Gov. Mary Fallin details state personal income tax reduction plan

Oklahoma couples making more than $70,000 a year would see their state personal income tax rate drop nearly in half and families making up to $30,000 a year would pay no state personal income taxes under a plan Gov. Mary Fallin proposed Monday to lawmakers.

"Over time, our income tax would be phased out for every Oklahoman," she said.

Fallin provided details of her personal income tax reduction in her State of the State address to a joint session of the House of Representatives and the Senate. The 49-minute speech kicked off this year's legislative session, which runs through late May.

Fallin called for reducing the number of brackets in the personal income tax code from seven to three. The income brackets range from individuals making up to $1,000 to individuals earning $8,700 and over. The rates range from one half of 1 percent of taxable income to 5.25 percent.

The second-year GOP governor, who received applause 45 times during her speech, received applause on her income tax plan from Republican legislators, who control both the House and the Senate. Democrats were silent.

"There are still losers in the governor's plan," said House Minority Leader Scott Inman, D-Del City. "If you're a working family that makes $40,000 to $50,000 a year with children, odds are you will see a tax increase nevertheless under the governor's plan. We in the House Democratic caucus refuse to allow the budget to be balanced on the backs of working families in Oklahoma, and we will oppose that plan at every opportunity. "

House Speaker Kris Steele, R-Shawnee, will file a bill that contains the governor's proposal, a spokesman said.

Steele said he is reviewing the plan, along with income tax-cutting plans proposed by lawmakers.

"All income tax plans will get careful consideration as we determine the best way to achieve a growth-spurring, responsible tax reduction," he said.

About the plan

Fallin's plan, which would take effect Jan. 1, calls for couples making up to $30,000 a year to pay nothing in state income taxes. Those making $30,000 to $70,000 a year would have a personal income tax rate of 2.25 percent. Families making more than $70,000 a year would see their rate drop from 5.25 percent to 3.5 percent.

For individuals, the plans calls for no state income tax on those making less than $15,000 a year, a tax rate of 2.25 percent for those who earn $15,000 to $35,000 and a 3.5 percent rate for those making $35,000 and above.

Personal income taxes bring in about one-third of the state's legislatively appropriated budget. For this fiscal year, personal income taxes are estimated to bring in $1.9 billion of the $6.4 billion budget.

The Oklahoma Policy Institute, a nonprofit group that analyzes state government spending, criticized Fallin's proposal for reducing a big chunk of the state's revenue and for unfairly increasing taxes on some low and moderate-income residents.

"Gov. Fallin's plan would bust a huge and permanent hole in the budget," said David Blatt, director of the Oklahoma Policy Institute. "After three straight years of cuts to services, further tax cuts should not be a higher priority than educating our children, training our workforce, fixing our infrastructure and ensuring public safety."

Fallin proposed to pay for the income tax cuts by eliminating tax loopholes, carve-outs and other exceptions. She calls for eliminating 39 tax credits and the personal exemption deductions, which costs the state about $133 million. Nearly all Oklahoma taxpayers claim personal exemptions, according to the Oklahoma Tax Commission. Of about 1.8 million returns filed in 2009, the latest year that information is available, about 1.5 million taxpayers claimed personal exemptions of $1,000 per eligible household member.

Her proposal also calls for eliminating the child care income tax credit. In 2010, the child care tax credit was claimed on 362,470 income tax returns, according to the Tax Commission. It resulted in the state returning $28.9 million to those taxpayers.

Blatt said her proposal to stretch out the tax brackets to reflect modern income levels is a step in the right direction.

"However, by doing away with the child tax credit, sales tax relief credit and other tax preferences that help hundreds of thousands of Oklahomans, the governor's plan would still unfairly increase taxes on many low- and moderate-income seniors and families with children."

Jerrod Shouse, state director of the National Federation of Independent Business, said Fallin's plan to reduce the top income tax rate to 3.5 percent and cutting the tax brackets is welcome news for Oklahoma's small business community.

"This simplification of the tax code means that our state's small business owners can spend less time meeting with their accountants trying to figure out complicated schedules and deductions, and more time back at their businesses working to grow Oklahoma's economy," he said. "Many new small businesses, especially in this economy, start off by making very little profit. By eliminating the income tax on those making $15,000 or less, that may mean the difference between a small business staying open rather than shutting their doors for good."

Revenue loss

Fallin said the lost revenue by reducing the income tax rates also would be paid for by continuing efforts to eliminate government waste and making government more efficient and effective. New revenue growth also will pay for the tax cuts, she said. She is hoping legislation passed last year that is intended to improve the state's business climate, such as changes in workers' compensation and alterations in the way lawsuits are treated in court cases ranging from personal injury to medical malpractice.

Fallin's income tax plan will cost the state about $1 billion in revenue, said Secretary of State Glenn Coffee, who serves on the governor's Cabinet and serves as a chief policy adviser. Taking into account Fallin's projections, lawmakers still will have to find about $100 million in the 2013 fiscal year, which starts July 1, to pay for it and more than $300 million in the 2014 fiscal year to fund it, he said.

Under the new rates, a middle class couple making $40,000 a year would pay 37 percent less taxes in 2013, she said. Fallin promised additional income tax cuts in future years.

After the proposed personal income tax cuts would take effect in 2013, income tax rates would be cut by an additional quarter point in any year in which the state sees 5 percent revenue growth, Fallin said.

"That growth trigger gives the state a safety net should we experience another major economic downturn," Fallin said.