Taxes

I was struck by two things after watching Gov. Mary Fallin’s State of the State address on Monday.

First, her proposal to drastically cut the state income tax starting in 2013 makes it highly likely there will be some type of tax cut this upcoming legislative session. Fallin is a fairly popular governor, leading a surging Oklahoma Republican Party. It’s doubtful there could be enough GOP in-fighting or a large enough corporate-funded television advertisement campaign, if any, to stop the measure through generating popular opposition.

In addition, proposing extreme cuts leaves the door open for a “compromise” measure that might lead to smaller cuts over a larger time frame. The message is clear, though: Conservatives see eliminating the state income tax as a panacea.

Under Fallin’s plan, those couples who make $30,000 a year or less would pay no taxes while couples making $30,000 to $70,000 would pay 2.25 percent. Those couples making over $70,000 would pay 3.5 percent. Individuals making $35,000 and above would pay the 3.5 percent rate. Eventually, Fallin’s plan would eliminate the income tax altogether through annual income tax cuts tied to revenue growth.

The state’s current top tax rate is 5.25 percent down from 6.65 percent in Gov. Frank Keating’s years as governor.

The second thing that struck me about Fallin’s address was the lack of specific information about how the tax cut would be paid for without draconian cuts to state government.
This is from Fallin’s speech:

The question remains, how will we pay for a tax cut? Under the Oklahoma Tax Reduction and Simplification Act, we do it in three ways:

First, by eliminating tax loopholes, carve-outs and other exceptions.

Second, by continuing to eliminate government waste and making government more efficient and effective. We’ve already proven that we can find substantial savings through government modernization initiatives.

Third, by capitalizing on economic growth we expect to see as a result of our pro-jobs, pro-business policies.

Only Fallin’s first reference—eliminating tax loopholes or credits or exemptions equal to the cuts—is a sure thing. Eliminating government waste and the supposed economic growth that will follow a major tax cut as ways to pay for the tax cut are ambiguous at best.

This means as the plan makes its way through the legislature, there are going to be winners and losers when it comes to losing tax advantages or breaks, and it’s quite possible too much of the burden will fall on Oklahoma’s lowest income earners.

Perhaps even worse is what will happen during the next major economic downturn if the tax cuts are implemented. Income taxes provide about one-third of the state’s revenues. A major loss of jobs here—think what sustained lower oil and natural gas prices would mean when it comes to employment and other taxes-- could lead to huge cuts in state services and education.

This, however, is the path we’re on with the huge conservative majority, which will probably grow even larger after the 2012 election, now governing Oklahoma’s state government. Conservatives here and elsewhere have made no secret of the fact they want to cut taxes and shrink government. I sense a majority of Oklahomans believe in this governing philosophy right now. That’s the reality.

A recent editorial in The Oklahoman that argues the state “top income tax rate is too high” is an indication that Republicans and the corporate power structure here have cemented a plan to reduce the income tax again this coming legislative session.

It’s highly unlikely the plan can be stopped. The activists who oppose the upcoming cut do so with the best intentions but specific efforts and the money spent to try to stop it might be better used developing and implementing long-range initiatives to bring more political balance to state government.

The plan, as with other recent income tax cuts in the state, will overwhelmingly benefit the state’s wealthiest citizens. In recent years, middle class and some poor state residents have seen their taxes drop, too, but their small tax “savings,” combined with the huge tax-break largess of the richest citizens, have been at least partially responsible for major cuts in state services and education.

None of this should come as any surprise. The Republicans have solid majorities in the House and Senate and the governor is a Republican. Democrats here are in complete disarray, and many no doubt will favor more tax cuts, anyway. For the most part, the kooky and often infuriating proposed social-conservative legislation and statements made by legislators like state Rep. Sally Kern (R-Oklahoma City) are really just a sideshow to the main performance. Republicans here are pretty much unified in their quest to cut taxes and shrink government. That’s neither a controversial or hidden agenda. It’s a reality.

The editorial, titled ”Debate over income tax needs more than rhetoric, platitudes” (Jan. 9, 2012), is a classic piece of doublespeak mush that argues people on both sides of the issue should tone down the “divisive rhetoric” while apparently exempting itself. Thus, there are references to “Barack-Obama style class warfare” and “tax consumers.” Here’s the editorial’s first paragraph:

A coalition is forming to “safeguard” funding for state services. That's code talk for opposing state income tax cuts.

What does “code talk” mean in this context? It’s demeaning. There’s no code talk. Is it really hyperbole to use the word “safeguard”? The proposed income tax cut, from 5.25 percent to 4.75 percent in the top rate over two years, will almost certainly lead to more cuts in state government or, at the very least, stagnant budgets because the income tax accounts for approximately a third of state revenues.

One of the ways the cut would be paid for would be the elimination of the $1,000 personal exemption. Under this rubric, according to some experts, a family of four earning $50,000 would save around $40 a year with the cut. Obviously, families earning more stand to gain more incrementally. This is not “divisive rhetoric”: it’s math.

