Tax Cuts Needed, Experts Tell Panel

National experts told state lawmakers today that additional tax cuts must be approved if Oklahoma is to remain competitive with other states.

"Throughout this study, we've focused on the need to keep Oklahoma's tax climate competitive with surrounding states," said Rep. Randy Terrill, R-Moore. "We want to determine if additional tax cuts are necessary and, if so, what shape they should take to be best promote economic development, growth and job creation. Today's testimony indicates, once again, that we have room to improve."

Donna Arduin, a partner with Arduin, Laffer & Moore Econometrics, told lawmakers that some taxes imposed by Oklahoma discourage business investment in the state. For example, she noted that Oklahoma's 6.65-percent capital gains tax rate is one of the highest in the region. "Compared to Oklahoma's neighbors, Arkansas is the only state with a higher short-term capital gains tax, and no neighboring state taxes long-term capital gains at a higher rate," Arduin said. "Nationally, Oklahoma's capital gains taxes are around 30 percent higher than the average state capital gains tax."

She noted that capital gains taxes "discourage investment and, due to their volatility, lead to significant revenue swings for the state."

Because the state generates nearly 85 percent of revenue from other sources (such as income, sales and severance taxes), Arduin said the "minimal amount of revenue that Oklahoma raises from capital gains taxes come at a high economic cost."

Arduin also noted that Oklahoma's top marginal personal income and corporate income tax rates "are too high - especially compared to neighboring Texas and Colorado."

She urged lawmakers to lower those rates "to bring them closer in line with neighboring Texas and Colorado."

Although Oklahoma has experienced decent economic growth rates in recent years, that activity has not created new jobs in corresponding numbers: "Overall employment growth in Oklahoma has barely outpaced the average employment growth in the country even though the state's economic growth rate since 2002 is the sixth-fastest in the nation," Arduin said. "From a jobs perspective, Oklahoma can do better."

Chris Atkins, senior tax counsel with the Tax Foundation, also told lawmakers that several state taxes are a barrier to economic growth: "Compared to many state tax burdens, Oklahoma is doing 'okay,' but there's definitely room for improvement," Atkins said. "If Oklahoma is going to enhance its competitiveness, you need to repeal the franchise tax, inventory tax, and reduce the state sales tax rate."

He said the inventory tax actually punishes businesses for operating in Oklahoma. "Basically, if a business chooses to store inventory in Oklahoma, they're punished," Atkins said. "The tax is a huge incentive for businesses to store inventory in other states even if they plan to ultimately sell it in Oklahoma."

Neither the franchise tax nor the inventory tax generates a large share of state revenue, making their repeal relatively easy while making Oklahoma more competitive with surrounding states, he said. "Most of your regional competitors don't have a franchise or inventory tax and those that do are trying to eliminate them," Atkins said.

Oklahoma's combined state and local sales tax rate is 6.89 percent on average, the third-highest rate in the region, Atkins said. "That tax can have a big impact on retail activity, particularly in your border areas," Atkins said. "At the same time, it affects business-to-business transactions, which directly increases the cost of doing business in Oklahoma."

To reach the regional average, he urged Oklahoma lawmakers to reduce the state sales tax rate by at least 0.5 percent.

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