Senate Republicans have blocked plans to phase out Oklahoma’s corporate income tax this legislative session and lawmakers have yet to reach an agreement to lower personal income taxes as they try to map the state’s financial future after the pandemic.
House Speaker Charles McCall, R-Atoka, has championed tax reform as a way to entice businesses and remote workers to relocate to Oklahoma as the pandemic wanes. He says the timing is right as lawmakers revel in a budget surplus spurred on by federal COVID-19 stimulus funds.
The House of Representatives easily passed two bills in March to phase out the state’s corporate income tax in its entirety over five years and lower personal income taxes for all income levels through credits.
But on the heels of financial uncertainty caused by the pandemic and amid concerns about the millions of dollars in education funding that would have to be replaced, the Senate has not widely supported the tax reforms.
“I can tell you today, there is no agreement nor discussion about advancing either one of those two taxes this year in the Senate,” Senate Appropriations Chairman Roger Thompson told The Frontier Tuesday.
Thompson, R-Okemah, added that nothing is final until budget negotiations have concluded, which is expected to happen sometime in the coming weeks.
Senate Pro Tem Greg Treat, R-Oklahoma City, previously said there is “not the appetite” among Senate Republicans for ending the corporate income tax and they wouldn’t be part of negotiations including that tax cut.
“We are living in a time that is uncertain financially,” Treat said at an April press conference. “The politics of it are, as a Republican — yes — we cut taxes. That’s a great political statement. But we’ve got to get beyond the politics of it and see — is it the right policy?”
While the state has a funding surplus this year, the cushion is artificially inflated by billions of dollars in federal unemployment benefits, stimulus checks and money flowing directly to state agencies. Relying on one-time funds to make long-lasting revenue decisions can be problematic, Thompson said.
“What do we look like when all this money is gone? We don’t know,” Thompson said. “So I am really hesitant to cut any taxes at this point.”
Initially, Senate leaders said discussions about lowering personal income taxes by a quarter of a percentage point were ongoing. Now, Thompson said there is some disagreement on how lawmakers would actually implement that change.
The House’s plan for personal income tax reform relies on creating credits, which would make it easier for lawmakers to raise the tax back to current rates in the future if needed. Thompson said the Senate is more interested in lowering actual income tax rates, which would require the approval of 75 percent of lawmakers to raise the tax back to current rates in the future.
The corporate income tax generates over $350 million a year on average for the state, though it has been acknowledged as an unstable revenue stream. That funding would have been completely phased out in 2026 under McCall’s plan.
The state’s personal income tax is slated to bring in more than $3 billion for the next fiscal year, according to the state Office of Management and Enterprise Services. If personal income taxes were lowered, the state would have had $180 million less in total revenue in 2023, according to a House press release.
Together, McCall’s two tax reform measures would have eliminated roughly $100 million in dedicated, recurring education funding, according to figures provided by OMES.
McCall said in a previous interview that he believes cutting the taxes would incentivize enough new businesses to come to the state to generate new revenue that would make up for any eliminated funding. He sees the federal funding as a kind of insurance policy in the meantime.
Gov. Kevin Stitt has also stated his support for both tax reform measures.
“I think the governor and I see this issue the same because we’re private sector business people. We’ve seen it in the course of our business,” McCall said. “But we know we have a responsibility to show and convince the other chamber of its effectiveness and its merits. And we’re going to continue to do that.”
Lowering personal income taxes had broad, bipartisan support in the House because of the restoration of the Earned Income Tax Credit, a longtime Democratic priority.
These discussions are also framed by the wide-reaching effects of the U.S. Supreme Court’s McGirt decision, which found that Congress never dismantled Indian reservations for the Five Civilized Tribes that existed in Oklahoma before statehood. The decision held that much of the eastern part of the state is Indian Country.
The Oklahoma Tax Commission released a report last fall outlining the possibility for state revenue from personal income taxes to drop as much as $73 million per year because of the decision.
The state doesn’t have jurisdiction to tax certain income from tribal citizens living and working on Indian land, according to the Tax Commission report, and the McGirt ruling expands the area where members of at least one tribe can live without paying certain income taxes.
The commission anticipated “a significant, immediate and ongoing fiscal impact” if the ruling applies to criminal and civil issues like taxation, according to the report.
McCall questioned whether the McGirt decision should be applied to civil issues and said he thinks the state and tribal governments will come to an agreement eventually.
“McGirt does create some uncertainty, I understand that,” McCall said. “But I think, as Oklahomans, we all should contribute. I think the precedent of the state is of all Oklahomans being subject to taxation.”
House and Senate budget leaders have yet to reveal any final budget proposals or how tax reform fits in with other House priorities, like increasing education funding to trigger a classroom size cap. Lawmakers have until the end of the 2021 session to agree on a budget proposal.