Oklahoma income tax plan pressures Arkansas’ tax future

Oklahoma's Governor is pursuing a radical overhaul in the Sooner State's personal income tax structure and Arkansas policy makers say the Natural State will feel the pressure to respond.

Earlier this month, Oklahoma Governor Mary Fallin (R) proposed the Oklahoma Tax Reduction and Simplification Act with a goal of enacting it by Jan. 1, 2013.

"Our plan is bold. It cuts income taxes by a significant amount for a majority of Oklahomans in every tax bracket and of every income level," Fallin has said. "The Oklahoma Tax Reduction and Simplification Act is what I like to call a 'game-changer.'"

OKLAHOMA OVERVIEW
In short, the proposed law reduces Oklahomans seven-tier income tax system to three.

Married couples filing jointly making less than $30,000 would pay no income taxes, or zero percent. A couple making between $30,000 and $70,000 would pay a 2.25% tax rate. Those making more than $70,000 would be taxed at a rate of 3.5%, down from 5.25%.

Fallin's plan eventually eliminates the income tax altogether by proposing a quarter-point reduction in taxes each year after the restructure. However, the cuts are tied to a revenue growth trigger of 5%. In part, Fallin said the trigger mechanism protects state services from recession pressures.

"By implementing our tax plan, we would immediately become a more attractive state to do business in. Oklahoma would have one of the lowest income tax rates in the country and the lowest in our region, second only to Texas." Fallin wrote in this report.

The idea Fallin proposed is not a new one; it is a topic she's discussed for months. In large part, it is in response to Texas' 0% personal income tax. Border states Kansas and Missouri are debating reductions and eliminations to their personal income tax structures. Elimination of Oklahoma’s income tax — although that is not what Fallin has initially proposed — could create tax choices for Fort Smith, Siloam Springs and other Arkansas cities bordering Oklahoma.

ARKANSAS EFFECT
Individual income tax collections have been the strongest source of revenue strength for Arkansas in recent years, according to the Arkansas Department of Finance and Administration.

In the last fiscal year, personal income taxes totaled $2.739 billion, accounting for roughly 48% of overall gross state revenue. The revenue category was up 6.2% from the previous year and exceeded state forecasters' predictions by 2.3%.

In the first 7 months of the current fiscal year, that income tax category has brought in $1.554 billion, about 47% of total state gross revenue. Year-to-date, income taxes are 4.4% above last year's collections and 2.6% above forecast.

"I'm more concerned about Arkansas than Oklahoma, but it's hard to ignore what our surrounding states are doing regarding tax policy. We must be competitive," said Rep. Davy Carter, R-Cabot, chairman of Arkansas' House Revenue and Tax Committee.

Carter has proposed a total review of all Arkansas tax exemptions and exclusions with an eye toward restructuring Arkansas' tax system and lowering personal income taxes. After this month's fiscal session concludes, Carter plans to begin hearings in the interim to lay the groundwork for reforms in the 2013 General Assembly.

Next week, Carter will hold a Revenue and Tax committee hearing during the fiscal session to get organized for the interim work.

"I am excited about the Arkansas General Assembly working together over the coming months to see how we can improve our tax system," he says. "There are a lot of good ideas out there and I look forward to being a part of the process."

Gov. Mike Beebe (D), who has pushed a tax cut agenda centered around eliminating the food tax during his six years in office, has praised Carter's efforts. He thinks the review is warranted, but is not sure what it could lead to.

“I love Davy Carter’s (proposal)” Beebe said last month. “His proposal to look at every aspect of the tax code – good, bad, and indifferent – and look at it in toto is a responsible way to do it. So I am fully supportive of what he is trying to do.”

Senate Revenue and Tax Committee chairman Larry Teague, D-Nashville, is also the incoming President Pro Temp of the Senate. He agrees that Oklahoma's move will ratchet up the heat to be bolder in the 2013 session.

"I think we're always looking to find a way to make our tax structure friendlier for the taxpayer and more competitive in the great scheme of things," Teague said. "Clearly, if one of our surrounding states is more competitive, then that will put some pressure on us."

Teague cautions that a lot of ideas are likely to be discussed entering the interim period and 2013 session. It may be too soon to tell which ideas, if any, will gain momentum.

"I think there's interest and appetite for doing something with our whole tax structure here in Arkansas. What we don't have is any surplus big enough to move around and get us over the hump," Teague said. "It (the Oklahoma plan) certainly will create some more interest in remaining competitive with our neighboring states."