Business Tax Modernization

Executive Summary

Key Objectives:

• Examine Oklahoma's taxes on businesses.
• Identify the mechanisms for adjusting Oklahoma's tax structure for business.
• Assess what businesses value when deciding to expand or relocate.
• Identify tax policies that deter business.
• Compare the competitiveness of Oklahoma's tax policy to peers.
• Identify tax policy options for providing certainty to businesses and revenue stability to the State.

Executive Summary

Recent actions to improve the competitiveness of Oklahoma’s business climate have led to it being recognized as one of the least expensive states to operate a business. While there are several factors that contribute to a State’s overall competitiveness – such as cost of living, utility costs, workforce readiness, and infrastructure – a state’s tax policy and overall tax burden plays a significant role in business decisions to open, expand, or relocate.

In examining Oklahoma’s overall business environment, LOFT found:

• Oklahoma had the 28^th largest economy in the United States (2020).
• Oklahoma’s real GDP had the fourteenth-highest growth in the nation, at 18.9 percent, between 2010 and 2020.
• Oklahoma had the second-lowest overall state/local tax burden in the region (2021)
• Oklahoma had the second-highest total effective tax rate on businesses in the region (2021), although Oklahoma’s ranking has likely improved with the 2022 reduction in the corporate income tax, from 6 percent to 4 percent.
• During a time of general decline in manufacturing, Oklahoma’s aeronautics industry experienced 188 percent growth in GDP (2011-2021), with aerospace products and parts manufacturing recording the 7^th largest increase in total employment from 2008-2022.
• As Oklahoma’s tax structure differs from other states in the region, tax policy changes require different considerations.

Source: Left Map - Ernst & Young, with the Council on State Taxation and State Tax Research Institute; Right Map – Tax Foundation.

Note: Texas does not have a corporate income tax, instead relying on higher franchise and ad valorem taxes. Maps do not reflect that Oklahoma’s corporate income tax rate went from six to four percent in 2022.

In 2022, approximately 19 percent of Oklahoma’s total tax revenue ($2.4 billion) came from four taxes levied solely on businesses: Gross Production, Corporate Income, Franchise, and withholdings for pass-through entities. When taken as a portion of all statewide revenues, including fines, fees, and other levies, business taxes average just over 11 percent of all state revenue in the past ten years.

Oklahoma’s top five industries (by GDP) have not changed over the last ten years, though the mix of companies and subsectors within those industries has evolved. Oil and gas remains Oklahoma’s largest industry. In the last ten years, the share of Oklahoma’s GDP made up by oil and gas rose from 13.6 to 19.35 percent. Total taxes directly generated by the oil and gas industry comprised, on average, 7.24 percent of total revenue, though this metric does not reflect the full economic impact of an industry. 

Source: United States Bureau of Economic Analysis (BEA)

With this evaluation, the Legislative Office of Fiscal Transparency examined Oklahoma’s taxes on businesses and the available methods for adjusting the State’s tax structure. Additionally, LOFT sought to identify policies that either deter or encourage business growth. Last, LOFT examined options to provide tax certainty to businesses and revenue stability to the State.

This evaluation resulted in three key findings:

Finding 1:  Oklahoma Has Worked to Make the Tax Burden Competitive, Now Workforce and Infrastructure Are More Significant Concerns for Businesses.

Over the past 30 years, Oklahoma has significantly reduced its tax rates. In 1992, the tax rate for individual income tax was 7 percent and corporate income tax was 6 percent. Today, the top individual income tax rate is 4.75 percent and the corporate income tax is 4 percent.

While a state’s tax burden is certainly a consideration in a company’s decision to relocate or expand, LOFT learned from stakeholder engagements that workforce and infrastructure are currently the greatest impediments to Oklahoma’s business recruitment efforts. For example, the Department of Commerce reports that lack of sites with utility infrastructure is the single greatest factor in not securing a prospective business. Meanwhile, a survey by the Oklahoma State Chamber reflects workforce needs are the biggest concern among surveyed business leaders. LOFT found that Oklahoma’s workforce and infrastructure can both be improved to meet the needs of relocating and expanding businesses through strategic investments, as well as improved coordination of state, local, and private stakeholders.

