Oklahoma proposes phasing out Corporate Income and Franchise Tax

Jul 07, 2022
Income & franchise tax State & local tax Tax policy

Recently, Oklahoma legislators introduced two bills in the state’s third special session of the year that would if enacted, significantly reduce the state’s business tax burden. House Bill 1021 would phase out the state’s corporate income tax by 2030. Introduced by Rep. Kevin Wallace, the chair of the House Appropriations and Budget Committee, the bill would phase out the state's corporate income tax rate beginning in the 2024 tax year by half a percentage point, from 4% to 3.5%. The rate would be reduced each year after until it reaches 0% beginning in 2030. House Bill 1022, introduced by Speaker of the House Charles McCall, would suspend the state franchise tax beginning Nov. 1, 2022. The state's franchise tax is currently $1.25 levied for every $1,000 of capital a business has allocated or employed in the state. Other tax cut proposals being considered include personal income tax reductions across every bracket and suspension of the sales tax on groceries. No fiscal notes or other revenue impact documents have been published at the time of this article as these bills were introduced recently in the latest special session.

RSM’s Washington National Tax (WNT) state and local tax team weighs in on these measures from a policy perspective.

David Brunori: As someone who thinks all state corporate income taxes should be repealed, I believe that the Oklahoma measure to phase out the tax represents sound policy. The corporate income tax does not work well. And it will never work well. It raises very little money and consumes an inordinate amount of government and taxpayer resources. The tax does not add to the progressivity of the system as there is much evidence that the state corporate income tax falls mainly on labor in the form of lower wages and consumers in the form of higher prices. And, with the movement toward single sales factor apportionment, the tax cannot be justified as a way to make corporations pay for public services. Ultimately, I think repeal will make Oklahoma more competitive and lead to more economic growth.

The case against the franchise tax is even stronger. Only fifteen states still impose a franchise tax and three of those are phasing it out. The tax punishes companies for investing in Oklahoma. The more plant and equipment you have in the state the greater your franchise tax bill. I am not sure under what scenario that could ever be a good thing. The franchise tax is simply a bad tax. And Oklahoma would be wise to join the legion of states that have repealed it. 

Mo Bell-Jacobs: State tax cuts have been popular lately as over a dozen states since January 2021 have cut corporate income tax rates, personal income tax rates, or sometimes both. Flush with revenue from the infusion of federal pandemic relief dollars, state budgets have looked better than they have in years and many legislatures seized on the opportunity to “give something back” or gain a few points in the polls with mostly minor tax relief. The problem is this: nothing lasts forever. Economies are cyclical and if you have read a newspaper, taken a look at the market, or watched CNBC you would know the economy is turning—perhaps in slow motion, perhaps on the precipice of a loud thunk. Regardless, no more pandemic relief is coming to the states once ARPA (American Rescue Plan Act of 2021) funds are spent and depleted. No more cash payments to individuals to engage in the retail economy. A once-in-a-lifetime job market can reverse at a moment’s notice as those large retail purchases are curbed and first-since-the-pandemic vacations are cut back. There is something in the air and my cynical nature combined with following state budgets for over a decade tells me the states need to be preparing, not giving tax dollars back.

Oklahoma needs the hundreds of millions of dollars the state generates in corporate income tax. And while almost half of the states are outpacing their pre-pandemic growth trends, Oklahoma is not one of those states (although recent collections have been positive). With an already reduced corporate income tax rate for 2022, now is not the time for such a large hit to revenue. Additionally, with likely one-time or one-off surpluses, any rate reduction schedule to the corporate income tax will have to be balanced with cuts to other areas of government. The state should consider the next two or three years, not the past two or three.

That said, I cannot in good conscience argue for preserving the franchise tax. I will concede that David is right. The tax hurts investment and essentially brings in little meaningful revenue. Time to kick it to the curb.

Anna Cronic: We’re seeing more states either propose or pass legislation to phase out state corporate income tax, and I think it’s important to really break down the thought process behind these tax cuts. The proponents of these tax repeals point largely to the prospect of increased economic growth, which does, in theory, make sense. However, as someone who always needs to see the data before weighing in on even the most logical sounding of theories, I was interested to see how much empirical data exists on the actual measured impacts of reductions in corporate income tax rates on economic growth. There really are not many robust, publicly available studies focused specifically on the impacts of state-level corporate income taxes; the most frequently cited seems to be a study from 2018 that examined state corporate tax changes between 1970 and 2010 and found that a one-percentage-point decrease in corporate income tax rates correlated with 0.2% and 0.3% increases in wages and employment, respectively. The effects at least seem to be in a positive direction and do support the other existing evidence that wages and employment tend to bear the cost of corporate income taxes, as David notes in his response, though it’s hard to assert that a single empirical study narrowly focused on selected variables is enough evidence to support the entire concept of eliminating corporate income tax. Other researchers focused on measuring the impacts of repealing individual income taxes have found mixed results on economic growth, and many point to the fact that reducing income tax collections can force states to seek revenue from other tax types, such as sales and use tax, that are regressive taxes which place a disproportionate burden on lower-income households.

In addition to looking at the overall merits of the theory behind the proposal, it’s important to consider the potential expected impacts for Oklahoma specifically. The FY21 annual report for Oklahoma indicates that corporate income tax collections of $601 million comprised just over 11% of total income tax collections and roughly 5% of overall tax collections across all tax types. Franchise tax collections of $56 million were just below 0.5% of total tax collections for the year, so we’re looking at eliminating roughly 5.5% of total tax collection revenue. This isn’t an earth-shattering amount of revenue to eliminate, and Oklahoma did end FY21 with a $282 million budget surplus. If we do assume that reducing corporate taxes has a positive effect on wages and employment, then trading a relatively small chunk of total tax collections for other positive changes that could have a multitude of indirect positive economic effects seems like a pretty good deal. Either way, I don’t think the quantity of revenue that would be eliminated in Oklahoma makes this gamble on economic growth a poor choice.

RSM contributors