A rallying cry for many of those who oppose raising revenue in Oklahoma to increase teacher pay and improve education funding has been that we need to find wasteful spending through audits first. Well, the audit is in on Oklahoma’s capital gains deduction, and it’s the single most expensive, wasteful state policy anyone has found.
Oklahoma’s capital gains deduction is a tax break that costs more than $100 million each year. According to data from the Oklahoma Tax Commission, in 2014 nearly two-thirds (64 percent) of the tax break went to just 824 households with incomes over $1 million. The average tax break for these households was nearly $80,000 each. Meanwhile, only 6 percent of the deduction went to the large majority of households making less than $100,000.
We might accept such a deeply skewed benefit if we had evidence that it was helping to boost the overall economy. The reality is just the opposite: Economic development experts working with Oklahoma’s Incentive Evaluation Commission found that the deduction cost $474 million from 2010 to 2014 while creating just $9 million in revenue growth. That constitutes a net loss of $465 million.
Even those troubling statistics may substantially understate the cost of the capital gains deduction. Corporations in Oklahoma can also claim this deduction, but a footnote in an Oklahoma Tax Commission report explains that, “The tax expenditure estimates in this report, for deductions and exemptions that are available for both corporate and individual filers, reflect only individual income tax due to the data limitation.”
In other words, corporations can claim the capital gains deduction, too, but we have no idea how much that part of the tax break costs the state. This is more evidence that Oklahoma is giving out hundreds of millions in tax breaks with very little oversight of who gets the money, how recipients use the money or whether the tax break is creating any benefit for the state as a whole.
That’s why Sen. Dave Rader (R-Tulsa) sponsored SB 1086 (full text embedded below) to repeal this deduction and why his bill passed the Senate with bipartisan support. Rader said about the capital gains deduction, “It’s not a good policy. We picked the winner with this. We benefited the few at the expense of many.”
Unfortunately, House leaders have so far refused to allow SB 1086 a vote in their chamber. Opposition has emerged from lobbyists for the agriculture industry who want to make sure capital gains income from the sale of Oklahoma cattle and farmland stay untaxed by the state.
We can debate the merits of a targeted tax break for agriculture, but that’s hardly a good excuse for allowing the whole tax break to go unreformed. The vast majority of Oklahomans in rural and non-rural areas are not receiving any benefit from the capital gains deduction, and lawmakers should not continue an untargeted tax loophole just so some portion of the benefit might go to a few cattle operations or farms.
We have plenty of examples from other states for how to reform this deduction. Only 10 other states have any kind of tax preference for capital gains, and all of those states have more safeguards and limitations on their deductions than Oklahoma. Iowa offers a capital gains deduction that is carefully limited to benefit agriculture. Virginia designed their capital gains deduction to encourage investment in small technology businesses. Colorado offers a general capital gains deduction but limits how much can be deducted to no more than $100,000 per household. A similar cap in Oklahoma would save two-thirds to three-fourths of the cost while affecting only a small number of extremely wealthy households that are taking home huge gains.
When combined with the revenue measures already approved by the Legislature, capital gains reform would bring more than enough new funding to meet the needs identified by teachers and other education advocates. It would ensure a more broad-based tax system and put the whole state budget on a better foundation going forward.
If lawmakers are willing to bring it to a vote, reforming the capital gains deduction should be obvious.