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Oklahoma Academy tax reform
From left, Sen. Roger Thompson (R-Okmulgee) thanks Oklahoma Academy board chairwoman Rachel Hutchings and 2018 town hall co-chairman Dan Boren for their work to produce a report on tax reform Tuesday, Jan. 22, 2019, at the Oklahoma State Capitol. (William W. Savage III)

How do you teach an 111-year-old dog new tricks?

More than 400 Oklahomans provided input at November’s 2018 Oklahoma Academy Town Hall to help a pooch deep in the weeds and covered with ticks: the Sooner state’s complex and unique tax system.

“Sometimes it’s just mind-boggling,” Rep. Carol Bush (R-Tulsa) said of Oklahoma’s budgetary processes this morning at the State Capitol. “I describe it as an onion. You peel back the different layers because it’s so complicated, and sometimes it’s really stinky, and sometimes it really makes you cry.”

Bush joined Senate Appropriations and Budget Chairman Roger Thompson (R-Okemah) and leaders of the Oklahoma Academy in revealing the nonpartisan public-policy group’s three priority recommendations for tax reform.

Priority one: Reform or repeal State Question 640

A 1992 voter-approved measure, State Question 640 modified the Oklahoma Constitution to require three-fourths majority legislative approval — or a statewide vote — for any revenue-raising measure.

Oklahoma Academy 2018 co-chairman Dan Boren read from the final recommendations (embedded below) Tuesday:

Town Hall participants favored lowering the threshold for raising new revenue from the current 75 percent to 60 percent, which would match the requirement threshold for local school bond proposals. It is recognized that the burdens imposed upon the Legislature to generate sufficient revenue with the current 75 percent threshold results in the adoption of taxes veiled as “fees” to circumvent the SQ 640 restrictions. Often, these fees disproportionately fall upon low and middle-income Oklahomans.

Boren noted that the 2013, 2015 and 2017 Oklahoma Academy town halls also recommended addressing State Question 640, and Thompson emphasized another potential way to modify what Boren called its “asymmetry”: Add a 60 percent legislative majority for cutting state taxes.

“When we talk about tax reform, [this] is a study that needed to be done. I’ve enjoyed reading the book about this. It’s something that is hard to get people really excited about,” Thompson said. “It’s something where people say, ‘We want tax reform,’ but it’s also something where there are a lot of obstacles. One of the greatest obstacles of doing tax reform in Oklahoma — and I’ve been looking at it from different angles since I’ve been here — is State Question 640.”

Bush was more succinct in describing State Question 640’s challenges for the Legislature.

“We have some legislators who weren’t even born when State Question 640 was voted on,” she said.

Priority two: The state should add sales tax for some services

Former Gov. Mary Fallin floated a sales tax reform effort in her 2017 executive budget, but with every head that nodded in favor of taxing services like fur storage businesses, other heads shook to oppose taxing services like child care.

From the Oklahoma Academy report:

The Town Hall recommends that the state should tax services, but that a judicious approach is required. The Town Hall believes a tax on services should be applied across the board, rather than to a list of specified industries. Stacking of taxes must be avoided and in areas where consumers may be paying taxes on services, special care will have to be applied so as to ensure those services would not become too expensive for the vast majority of Oklahomans. Doing so is necessary because of the ever-increasing trend towards becoming a service-based economy in order to capture a broader revenue source. Owing to the overall increase in services in our economy, it is specifically recommended that the tax rate on goods be reduced accordingly if the tax base is broadened to include services resulting in a collective increase in revenue.

Thompson said the complexity of that issue combined with a revenue surplus for an upcoming session that will feature 55 freshmen lawmakers means “education” about tax reform will be his 2019 priority.

“I really believe if we can tax services that are out there — and the debate is going to be which services — but then we could actually lower our tax rate and broaden the base,” Thompson said. “But right now, those are all 75 percent votes.”

Thompson called legislative term limits one of the biggest obstacles to tax reform and said he will be holding weekly informational meetings in his office for new senators in both parties.

Priority three: Greater flexibility for municipalities

Thompson reminded Tuesday’s assembled audience that, currently, cities and towns have little leeway to add sales tax to specific items or services. With property taxes dedicated primarily at the county level, that leaves municipalities relying heavily upon sales tax.

From the report:

[We recommend] authorizing a diverse tax base using ad valorem taxes, millages, implementation of Public Safety Districts, and the strategic use of taxes on services in a broad multi-prong approach to fund municipal governmental services. A wholesale tax overhaul should occur. We should not make structural changes on a line-by-line basis. To eliminate the existing system may seem radical, but is necessary to address the system’s dysfunction as a whole to actually contribute to sustainable long-term planning for Oklahoma’s prosperity.

These recommendations are made because Oklahoma is the only state in the nation where cities and towns are solely dependent upon sales tax for general operations. The recommendations enable giving local control to municipalities and counties, especially enabling services in rural areas.

Bush said Tulsa’s sole reliance on sales tax can trigger a litany of problems.

“When those monies aren’t there and then you start laying off police and firefighters who are our first responders, well, Houston, you’ve got a public safety problem,” Bush said.

Boren said sales tax rates across Oklahoma are some of the highest in the nation.

“It’s a real problem,” he said in an interview. “There have been successes off of sales tax like in Oklahoma City with MAPS, but what happens if you’re not able to do that because your sales tax is so high? So we’ve got to be able to have diverse sets of revenues.”

Thompson agreed, but he said the state should not jeopardize its compliance with the national Streamlined Sales and Use Tax Agreement, which 23 states follow for benefits such as more efficient online sales tax collection.

“I serve on the Streamlined Sales Tax Governing Board, and one of the most exciting meetings I sat through was about whether we were going to tax adult diapers or not because there needs to be somewhat of a standardization out there,” Thompson said.

Boren noted that state leaders must consider these types of tax reform despite a rosy fiscal outlook in 2019.

“I think it’s important that even though we’ve come out of a crisis, there’s always going to be another crisis,” he said. “I was pleased to see Gov. Stitt come out and say that we need to make sure we have a larger Rainy Day Fund. We need to be prepared for these crises. It could be 10 years away, it could be six months away. We just don’t know.”

Oklahoma Academy tax reform
From left, Rep. Carol Bush (R-Tulsa) speaks while Oklahoma Academy board chairwoman Rachel Hutchings and 2018 town hall co-chairman Dan Boren listen Tuesday, Jan. 22, 2019, at the Oklahoma State Capitol. (William W. Savage III)

Read the newest Oklahoma Academy tax reform priorities