With Democrats holding Congress and the White House, most officials expect states to receive another round of federal bailouts soon. That will mean hundreds of millions of dollars going into the Oklahoma government.
Without a doubt, this federal policy is wasteful and will encourage state governments to be wasteful too. But Oklahoma can make lemonade out of those lemons. With federal funds flowing into our state, Oklahoma lawmakers should also use unrestricted state funds to strategically lower Oklahoma income tax.
This will put the state on a path to strong economic growth and job creation, and will make us more economically competitive against Texas, Florida, and Tennessee. The data makes it clear that these three states’ biggest advantage over Oklahoma is that they don’t levy personal income tax.
Some Oklahoma Capitol officials know that taxes are a factor in this competition, but there is a temptation to focus on state corporate tax rather than income tax. Personal income tax is most important, however, as decisions about where a business is ultimately based largely on its impact on employees, their lives and livelihoods. People don’t work to pay taxes.
And when federal job creators and business leaders are attacked who control where millions of jobs are, personal income taxes play an even bigger role.
If you don’t think personal income taxes matter, remember that at the urging of state and local corporations, Oklahoma lawmakers created a specific tax credit that often removes personal income tax liability for aerospace engineers. Chambers of Commerce and aerospace company employees said the credit is necessary if Oklahoma is to compete with two states that are aerospace giants, Washington and Texas, which have no income tax.
Because employee compensation is, in most cases, a valid expense that reduces corporate taxable income from dollar to dollar, it rewards employees as they make capital investments and increase the compensation of all employees, and protects them from corporate tax liability. In states with personal income tax, however, workers are penalized if a company provides generous pay increases.
It should not be ignored that income tax is particularly criminal for entrepreneurs setting up start-up businesses, as small business incomes are often subject to income tax rather than corporation tax.
Some will want to spend every penny available on growing the state government. This will only put Oklahoma on a path of unsustainable spending and ultimately lead to tax hikes as we saw in 2018. And that will make the state less attractive for job creation and create a downward spiral.
Instead, now is the time to act boldly and prudently. Now is the time to not only make Oklahoma competitive with Texas, but also create a place where long-term growth becomes the norm, not the exception.
Jonathan Small is President of the Oklahoma Council of Public Affairs