Small: income-tax cuts provide greatest benefit

Income-tax cuts provide greatest benefit

By Jonathan Small

Does the greatest benefit come from cutting the state’s penalty on work, the personal income tax, or from exempting groceries from the state sales tax? That question is on the minds of Oklahoma policymakers.

But the answer is straightforward. While exempting groceries from the state sales tax may provide some financial benefit to individuals, it does not make people more likely to invest in Oklahoma, create new jobs or raise wages.

When it comes to generating those economic benefits, income-tax cuts are far superior.

The income tax is effectively taken from Oklahomans before they spend a cent of their earnings, making it more harmful than the sales tax.

Also, the argument that sales-tax cuts benefit the poor has also been proven false.

In April 2022, the Tax Foundation found the poor pay more in sales taxes when states exempt groceries because the sales-tax rate on other goods is typically kept higher to make up the difference.

“The poorest decile of households experiences 9 percent more sales tax liability with a grocery tax exemption than they would if groceries were taxed and the general rate were reduced commensurately,” the Tax Foundation reported.

Also, most states also impose the sales tax on prepared food (fast food) even when exempting groceries. Since low-income families typically rely on prepared food more than upper-income families, lower-income families disproportionately pay more in sales tax on food even when groceries are exempted, the Tax Foundation noted.

Weaning state government from dependence on income tax makes it less likely Oklahomans will face tax increases in the future. Why? Because sales-tax collections are more stable than income-tax collections.

With the income tax, state spending surges when incomes increase, which can happen rapidly. But incomes can also decline significantly (as happens in a recession). Lawmakers then feel pressure to maintain inflated levels of government spending by passing additional tax increases.

Sales taxes, in contrast, rise more gradually and decline less severely, meaning you have fewer and less severe state revenue shortfalls when sales tax is the main revenue source.

No one doubts the income tax impacts where, and how much, people invest in new businesses – unlike the sales tax. The competition between states is very real and those with lower (or no) income tax are faring best. Lawmakers in Arkansas recently voted to reduce that state’s personal income tax rate, meaning Oklahoma has a higher income-tax rate than three bordering states: Texas, Arkansas and Colorado.

Even with repeal of the state portion of the sales tax on groceries, Oklahoma lawmakers can still afford to cut the state’s income-tax rate given this year’s substantial growth revenue.

It’s time to cut Oklahoma’s penalty on work.

Jonathan Small serves as president of the Oklahoma Council of Public Affairs.