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From Governing’s
In the wonderfully named town of Okay, Oklahoma, for example, it’s hard to convince citizens that there’s anything okay about the sales tax. Theirs is 10.35 percent — 4.5 percent goes to the state, 1 percent to Wagoner County and 4.85 percent to the municipality, which is pretty much forced into this position by the failure of the property tax to cover its operating costs. “The typical city, more or less, has a total sales tax of 8 or 9 percent,” says Alexander Holmes, a professor at the University of Oklahoma and former secretary of finance and revenue. “It’s getting to the point where you’re actually having a negative effect on economic development.”
Reliance on the sales tax may be more dangerous to fiscal health here than it is elsewhere, because Oklahoma has a duty-free zone right within its borders. The state is home to 39 Indian tribes, and its Native American population is over 270,000, second only to California’s. Items purchased on Indian land are subject to limited state sales taxes (in many cases none at all), and the tribes are happy to take advantage of that fact. The Cherokee Nation, for example, whose headquarters is located 30 miles east of Okay, sells cigarettes and gasoline, along with other convenience-store items. Recent estimates show that nearly a third of the cigarettes in the state may be sold at Indian reservations. The obvious solution is to establish a better balance between sales and property taxes, but that won’t be easy. In fact, it may be almost impossible. Property tax millage rates are set in the state constitution. What’s more, under Proposition 640, any increase in taxes requires either a three-quarters supermajority in both houses of the legislature or a vote of the people. Since the passage of Prop 640 in 1992, there have been no tax increases at all. This year, however, Prop 640 may be put to the test. The state faces a budget shortfall of almost $600 million, or 11 percent of its general fund. Things would be even worse if it weren’t that the legislature can appropriate only 95 percent of the state’s estimated revenue, and that a tax cut passed in the 1990s was stopped last year under an automatic budget trigger. The state has been through situations like this before — in fact, not so long ago. Back in the early 1980s, the price of oil fell from $35 a barrel to $9, wiping out more than 900 of Oklahoma’s 1,000 oil rigs and many banks and other businesses as well. At that time, the state decoupled its income tax from the federal tax code, froze deductions and exemptions at $1,000, and wound up with what to all intents and purposes is a flat-rate tax on incomes. But while it may be flat, it isn’t low. For individuals, the top marginal rate of 7 percent rate kicks in at incomes just over $10,000, and the state’s average salary is $28,000. It’s no surprise that there’s a great deal of discontent with the current income tax structure. Tax reform is a perennial topic of debate in Oklahoma, and last year the legislature discussed numerous changes. Some think that the flat tax is a good idea, and the problem is simply the high rate. They would like to move from 7 percent down to 4.5. Others would rather increase the deductions and exemptions to create a more graduated system. Still others want to eliminate the income tax completely. One legislative proposal that made the rounds last year suggested ditching the whole tax code and simply replacing it with one similar to the code used in Texas. This would be an admission of defeat if there ever was one. Yet another source of dissatisfaction in Oklahoma is the franchise tax. It is not a particularly onerous levy: The state charges only $1.25 for each $1,000 used or invested in an Oklahoma business, and brings in a relatively skimpy $40 million per year. But it’s complex and demands considerable paperwork even for those with a small liability — or no liability. Many corporations in Oklahoma now pay more to have the tax prepared than they actually pay the state. Citizens in Oklahoma have seen some improvements made to the tax appeals process — although it’s still far from ideal. Last year, the legislature repealed a law requiring that disputed tax bills be paid in full while an appeal is pending. The deadline for challenges was also extended from 30 days to 60 days. That was good news. But the system still does not support any adjudicating body outside of the tax commission. Meanwhile, the process of revenue collection has been hurt by budget cuts. Last year, the state tax commission announced that all employees earning more than $25,000 would be furloughed for three days. Two more furlough days are already on the calendar for 2003. The state also has decreased the budget for travel, hampering the work of some auditors. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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klahomans have always been a little obsessive about property — dating back to the famous land rush that opened up settlement in 1889 — and part of that ethos is a distinct aversion to taxing it. Among the 50 states, Alabama and New Mexico are the only ones that have lower property taxes per capita. That may be the way Sooner State taxpayers prefer things, but it causes them trouble in other ways.