September 19, 2014 Forbes Contributor Rex Sinquefield
Opponents to pro-growth tax policy argue that reducing income tax rates will only benefit the wealthy, hurt workers, and destroy social programs.
So, how does a state reduce marginal tax rates, lead the country in small business income and, at the same time, experience an all-time high in tax collections and spending?
One needs to look no further than the state of Oklahoma. According to the Oklahoma Center of Public Affairs (OCPA), the Sooner State’s commitment to reducing the penalty on work over the last 12 years has reduced the top marginal individual income tax rate by 22 percent, from 6.75 percent to 5.25. Since 85 percent of small business owners (sole-proprietors, partnerships, LLCs, or S-corporations) file as individuals, the reduced rates have led to remarkable growth in their business income.
What may surprise skeptics is that while Oklahoma’s small business income is growing at a rate of 171%, almost twice as fast as the national average (81.6 percent), tax collections on small business income now are at an all-time high. What may surprise them even more is that state spending also is at an all-time high, providing much needed resources for infrastructure projects, education, and social programs.
And according to this report, between fiscal year 2011 and 2013, the number of tax filers with an adjusted gross income (AGI) of more than $50,000 increased by 152,029. That is an amazing 39% rate of growth. Whereas, those who had an AGI of $25,000 or less saw their personal income tax liability slashed from 6 percent to 3 percent. The total personal income tax liability for this group was reduced by 55 percent.
Without a doubt, Oklahoma provides an excellent example of how informed, well-thought-out, pro-growth tax policies provide a more dynamic economic environment, which in turn allows businesses to flourish, provides opportunities for job creation, and supports government spending on vital government programs.
But, whether Oklahomans will continue to experience these benefits is in question. According to The Tax Foundation’s 2014 State Business Tax Climate Index, Oklahoma ranks 36th in the nation. Compared with its neighbor to the south, no-income tax state of Texas (11th), the state has more work to do if it is to strengthen its competitive position.
Earlier this month, the OCPA Center for Economic Freedom reported that, “During the Great Recession, over half of all new U.S. jobs were created in Texas. Since the recession, Texas has seen more job growth than any state but North Dakota. Now Toyota, the world’s largest automaker, is moving its U.S. headquarters from California to Plano, a Dallas suburb. With additional jobs coming from Toyota’s Kentucky and New York facilities, Texas is expected to gain 4,000 jobs.” And, as reported here, Oklahoma’s economy is starting to stagnate. While it ranks ninth among the states in economic performance, its economic outlook position is 21st.
According to www.howmoneywalks.com, between 1992-2011, Oklahoma lost a total of $954.77 million in annual adjusted gross income. Neighboring Texas was the greatest beneficiary, receiving $1.3 billion from Oklahoma, followed by Florida, another no-income tax state, receiving $293 million.
The recent gains that Oklahoma has experienced could be lost if leaders do not stay the course. The evidence is clear, reducing the penalty on work is one critical tool to bolstering the state’s competitive advantage in the battle between the states for business development, job creation, and delivering social programs. More than a decade of pro-growth reforms has laid the groundwork in Oklahoma. Continuing along these same lines will most certainly prove to be a pathway to prosperity for thousands more people. Period.