Cutting taxes on low-income Oklahoma families

Journal Record, The (Oklahoma City), Feb 20, 2001 by Jon Forman

Oklahoma is one of just 20 states that require families to pay some income tax even though their incomes fall below the poverty line. In fact, the typical family of four with a $17,050 poverty- level income must pay $210 in Oklahoma state income taxes for the year 2000, and families earning as little as $12,950 in the year 2000 typically must pay some Oklahoma income tax.

Increasingly though, Oklahomans of all political persuasions are speaking out against taxing low-income families. For example, Steve W. Beebe, a certified public accountant from Duncan, calls it "unsettling that our poorest citizens have such a high tax burden."

Writing in the January issue of the Oklahoma Council of Public Affairs journal Perspective, Beebe explains that the problem is that our state income tax exemptions and deductions have just not kept up with inflation. Similarly, in its recent report Welfare Reform and Beyond: Making Work Work, the corporate-sponsored Committee for Economic Development recommended that states "reduce or eliminate state income tax burdens for families below the federal poverty threshold."

On the other side of the political spectrum, the Washington-based Center for Budget and Policy Priorities has long supported state income tax relief for low-income families.

Here in Oklahoma, the same concerns have been repeatedly expressed by the Community Action Project of Tulsa and by the Oklahoma Institute for Child Advocacy. According to Steven Dow, the executive director of the Community Action Project, "Taxing the working poor is inexcusable. It punishes those who are striving to make ends meet and stay off welfare."

Could this be the year that the Oklahoma Legislature eliminates the income tax burden for low-income families? I hope so.

The federal tax system is already designed to ensure that low- income families are not stuck with federal tax bills. Consider a family of four consisting of a married couple and two children. For 2000, a married couple with two children can file a joint tax return and claim a $7,350 standard deduction and four $2,800 personal exemptions.

Consequently, the couple will not have to pay any income tax for the year 2000 unless its income exceeded an $18,550 simple income tax threshold. In fact, once the couple's earned income tax credit and child tax credits (and Social Security tax liability) are taken in to account, the typical married couple with two children will not actually owe any federal taxes for the year 2000 unless its income exceeded $22,851.

Unfortunately, the Oklahoma income tax system is not nearly as generous. That same family of four would start paying Oklahoma income taxes as soon as its income exceeded $12,950 in the year 2000. As a result, thousands of low-income Oklahoma families must pay state income taxes, even though they owe no federal taxes.

So what can be done?

One approach would be to raise the state income tax thresholds above the poverty level. For example, the state could increase personal exemptions and standard deductions, and the state could index these tax exemptions to take into account future inflation. Moreover, this type of change would be a way of giving a tax cut to all Oklahoma taxpayers. We would all benefit from an increase in the state's measly $1,000 personal exemption allowance.

Another approach would be to adopt a state earned income tax credit to supplement the federal earned income credit. According to the Center on Budget and Policy Priorities, some 15 states now offer earned income tax credits based on the federal credit, but Oklahoma is not among them.

Of note, however, Oklahoma Sen. Bernest Cain and Rep. Opio Toure are sponsoring legislation that would create a state earned income tax credit.

For example, under the federal earned income credit, individuals with two or more children can claim a refundable earned income credit of up to $3,888 for the year 2000. A state earned income tax credit could be set at a straight percentage of the federal credit.

For example, a state earned income credit could be set at 10 percent of the federal credit, so a low-income family of four could have a state earned income credit of up to $389. That would be more than enough to wipe out the $210 of tax liability now owed by a family of four with a poverty-level income $17,050.

According to the Center on Budget and Policy Priorities, a 10 percent state earned income tax credit would cost about $40 million a year.

One way or the other, it would make sense to cut the income tax burden on low-income Oklahoma families.

Jon Forman, a professor of law at the University of Oklahoma College of Law, welcomes your comments and contributions. You may reach him by phone at 325-4779, by mail at the University of Oklahoma College of Law, 300 Timberdell Road, Norman, OK 73019-5081, or by e- mail: jforman