Since 2021, Oklahoma lawmakers have made 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. competitiveness a focus of legislative sessions. In 2022, the Sooner State ranked 31st in our State Tax Competitiveness Index. Today, Oklahoma boasts an overall rank of 21st thanks to positive reforms, including reductions in corporate and 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. rates, the elimination of the state’s capital stock tax (franchise tax), and the repeal of the marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. . The state was also the first to adopt permanent full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. at a time when the federal provision was phasing down (a competitive advantage that may be reduced now that the federal policy has been restored in full and without expiry). The state is now more tax competitive than all its neighbors except Texas (7th) and Missouri (13th).
Governor Kevin Stitt (R) used the 2025 State of the State address to announce a plan to reduce, and eventually eliminate, the individual income tax. Ultimately, the legislature was able to settle on a compromise package, which was signed into law in May 2025. Through HB 2764, Oklahoma’s top marginal rate will be 4.5 percent, down from 4.75 percent, as of the 2026 tax year. Additionally, the state’s six individual income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. will be consolidated into three.
The bill further created triggered rate reductions of 0.25 percent each, contingent on revenue availability. Lawmakers crafted fiscal safeguards, requiring the state Board of Equalization to certify that benchmarks have been reached. Moreover, triggered reductions take effect after two years, giving the state sufficient time to make necessary budget adjustments. In the intervening period, if a revenue failure is declared, a scheduled rate reduction is automatically nullified.
Had HB 2764 been in place at the time of our last Index, the state’s overall rank could have improved to 20th, and the individual income tax component ranking could have improved from 28th to 24th, with further improvements as rates continue to phase down. Numbers aside, the directional changes show that the bill is competitive and represents sound tax policy. As we have noted, lowering rates and simplifying tax structures can help recruit and retain residents and ease the burdens of tax administration.
The reforms to date are laudable, but there is still work to do. Lawmakers have proven thoughtful when considering the cost of reforms and future revenue. With uncertainties surrounding state finance following passage of the federal One Big Beautiful Bill Act, lawmakers may opt to focus on achieving greater tax competitiveness through low-cost options. Recently, we updated a 2021 study that offered several reform options. Some of them would prove to be bold, comprehensive approaches, while others were standalone policy updates. Nevertheless, all would benefit Oklahoma taxpayers, individuals and businesses alike. Fortunately, regardless of the economic environment, lawmakers have options.
The Oklahoma individual income tax is not indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , a flaw that was not corrected by HB 2764. This creates a phenomenon known as bracket creepBracket creep occurs when inflation, or real income growth, pushes taxpayers into higher income tax brackets. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state levels—are adjusted for inflation. Over time, bracket creep can increase how much income tax people owe as their income grows, either due to inflation or economic growth. To prevent inflation-driven bracket creep, many tax provisions at the federal and state levels are adjusted for inflation. , which occurs when a taxpayer is pushed from a lower bracket to a higher one when nominal income rises, but, due to inflation, real income does not, or may even decline. This means that Oklahomans are subject to unlegislated tax increases based on economic conditions. This is uncompetitive but easily resolvable.
For corporate taxpayers, the state’s tax code includes several nonneutral corporate incentives. When certain taxpayers are favored over others, it makes it harder for lawmakers to lower the single corporate rate for all payors. Additionally, Oklahoma fails to conform to the federal depletion provisions, which are like depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. rules but applied to natural resources. Conforming to the federal code in this regard would provide greater simplicity.
The Senate Appropriations Committee proposed eliminating the state’s throwback rule, which attributes “nowhere income” to Oklahoma when a seller lacks sufficient nexus to be taxed on the income resulting from sales in a separate, destination state. This results in taxation in the wrong state and at the wrong rate. Repealing this provision would be a competitive reform and help simplify Oklahoma’s tax code.
While Oklahoma eliminated its capital stock tax, the code still taxes business inventory, which is levied regardless of profitability. These taxes are nonneutral and disproportionately affect those businesses with larger inventories, causing taxpayers to make inefficient timing and location decisions. Repealing this tax would prove to be a competitive and pro-growth reform.
As lawmakers harness the gains of recent years, they would do well to ensure that economically harmful policies are not pursued. For example, Oklahoma’s property taxes are relatively low. Per US Census data, only Arkansas and Alabama collected less state and local property taxes per capita. Nevertheless, lawmakers have called for an interim study to examine eliminating the tax altogether, joining several other states that are actively considering similar measures.
Nationwide, over 70 percent of local funding comes from the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. . In Oklahoma, the tax accounts for 56 percent of local tax revenue and 21 percent of all revenue. Eliminating it would mean compromising the local services that Oklahomans rely on each day, or shifting to far more economically harmful forms of taxation. Replacement revenue sources, whether levied at the state level and distributed to localities or imposed by the localities themselves, also pose challenges of geographic distribution, as no alternative local tax will yield adequate replacement revenue in all jurisdictions, and state distribution formulas often create perverse incentives for localities.
A study conducted in Indiana considered replacing the property tax with an income or sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . The study concluded that shifting from a property tax to an income tax would cause gross state product to fall by 2.8 percent, and by 2.7 percent when replaced by a sales tax. Despite its unpopularity, the property tax is relatively efficient. Shifting to other forms of taxation to compensate for revenue loss would cause economic harm and leave Oklahomans worse off in the long run. By comparison, Texans pay significantly more per capita in property taxes, yet Texas remains a top 10 state for net in-migration (slightly edging out Oklahoma), largely due to the state’s competitive tax code.
If lawmakers would like to provide property tax relief, they should choose to enact strong levy limits that constrain overall revenue growth, adjusting for inflation and population growth. This is a much more neutral and stable way of providing relief without compromising local financing. Levy limits ensure adequate funding but prevent local governments from reaping a windfall during periods of surging valuations. They are far less distortionary than other relief options.
In recent years, Oklahoma has prioritized competitiveness and made concerted efforts to ensure its tax code features the principles of sound tax policy: simplicity, transparency, neutrality, and stability. Lawmakers and the administration should be proud of the gains the state has made and look to build on past successes.
Despite economic uncertainties, the state has options. Failing to seize the moment could see the Sooner State fall further behind regional juggernaut Texas. Now is not the time to rest on past reforms or consider harmful economic policies that could set the state back for many years to come. Rather, lawmakers should continue to pour their energies into reforms that benefit the state and its residents.
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