Finding 2: Oklahoma’s Existing Tax Policy Tools Can Manage Revenue Volatility and Encourage Economic Growth

Since the passage of State Question 640 in 1992, which requires either a 75 percent supermajority of each legislative chamber or a simple majority of Oklahoma voters to approve new revenue raising bills, the state has passed only two new tax bills: once through the legislative supermajority process and once through a state question. Oklahoma’s tax base, which relies heavily on inherently unstable Gross Production and Corporate Income taxes, is ranked the ninth most volatile in the country. Additionally, Oklahoma’s tax structure is reliant on Statewide taxes, which accounted for an average of 63 percent of total tax revenues from 2015-2020. This is in stark contrast with neighbors like Texas, which vests the majority of its taxing power in local entities.

Oklahoma’s three distinct challenges of tax raising restrictions, volatile revenue sources, and centralized taxation compound on each other. For example, heavy reliance on statewide taxes (as opposed to local) would be less of an issue if the statewide tax base were less volatile. And if taxpayer protections were less robust, the Legislature could more easily amend tax policy to compensate for volatility (though, at the potentially high cost of creating uncertainty for businesses). LOFT identified legislative tools to help mitigate each of these challenges.

Finding 3: Oklahoma Can Position Itself for Future Business Growth with Targeted Tax Policy.

Based on Oklahoma’s success with using targeted tax credits to grow the aerospace industry into a key sector of Oklahoma’s economy, as well as an examination of leading programs in peer states, LOFT concludes that the following factors are critical in spurring economic development:

1)     Identify Existing Advantages. This may include natural resources and preexisting companies in the State. Oklahoma has experienced significant growth in sectors that overlapped with existing resources such as a qualified workforce and sufficient infrastructure, especially when those sectors benefit from targeted tax policy. Aerospace is the prime example in Oklahoma. Tulsa Innovation Labs identified several more industries ripe for growth in the state: Virtual Health, Energy Technology, Advanced Aerial Mobility, Cyber, and Analytics. Since 2018, the Legislature has implemented tax credits for qualifying workers in the cybersecurity industry, as well as employer and employee tax credits for the automotive industry, with the intention of growing these industries in the State.

2)     Align Tax Policy with Clear Goals. When determining how to adapt tax policy to aid, incentivize, and generate business activity in the State, consideration should be given to the type of business and their respective workforce and capital needs. Small businesses will have different needs from large businesses. Businesses moving to Oklahoma will have different needs than Oklahoma businesses looking to expand. Different industries will have different needs for infrastructure, such as utilities. Clear end goals can also drive policy decisions. For example, increasing revenues through sales tax might favor fewer high-wage jobs, while increasing workforce participation rates might require more, but lower-paying, jobs. Additionally, there will likely be industry-specific variances.

3)     Focus Additional Resources to Foster Growth. Oklahoma can improve its business climate by crafting tax policy to build an economic ecosystem around one or two industries that align with existing advantages as well as future growth potential. Currently, Oklahoma lacks a cohesive statewide strategy for economic growth. The state offers broad incentives to all prospects, as well as targeted incentives to unique industries that are unlikely to make meaningful improvement to the state’s economy. A targeted approach pulling in a single direction could make Oklahoma the hub of additional industries.  

Oklahoma has achieved a competitive business climate offering low and stable tax rates. Taxpayer protections implemented with State Question 640 create certainty for businesses that their tax burden will not increase. In addition, Oklahoma has the policy tools to address top business needs, such as workforce development and infrastructure investments, and to attract and retain business.

Through its expansion of the aerospace industry, Oklahoma has demonstrated it can be successful with clear and specific State economic goals and by aligning tax tools to produce results. This success can be replicated with a focused State effort that aligns tax policies with industry-specific economic goals. As the economy adapts and shifts to market needs, changes in the type of workforce required will likely follow. Any new business tax policy should consider the projected needs of the future workforce and the type of economic growth that would benefit the State long-term.