Oklahoma Curve: Phased-in income tax elimination would yield 312,000 more jobs, higher personal income, better economy, analysis says

Economist Arthur Laffer has outlined an historic proposal for transformation of Oklahoma state government's system of taxation and revenue. Guiding a trio of leading American tax researchers, Professor Laffer projects dramatic positive results if policymakers pursue phased-in reductions of state personal income tax rates, leading to eventual elimination of the unpopular levy.

Assessment of the positive impact triggered by a gradual elimination of the personal income tax comes as members of the state Legislature move to wrap up detailed study of possible tax reforms. Proposals now “in play” include ending some of the most controversial business incentives and tax credits.

CapitolBeatOK has studied the analysis for several days. A summary of key findings in the Laffer-OCPA study, which is being released this week, follows.

In the 17-page publication co-published by the Oklahoma Council of Public Affairs (OCPA) and Arduin, Laffer and Moore Econometrics (ALME), analysts contend a complete phaseout of the state income tax “would create a long-lasting economic boom, benefiting generations to come.”

Highlights include projected net growth of over 310,000 jobs more than if current policies stay in place. The analysis projects dramatic economic improvements, while acknowledging the spending impact of a shift away from Oklahoma government's present reliance on income tax revenues.

An executive summary of the analysis includes these words: “The reductions of waste and non-core government spending necessary to accomplish this proposal are not draconian by any measure — approximately $300–$400 million, or 6 percent of current appropriations. By gradually lowering personal income taxes, the proposal does slow the total growth in appropriations and in total tax collections.”

Lower taxes and smaller government are long-sought goals of the conservative Republican majorities in the state House and Senate. In wake of the historic 2010 elections, the Grand Old Party controls the governor's office and both Houses of the Legislature for the first time in state history. Governor Mary Fallin has advocated a range of government efficiencies, and has expressed sympathy for conservative goals to “right-size” government.

The proposed phaseout of personal income taxes, beginning during Fiscal Year 2013 and running through 2022, would yield, the analysis projects, personal income growth of 3.27 percent in 2013, “accelerating to 5.65 percent by 2022.” This compares to a baseline scenario (without the reform) of 2.39 percent growth in that decade.

As for state Gross Domestic Product (GDP), the baseline scenario projects 2.03 percent growth, while the proposed reform phasing out income taxes would yield real annual GDP of 2.95 percent in 2013, “accelerating to 5.44 percent by 2022.”

Perhaps most dramatically, the analysis asserts “the proposed tax reform would create

312,000 more jobs in Oklahoma than the number of jobs that would be created in Oklahoma under the baseline scenario.”

This year at the state Capitol in Oklahoma City, thorny issues of looming “intangible property” taxation and the broader structure of Oklahoma’s tax revenue system triggered creation of a major task force of legislators and private citizens. They are investigating a way forward for the state in terms of adequate taxation to finance government that leaves room for a vibrant and growing economy.

While there is some agreement on the need to avoid a dramatic tax hike for businesses due to a state Supreme Court decision allowing taxation of “intangibles,” there are many conflicts among analysts when the remaining mix of state tax revenue sources is studied .

Advocating phased-in elimination of the state income tax is OCPA, a leading advocate of limited government and economic liberty, along with many allies inside and outside of state government.

Leading critics include Professor Alexander (“Lex”) Holmes. Larkin Warner, emeritus professor of economics at Oklahoma State University, urged caution on the income tax issue when he testified before a legislative panel on November 17. The Oklahoma Policy Institute, a liberal or progressive “think tank,” has also advocated retaining the personal income tax.

Looking at only major sources of state tax revenue, the individual income tax now provides more than one-third of state government tax revenue, with about one-fourth of revenue coming from sales taxes, and less than 10 percent from gross production taxes on oil and gas. Adding to the revenue picture is the corporate income tax. and a variety of lesser revenue sources.

State Rep. David Dank of Oklahoma City, a Republican, has led a major investigation of tax credits and business incentives, with some programs deemed models of efficiency, and others denounced as “giveaways.”

This week (on Wednesday, Nov. 30), the Task Force on Tax Credits and Economic Incentives will move a step closer to defining principles to guide what are expected to be several pieces of legislation to limit or regulate existing programs.

In certain cases, elimination of programs is under serious consideration. From the $150 million or more that might thereby be shifted away from what he deems “giveaways,” Dank has indicated he wants to jump-start income tax rate reduction. An analysis by Warren Veith, of Oklahoma Watch, states estimates put that number as high as $174 million in tax breaks, spread across the dozen or so most controversial or “at-risk” incentives and tax credits.

Principals in the econometrics firm where Laffer is a name partner include Wayne Winegarden and Donna Arduin. Winegarden is a well-known and respected economist. Arduin is former state budget director for California, Florida, New York and Michigan.

Professor Laffer spoke before community leaders in downtown Oklahoma City today (Tuesday, November 29). Laffer, best-known as the father of “supply-side” economics, outlined an historic proposal for transformation of the state's government taxation and revenue system.

Laffer is widely-published and is best known for laying the intellectual bases for significant income tax reductions and subsequent economic growth during the presidency of Ronald Reagan. In addition to his speech before civic leaders, Professor Laffer is meeting with some government officials and with supporters of OCPA during his visit to the capital city.

Laffer's projections on taxable income “elasticity” assume that total income will change in response to tax rates. His analysis projects there are “arithmetic” and “economic” effects from income tax rates, and that rates too high reduce government revenue, while lower rates provoke new productive activity, and thus higher income and revenue that would otherwise never emerge. This is known as the “Laffer Curve.” It is illlustrated in a graphic found on page 9 of the new OCPA-ALME study.