Economists sometimes speak of “horizontal equity,” meaning that households with the same economic situation should have the same tax burden. But previous OCPA research has shown clearly that, all else being equal, a two-earner household who uses institutional daycare has a lower tax bill than a one-earner household with a spouse at home.1 In other words, Oklahoma’s tax system lacks horizontal equity for stay-at-home households.
Fortunately, in 2007 Oklahoma legislators passed, and Gov. Brad Henry signed into law, a new tax credit that helps to level the playing field. The new tax credit allows taxpayers to use the child care tax credit for institutional daycare (worth 20 percent of the federal child care tax credit) or take a tax credit worth five percent of the federal child tax credit for a stay-at-home household. This does not fully restore horizontal equity, but it was an important first step.
To fully restore horizontal equity, Oklahoma’s policymakers will have to take a more holistic view of the individual income tax’s ill effects on the family. Five simple steps would more solidly put Oklahoma’s income tax in the family-friendly camp.