Proposals to permanently eliminate Oklahoma’s state sales tax on groceries have bipartisan support, but there aren’t any firm plans to replace the roughly $300 million in revenue the tax generates for the state each year.
Lawmakers have argued cutting taxes on groceries will help Oklahomans better afford basic expenses as inflation reaches a 40-year high. Oklahoma is one of 13 states that still tax groceries.
Senate Pro Tem Greg Treat, R-Oklahoma City, has filed Senate Bill 1495 to completely eliminate a 4.5% sales tax on groceries this year. Treat says the cut is needed because Oklahoma families are struggling to afford groceries, but acknowledged to a Senate committee that the price tag of the tax cut is “something we cannot ignore.”
To address budget stability concerns while still providing tax cuts, House Speaker Charles McCall, R-Atoka, unveiled new proposals Thursday to suspend the grocery sales tax for two years rather than cut it permanently and to enhance the grocery sales tax credit for two years.
McCall’s office said he wants to present multiple options to address inflation and isn’t “shutting the door” on Treat’s bill.
“The House wants to address inflation today without causing budget problems tomorrow,” McCall said in a press release after a House committee approved the bills.
Food banks saw a 20% to 30% increase in need during the pandemic, said Bailey Perkins Wright, state advocacy and public policy director for the Regional Food Bank of Oklahoma. The Regional Food Bank distributed a record amount of food in 2021.
Hayley Garcia, social services supervisor for Aging Services, Inc. in Cleveland County, said the seniors her organization serves have struggled to keep up with rising grocery prices.
While reducing monthly grocery bills could help people on fixed incomes, some worry a large tax cut could result in future reductions to social services.
“Our core services are also key to communities,” Perkins Wright said. “So we feel like it could present a double-edged sword.”
Lawmakers say the time is right for tax cuts
Republican and Democratic leadership in the Oklahoma Legislature say the time is right to continue cutting taxes, and have pointed to the state’s $2 billion in savings, billions in federal COVID-19 relief funding the state has received and record-breaking state revenue.
House Minority Leader Emily Virgin, D-Norman, has filed House Bill 3621, which would phase out the grocery sales tax over the next three fiscal years, allowing for a slower financial transition off the tax revenue.
Virgin said the grocery tax is regressive, meaning low-income people pay a higher percentage of their earnings on the tax. Democrats have been pushing for years to cut the grocery tax. Virgin is hopeful that there is enough support from Republicans to get the job done this election year.
Gov. Kevin Stitt said in his 2022 State of the State speech he supported cutting the tax.
“Whatever the reason, we’re happy to have bipartisan support,” Virgin said.
Virgin has heard concerns about long-term budget stability, but said the state is in a good financial position now to provide tax relief. Rather than cutting corporate and personal income taxes again, it’s time to do something “that would affect those who are making less,” she said.
The average two to three person household spent $416 on groceries a month in the 2021 fiscal year, according to a fiscal impact statement from the Oklahoma Tax Commission. With a 4.5% sales tax rate, they would have paid about $224 a year in sales tax.
State taxes on groceries are a stable revenue source that make up more than 12% of the state’s total sales tax revenue. That money is divided up between several state funds. Some of the money goes to fund public education.
Tax cuts popular when revenues are high
Emma Morris, a revenue policy analyst with the left-leaning Oklahoma Policy Institute, said lawmakers tend to cut taxes when the state has high revenues and struggle to fund needed services years later when facing a budget shortfall.
As state revenues recovered from the pandemic last year, lawmakers cut about $280 million in annual tax revenue from personal and corporate income taxes, some of it dedicated to funding public schools.
This year’s plan to eliminate sales taxes on groceries could also cut into dedicated education funding. A set portion of state sales tax goes to the Teacher’s Retirement Revolving Fund and the Education Reform Revolving Fund. About $380 million in state sales tax revenue went to fund education in the 2021 fiscal year.
While eliminating the grocery sales tax is the priority for many lawmakers this year, other tax cut proposals are also on the table, including cuts to the state franchise tax and motor vehicle tax and reducing court fines and fees.
The state saw gross receipts of $1.5 billion in January — up more than 27% over the previous year, but the state has more money in its coffers this year in part because of inflation and federal relief money, State Treasurer Randy McDaniel said in February.
“All of these factors should be considered this session as proposals impacting future state revenue and spending are discussed,” he said.
In lean years, it’s harder for lawmakers to raise taxes because of a state question voters passed in 1992 that requires 75% of lawmakers in the House and Senate to vote in favor of a tax increase. The Legislature accomplished this for the first time since the measure passed in 2018 after a teacher walkout following years of budget shortfalls and cuts to core services.
“I think it’s easy to make tax choices annually, to say we have extra revenue, so let’s just make a cut. Or we have flat revenue, so let’s not cut taxes,” Morris said. “We have a tendency to just think one year down the road.”
Other options could also provide targeted tax relief while still protecting state revenue streams.
The Grocery Sales Tax Relief Credit gives a $40-rebate to households below certain income levels. Roughly 780,000 Oklahomans took advantage of the tax credit in 2018. Instead of completely cutting the grocery sales tax, the state could raise income eligibility for the credit, which hasn’t happened in decades, Morris said.
If the grocery sales tax is eliminated, Perkins Wright hopes the state will find another way to fund core services. Treat told reporters in early February that conversations about revenue stability were ongoing, but that he is focused on cutting taxes.
Treat’s office didn’t respond to questions about how the tax cut could impact education funding or long-term budget stability.
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