Oklahoma business taxes are not a major factor in business expansion or relocation decisions, but the state’s personal income tax remains a challenge cited by many business officials, according to a review conducted by the Legislative Office of Oklahoma Fiscal Transparency (LOFT).
“While there are several factors that contribute to a state’s overall competitiveness, such as cost of living, utility costs, workforce readiness, and infrastructure, a state’s tax policy and overall tax burden play an important role in business opening decisions , expansion or relocation,” the LOFT report said.
The report examines five state taxes that fall almost entirely on business entities rather than individual taxpayers, including the state corporate income tax, franchise tax, withholding taxes, registered agent fees and the gross production tax.
In meetings with a number of stakeholder groups, LOFT officials found that “although competitive corporate tax rates and tax credit programs were a component of choosing a location in the region,” business decisions to relocate or expand were often driven by other factors.
Publicly available data show that the personal income tax—rather than any of the state taxes focused on business—is among the significant drivers of job creation decisions.
The report notes that the Oklahoma State Chamber of Commerce’s 2022 Survey of Oklahoma Business Leaders found that “54 percent of business leaders do not believe their business taxes are too high. They also responded individual income tax should be the main focus to be regionally competitive” [emphasis in the LOFT report].
Caitlin Jasper, program evaluator for LOFT, told lawmakers on the LOFT Oversight Committee that different businesses have different priorities and the personal income tax may be particularly important to one category of business.
“Businesses looking to relocate to Oklahoma may be more concerned about the personal tax burdens on employees and executives,” Jasper said.
The report comes as tax reform debate is expected to be a focus of the 2023 legislative session. Such reform could include a significant reduction or elimination of the personal income tax, potentially offsetting this change in revenue from other changes in the tax code.
Neighboring Texas has long enjoyed strong economic growth thanks in part to its lack of a personal income tax. Critics often note that Texas imposes higher property taxes than Oklahoma, but LOFT officials have found that the difference between the two states is not as stark as it is often made out to be.
“Texas ranks 38th overall in terms of how high their property taxes are,” said Mike Jackson, executive director of LOFT. “Oklahoma is ranked 30th. So the difference is not as big as many people would like to believe.
One business incentive credited with boosting the state’s space industry indirectly highlights the challenges created by the state’s personal income tax.
A personal tax credit for qualified engineers employed by an aerospace manufacturing company in Oklahoma provides these individuals with a tax credit of $5,000 per year for five years. It effectively exempts those individuals from state personal income tax and has been described as a crucial program if employees want to attract aerospace jobs to Oklahoma.
State Question 640, a state constitutional amendment passed in 1992 that prohibits tax increases unless they receive voter approval or three-quarters supermajority support in both houses of the Oklahoma Legislature, also makes Oklahoma more attractive for business, LOFT found.
“Oklahoma has the strongest taxpayer protection law in the nation, requiring the highest threshold for a vote to increase taxes, applying that threshold to all taxes, and providing no emergency exemptions,” LOFT’s report said. “This protection for taxpayers provides something businesses value highly: certainty. No other state in the country can give businesses more confidence that their tax rates won’t be raised.
The report also emphasized the need to curb spending to build up state savings, a policy championed by Gov. Kevin Stitt and adopted by lawmakers during Stitt’s first term.
LOFT’s report notes that Oklahoma’s tax base is ranked as the ninth most volatile in the country due to its heavy reliance on highly fluctuating gross production taxes and corporate income taxes.
LOFT noted that Oklahoma’s five largest industries (by gross domestic product) have not changed over the past 10 years and that oil and gas “remains Oklahoma’s largest industry.” Over the past 10 years, oil and gas’s share of Oklahoma’s GDP has risen from 13.6 to 19.35 percent.
Prudent financial planning requires the state to maintain enough savings to handle future downturns that may be more severe than what other states with less volatile collections may face, officials noted.
“The LOFT study found that states typically require at least 15 percent of their total spending in reserves to weather a recession without cutting spending or raising taxes,” the report said. “Research by the Pew Charitable Trust shows that states that rely heavily on variable revenue sources, such as benefits taxes, should consider holding more reserves as a percentage of their budgets to provide a budget cushion in the event of revenue shortfalls.” Based on total state service spending for FY 2021 ($27 billion), Oklahoma could require approximately $4 billion in general reserves to withstand a major recession.
While $4 billion in state savings would have been considered unattainable before Stitt’s administration, today they are close to becoming a reality. In August, Stitt announced that the state now has approximately $2.8 billion in savings and the government is expected to have $1.8 billion in growth revenue in the upcoming legislative session.
LOFT officials noted that significant state savings can be maintained even when states have no personal income tax.
The states of Alaska and Wyoming have the “largest revenue stabilization funds” in the country, Jackson noted.
“The two things they don’t have — neither of them — is a corporate or personal income tax,” Jackson said.