Laffer Starts the Conversation on Eliminating Oklahoma’s Income Tax

Laffer Starts the Conversation on Eliminating Oklahoma’s Income Tax
December 8, 2011

Economist Arthur Laffer, the father of supply-side economics, visited Oklahoma’s capital city to provide what could be called a “conversation starter.”

As keynote speaker at the 55th annual joint meeting of three venerable civic clubs (Kiwanis, Lions, and Rotary), Laffer on November 29 laid out a précis of a new policy analysis from the Oklahoma Council of Public Affairs (OCPA) in cooperation with Arduin, Laffer & Moore Econometrics (ALME).

OCPA, an Oklahoma-based free-market think tank, commissioned the study to lay out the implications of a 10-year glide path to elimination of the state income tax.

Job Creation

Bottom line: A complete phaseout of the levy “would create a long-lasting economic boom, benefiting generations to come,” said Laffer in his speech. Highlights include projected net growth of approximately 312,000 jobs more than if current policies stay in place.

The analysis is certain to provoke controversy and conversation “under the dome” at the state Capitol and throughout the state government.

Preston Doerflinger is Cabinet Secretary of Finance in the administration of Gov. Mary Fallin (R). Asked for a succinct reaction, he said, “Let’s get it on.”

With charts and analysis, ALME documented in the study what Laffer shared with the civic leaders: No matter how you slice it, states without income taxes perform better than those with the levy.

More Consumer Spending

In response to a question asked by a luncheon attendee, Laffer predicted Oklahoma would see higher sales tax receipts due to greater consumer spending as income tax rates come down.

He encouraged policymakers to be bold and to think of their children and grandchildren. Public policy should “make it more attractive for firms to hire, and for workers to work.”

Larkin Warner, an emeritus professor of economics at Oklahoma State University, gave Laffer a warm introduction, saying he had always considered him “primarily an economic educator, teaching us all how excessive taxation can work to the detriment of all.”

Response to Tax Rates

Professor Laffer's famous “curve” is based on the observation that income generators respond to tax rates and that there are both “arithmetic” and “economic” effects. Rates too high reduce government revenue, while lower rates provoke new productive activity, higher income, and higher tax revenue that would otherwise never emerge. The “curve” certainly informed Laffer’s presentation.

After the speech, OCPA president Michael Carnuccio said, "Eliminating our personal income tax through a gradual phase-out is the kind of transformational change that will move us from having a better-than-average economic climate to being among the very best states in the nation to do business, create jobs, raise a family, and retire."

Oklahoma has in recent years performed better economically than most states, but it still lags behind states without an income tax.

Oklahoma is performing well in economic growth and boasts one of the nation’s lowest unemployment rates. Traditionally one of the poorest states, Oklahoma is edging upward in a variety of measurements.

State’s ‘Achilles Heel’

But the authors of the OCPA-ALME analysis argue, “Oklahoma’s Achilles’ heel remains the state’s progressive personal income tax. Progressive income taxes filled with special interest loopholes and exemptions are especially bad. Progressive income taxes produce disproportionately large distortions and revenue volatility, and thereby seriously damage the economy. The damage they cause to the economy always reduces other tax revenues.”

To reach the top tier of states in terms of economic growth and prospects, the authors contend the state needs to take additional steps, including a phase-out of the income tax.

Small Cost

The “cost” to tax coffers of the “glide path” to abolition would put state government revenues around $400 million (or about 6 percent) below what they would be in a status quo model.

That gives policymakers “ample time to adjust, meaning only relatively minimal reductions in non-core areas of state spending would be necessary,” Carnuccio said.

He added, “Oklahoma does not need to raise taxes to cut taxes. With hundreds of millions of dollars in waste, inefficiency, and non-core spending in state government, there is plenty of revenue to fund education, transportation, public safety, and a safety net for the truly needy while returning tax dollars to the many Oklahoma families struggling to make ends meet.”

Lowest Tax Burden

The study found an Oklahoma family of four with $50,000 in gross income would save more than $1,300 a year after phase-out of the unpopular levy.

A September statewide survey found two-thirds of likely voters would prefer lower taxes, even if that meant fewer government-provided services.

If the Legislature and Gov. Fallin were to go down this path, Oklahoma would have the lowest tax burden in the lower 48 states a decade from now.

Carnuccio says that is a “a recipe for the best economic environment in the country. Not just better, the best.”

Patrick B. McGuigan (Patrick@capitolbeatok.com) is the editor of CapitolBeatOK.com, an online news service in Oklahoma City.

Internet Info

“Eliminating the State Income Tax in Oklahoma: An Economic Assessment,” Arduin, Moore and Laffer Econometrics: http://heartland.org/policy-documents/eliminating-state-income-tax-oklahoma-economic-assessment