Of course, many in the GOP want to eventually eliminate the income tax altogether, which will have to result in increases in sales and property taxes. Sales taxes, in particular, fall disproportionately on people with lower incomes, and high sales taxes here would drive people to other states or to the internet to make large purchases. Property tax increases would mean higher rents for middle-class and lower-income people. An extra $40 a year would hardly make up for a $100 a month rent increase.

The Oklahoman editorial urges a new coalition now getting formed to oppose the tax cut to “play it straight and drop the class warfare rhetoric” and admit its participants “want higher taxes.” It also deems the proposed cut from 5.25 to 4.75 percent as “relatively conservative” given that some Republicans want even deeper cuts.

Yet the editorial won’t concede the obvious in its own position: rich people will benefit the most from the tax cut and more cuts to state government are sure to follow.

As I’ve written before, two events could stop the cut: (1) The state’s corporate power structure could come together and decide that more cuts to education and state services will actually hurt their businesses and the state’s overall economic future because they would lower the quality of life here. This is what happened with the TABOR proposal a few years ago. (2) If tax revenues start to plummet again, which is not likely in the immediate future, Republicans might put the brakes on the plan for now.

The reality is that Republicans have a large majority in the legislature and those Democratic politicians who oppose the tax cut and the elimination of the income tax altogether are simply irrelevant.

It’s hard to conceive the general psyche of the Oklahoma voting electorate majority can be changed without a major financial crisis, such as an extended depression. Meanwhile, any cuts to the income tax must be considered permanent. Can you imagine the electorate here ever voting for a tax increase?

It was the corporate power structure and powerful politicians in both major parties and the state’s two leading think tanks that told us “the answer is always no” to State Question 744, the 2010 ballot initiative that would have increased educational funding here. What we’re getting now are more tax cuts for rich people, which will inevitably lead sooner or later to more cuts in education.

It would take a concerted campaign of the anti-SQ 744 magnitude to stop more income tax cuts here. I hope I’m wrong, but I can’t see that happening.

Republicans are poised to pass another reduction in the state income tax this coming legislative session, and it’s probably wishful thinking that somehow they can be stopped from further decimating government programs and educational systems in their quest to transfer more wealth to the super rich.

The fix is in. How can anyone refuse the Republicans' incredulous offer to lower taxes with no or limited immediate repercussions? Those who oppose a further reduction in the income tax at this point—like myself—can argue that more cuts in state government, which means less services, will hurt the most vulnerable: the poor, the elderly and school children. But that argument hasn’t resonated among Oklahoma voters, a solid majority of whom have bought into the conservative worldview of so-called limited government and trickle-down economics.

Last Friday, right before the holiday, an Oklahoma Senate task forced called for a reduction in both the income tax and the corporate tax. Here’s a key paragraph in a press release that was issued Dec. 30:

The report includes recommendations on reforms which will enable reductions in the top income tax rate from 5.25 to 4.75 percent over a two-year period as well as reducing corporate income taxes from 6 to 5 percent. Additional recommendations would offset those reductions through the elimination of select tax credits and a thorough review of existing tax preferences with an expectation of reduction or elimination of a number of tax credits.

The release didn’t outline the offsets, but the Oklahoma Policy Institute noted the proposed elimination of tax credits would affect “hundreds of thousands of taxpayers below a certain income level in order to offset regressive sales and property taxes. They would also end the personal exemption, which reduces the tax liability for every household in Oklahoma.”

As Gene Perry writes on the OK Policy Blog:

This proposal is a bad deal for hardworking Oklahomans. Doing away with broad-based tax benefits like the personal exemption, earned income tax credit, and sales tax relief credit in exchange for a cut in the top income tax rate would actually increase taxes for a majority of Oklahomans. This would hit hardest the poor and middle class families who are struggling most to make ends meet in a tough economy.

In other words, the proposal would essentially raise taxes on the poor and middle class to give yet another tax cut to the state’s most wealthy residents, who have seen their taxes lowered dramatically on the state and federal levels in recent years. The Republicans, of course, will never openly concede their basic plan is to take money from the poor to give to the rich. They only justify the plan in euphemistic terms: it will boost the economy, it will lead to economic development, it will create more jobs. None of this is certain.

In his recent newsletter, State Treasurer Ken Miller, a Republican, seems to argue for prudence when it comes to eliminating the income tax. He writes, “. . . the serious dialogue on tax reform is just beginning . . .” But this prudence—and that might be wishful thinking, too—is countered by Gov. Mary Fallin’s recent statement that she, too, wants to eliminate the state income tax.

The Republicans here talk about protecting “core services” as they cut taxes for the rich, but that’s a term loaded with plural definitions and is directly countered by GOP standard limited-government rhetoric.

Right now, it seems almost certain the Republicans, no doubt joined by some of the dwindling number of Democrats in the legislature, will pass an income tax reduction next session that primarily benefits wealthy Oklahomans. The only plausible events that could stop them at this point is if the state experiences a sudden, drastic drop in tax revenues, which isn’t likely, or if the state’s corporate power structure opposes the plan in the same way it united to oppose TABOR a few years ago.

Perhaps, a wild card is the potential of the Occupy Wall Street movement this spring to help jar people into paying attention to the increasing wealth disparity between the richest 1 percent of people in this country and everyone else. But, again, that’s probably wishful thinking.