The race is on, and Arkansas looks to take the lead. For the past decade, Oklahoma has defeated our neighbor to the east in economic growth and output, but Arkansas Governor Sarah Huckabee Sanders just signed off on more tax relief that could boost the Razorbacks past the Sooners.
The income tax rate for Arkansas was lowered from 4.4% to 3.9%, which is now the lowest income tax rate in the region. In April of 2023, Arkansas politicians lowered the income tax rate from 4.9% to 4.7%, and during a special session in September, it was lowered again from 4.7% to 4.4%.
Conservative legislators in Oklahoma are talking about becoming a no-income tax state, but in Arkansas, they are making it happen. Money and capital investments flow to where they are treated most friendly, and Arkansas is making a bold leap to hang out their shingle, “Come to Arkansas.”
Now, we have some advantages that Arkansas doesn’t have: significant oil and gas resources and a booming aerospace industry. We should be able to top whatever they are doing, but Oklahoma leaders have yet to get us on a serious path to become a no-income tax state.
Our economic growth the last ten years averaged 1.55% per year, according to the Bureau of Economic Statistics. For the no-income tax states (not counting Alaska because it’s just too cold!), the average economic growth was 2.35% per year. That may not sound like much, but to a finance geek like me, that means $40 billion more in economic output!
The key, of course, is how to get there, become more competitive in this 21st Century economy, and pay our bills for core services. The answer is not to cut the income tax and hope we have enough revenue to pay our bills.
The first step in tax reform isn’t all that hard – wipe out the $1.5 billion in tax credits, rebates, and exemptions that go to specific category groups and lower the Oklahoma income tax rate from the current 4.75% to 3.5%. The Tax Commission says that the average effective tax rate from all Oklahomans is 3.1% so, it’s a wash.
Next comes the elimination of a myriad of sales tax exemptions that we don’t need, which could lower the rate yet again to 2.5%. No-income tax states like Tennessee wisely tax activity, which gives more liberty and freedom to people about how to spend their money. Punishing hard work with an income tax reduces productivity and prosperity. In terms of economic growth over the last ten years, Tennessee beat us with 24.8% growth versus our 15.5%.
Finally for the hard part, to get all the way to no-income tax, Oklahoma legislators and citizens must decide which services to tax like Tennessee does. We better get busy catching up to those Volunteers from Tennessee, lest those Razorbacks of Arkansas leap ahead of us.
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