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Keep an Eye on the Trigger Mechanism in Oklahoma’s Tax Cut

2 min readBy: Scott Drenkard

Oklahoma Governor Mary Fallin (R) signed a bill into law on April 28th that could lower the state’s top individual income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate from 5.25 percent to 4.85 percent by 2018, depending on state revenue conditions.

Under S.B. 1246, the state’s top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate will be cut from 5.25 percent to 5 percent in 2016 if general revenue projections for 2016 exceed projections for the general fund made for 2014, and then two years later the rate could fall from 5 percent to 4.85 percent if revenue exceeds projections again. Put another way, the Oklahoma general revenue fund is smaller than it has been in the past, and when it grows again, policymakers want to cut taxes.

Well, ostensibly. Generally trigger mechanisms for tax cuts are good policy that can help neutralize concerns of cuts being “too much, too fast,” but in this case, there’s a catch. As opposed to being based on growth in the total budget, the trigger in the Oklahoma plan is based on the balance of the general revenue fund. Because of that, it is entirely possible that total revenues could grow year-over-year (which they have) while the general revenue fund appears anemic. How? Because the general revenue fund is only made up of what legislators choose to allocate to it, and they can move around the composition of different funds.

That last point is particularly worrisome to Jonathan Small, Vice President for Policy at the Oklahoma Council of Public Affairs. Over email, he told me, “lawmakers have been pre-authorizing spending and diverting funds from the general revenue fund, so it is going to be really hard to hit those triggers.”

His final take on the whole package? “It’s unfortunate that when total state revenues and spending are at all-time highs, and total state tax collections have grown by $1.5 billion since the recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. , Oklahoma lawmakers went back on their promise of a personal income tax cut for Oklahomans beginning January 1, 2015.”

Time will tell if Oklahomans see a tax cut in 2016.

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