Oklahoma lawmakers will meet in a special session next month called by Gov. Kevin Stitt, who wants to put the state on a path to zero income taxes and proposed a trigger law related to the state’s future ability to tax certain Native Americans.
In a post on X, the message platform formerly known as Twitter, the Republican governor said the session, slated to begin Oct. 3, is aimed at making the government smaller, smarter, and serve residents better.
“That starts with tax cuts – taking money out of government hands and back in yours,” the post said.
Eventually eliminating the state’s graduated income tax, which tops out at 4.75%, “will keep us in line with surrounding Republican-led states,” according to the Sept. 11 executive order announcing the special session.
Seven states do not tax personal or investment income: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
Fitch Ratings analyst Michael D’Arcy said while tax cutting fueled by a revenue surge that began in fiscal 2021 has peaked, some states are considering or are gradually shrinking or eliminating personal income taxes.
“There’s not too much precedent for those kinds of plans, but we’re starting to see them now against a pretty strong economic and revenue backdrop,” he said, adding the only state to repeal an income tax was Alaska.
Oklahoma, which Fitch rates AA, has a “very broad, very deep, very robust” system with taxes on personal and corporate income, sales and use, and oil and natural gas production that helps protect the state’s finances from the volatile fossil fuel industry, according to D’Arcy.
“The danger for Oklahoma is that if they were to eliminate the personal income tax, the tax system would have less width and depth and diversity to balance out those cycles,” he said.
For the state’s fiscal 2023 general revenue fund, the personal income tax raised $3.37 billion, which was up 4.9% from fiscal 2022, amid total collections of a record $9 billion.
“Oklahoma’s long-term liability burden is very low, their pensions are very well funded, their debt burden is very modest, and their rainy fund and overall fiscal reserves are at historic highs,” D’Arcy said.
The state has a record $1.3 billion in its rainy day fund and about $400 million in its revenue stabilization fund, with total reserves expected to hit $1.9 billion by the end of fiscal 2024, “assuming the economy doesn’t go south,” he added.
S&P Global Ratings revised the outlook on Oklahoma’s AA rating to positive from stable in July, noting there is a one-in-three chance it could upgrade the rating. That action would be based in part on if the state demonstrates “a firm commitment to structurally balanced financial performance and sustaining reserves and liquidity at levels that we believe position the state to more readily respond to volatile swings within future budgets, particularly given that a higher proportion of the state’s economy and revenue base are tied to cyclical global energy markets compared to the national average.”
As for a proposed personal income tax elimination, S&P analyst Thomas Zemetis said if “the substantial altering of revenue and expenditure balance are not prudently managed, we think that could present some potential downside credit risks.”
He and D’Arcy said ongoing state tax cuts are usually tied to meeting various economic and revenue triggers.
Stitt’s plan is not a slam dunk in the Republican-controlled legislature, where Senate Pro Tempore Greg Treat called on the governor to appear before the chamber’s appropriations committee to explain his “extraordinarily vague” proposal.
“From our estimate, he wants budget cuts somewhere in the neighborhood of $4 billion,” Treat said in a statement. “I would like to know which specific taxes Gov. Stitt proposes on raising to cover the hole his plan would create in the state budget.”
The Oklahoma Policy Institute, a liberal-leaning nonpartisan think tank, called eliminating the state’s largest revenue stream “irresponsible” and difficult to replace.
“The best long-range strategy is protecting existing state revenue streams,” an institute report said. “During a downturn or recession, stable revenue will help the state meet vital needs to ensure that essential public services continue to operate, that health care providers are able to keep our families healthy, that we don’t fall behind on road and bridge repairs, and so much more.”
On the other hand, the conservative Oklahoma Council of Public Affairs believes the state is in a great position to phase out the tax given recent record revenue.
“Whether the legislature chooses to slowly phase out the income tax or do it wholesale there are responsible ways for both approaches to work,” Curtis Shelton, a policy research fellow at the council, said in an email. “The important thing is that Oklahoma gets to zero however it can so that it can better compete with states like Tennessee, Texas, and Florida.”
The council is also on board with Stitt’s proposal for “a trigger law mandating that if a state or federal court finds that some individuals, due to their race, heritage, or political classification, don’t have to pay a state tax, then no Oklahoman will have to pay the tax.” It also reported that House Speaker Charles McCall told the council he’s in favor of the move.
“We believe it’s fair and right that all laws apply to all Oklahomans regardless of race,” Shelton said. “If the supreme court finds that tribal members don’t owe state income taxes, the fair and right thing to do would be to eliminate the income tax for everybody.”
Litigation before the Oklahoma Supreme Court involves Alicia Stroble, a citizen of the federally recognized Muscogee (Creek) Nation who lived and worked on the reservation and claimed an exempt tribal income exclusion for state income taxes paid for tax years 2017, 2018, and 2019. That exclusion was denied by the state tax commission last year based on a determination her residency was not within so-called “Indian country.”
The case cites the U.S. Supreme Court’s 2020 ruling in McGirt vs Oklahoma, which affirmed about 19 million acres in eastern Oklahoma as tribal reservation land for purposes of federal criminal law. Thousands of taxpayers have claimed exemptions from Oklahoma’s income tax in the wake of that decision, according to a tax commission filing in the case.
State income taxes are not paid on income earned on a federally designated Indian reservation for tribal members living on the reservation, according to the federal Bureau of Indian Affairs. The Stroble case hinges on whether the McGirt ruling makes that territory — about 42% of Oklahoma — federally designated reservation land for state tax purposes.
The Muscogee, Seminole, Cherokee, Chickasaw, and Choctaw Nations submitted court briefs in support of Stroble’s case.
“As we await the Oklahoma Supreme Court’s decision, we encourage our partners in the legislature to proceed in a manner that respects tribal sovereignty and encourages collaboration on our shared goals over political division,” Cherokee Nation Principal Chief Chuck Hoskin Jr. said in a statement.
He added his administration “will continue working to protect our sovereignty, regardless of the governor’s attacks that waste the time and resources of everyone in Oklahoma.”
The governor has reportedly warned that under the McGirt ruling, 42% of Oklahoma could be turned into a reservation. He has also reportedly claimed the Oklahoma Turnpike Authority was losing revenue under its license plate payment system due to the inability to access information on tribal-issued plates.
Stitt and the legislature are engaged in an ongoing battle over which branch of the government has the authority to negotiate tribal compacts.