes. Here’s what Dorman said:

It is my contention, due to State Question 640, that this tax increase for many Oklahomans cannot pass without a 2/3 super majority or by a vote of the people. Not only is this plan fiscally irresponsible because it will inevitably lead to reductions to core services, but it is also illegal under the Oklahoma Constitution, as we also cannot pass revenue bills in the final five days of session.

But will Dorman’s concerns even matter given the mad rush to finish business this week at the Oklahoma Legislature, and, frankly, are enough people who stand to lose money even paying attention? Probably not.

The tax cut plan will mean $32.7 million dollars less in state revenues in fiscal year 2013 and $102 million less the following year. The GOP, which controls state government, has announced a standstill budget for next year that doesn’t take into account recent budget cuts and inflation.

Dropping the income tax rate is not a panacea. This is a bad tax cut plan. The legislature should reject it.

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