Okla. Passes $600 Million Income Tax Cut

Published August 1, 2006

During a special session of the Oklahoma Legislature in June, lawmakers approved a $600 million tax cut, the largest tax cut in the state’s history. The new $7 billion budget also sets a spending record.

The bill reduces the top tax rate on personal income from 6.25 percent to 5.5 percent over the next three years, and if the economy continues to grow, the rate will be lowered to 5.25 percent in subsequent years. In addition, the standard deduction will be more than tripled, to match the federal deduction, and will be indexed for inflation. Indexing the standard deduction to keep up with inflation will protect Oklahoma taxpayers from the devaluation of this deduction that serves as an automatic tax hike during inflationary times.

When fully implemented in four years, the tax cut will total $600 million. The governor signed the budget June 28.

Estate Tax Ends

As part of the tax cut package, a four year phase-out of the Oklahoma estate tax was approved. The tax will end in 2010.

The legislature had deadlocked in late May when the leadership in the Democrat-controlled Senate refused to pass the tax cut agreement reached by Gov. Brad Henry (D) and legislative leaders in the Republican-controlled House. The special session was needed to break the deadlock.

The legislature and governor were under strong pressure to reduce taxes. Neighboring Texas has no income tax and recently enacted a major property tax cut, which tax cut advocates in Oklahoma pointed to as hurting the Sooner State’s economic competitiveness. In addition, last November Oklahoma voters overwhelmingly rejected a proposal to raise gasoline taxes. Eighty-seven percent of the state’s voters opposed the gas tax hike, a fact not lost on the state’s lawmakers.

Highways, Teachers Get More

Additional spending for highways, a $3,000 pay hike for teachers, and a variety of other increased state spending was approved as part of the total budget package. Solid revenue growth left Oklahoma in a position to enact significant tax cuts while also increasing state spending.

Several House members fought unsuccessfully to reduce the spending increases. State Rep. Mike Reynolds (R-Oklahoma City) dramatically ripped apart the Oklahoma Constitution while telling House members the budget violates the document.

State Rep. Randy Terrill (R-Moore) complained on the House floor the budget “is clearly tax cut light and spending increase heavy. It sickens and disgusts me how much government has grown in the last two years.”

Karl Peterjohn ([email protected]) is executive director of the Kansas Taxpayers Network.