December’s federal income tax reform bill would have decreased Oklahoma’s state income tax revenue by $375 million had legislators not “decoupled” from the federal standard deduction last year, analysts say.
“Had we not decoupled, the state would have been bringing in $375 million less this year,” said David Blatt of the Oklahoma Policy Institute, citing the Institute on Taxation and Economic Policy.
That $375 million can be looked at two ways — as $375 million in revenue the state could have lost but didn’t, or as a $375 million tax cut Oklahomans won’t get.
House Majority Floor Leader Jon Echols, R-Oklahoma City, agreed the decision to no longer link the standard deduction for state income taxes to federal law has turned out to be more important to the state than foreseen.
Echols said Rep. Leslie Osborn, R-Mustang, then the House Appropriations and Budget chairwoman, suggested decoupling from the federal standard deduction as a way of giving the state more control over its own tax policy, and as a hedge against changes in federal tax law.
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But, Echols added, he doesn’t think anyone really expected the federal standard deduction to nearly double in just one year.
“If I was that good of a prognosticator, I wouldn’t be in the Legislature. I’d be on Wall Street,” Echols said.
From 2004 to 2017, the Oklahoma standard deduction was the same as the federal standard deduction. The federal standard deduction was adjusted every year to account for inflation.
The immediate impact of decoupling, then, was to freeze Oklahoma’s standard deduction by severing the link to inflation.
The December tax reform bill, though, raised the standard deduction for couples from $12,700 to $24,000, and for other categories of filers by similar proportions.
Under the old state law, the standard deduction on Oklahoma’s state income taxes would have also gone to $24,000.
Instead, it remains at $12,700 — and could go even lower under provisions of the Step Up Oklahoma revenue and reform package.
The result is not a tax increase, but a potential tax cut forgone.
Echols said the decision to decouple was part of a larger effort to staunch a three-year drain on state revenue. Linking state and federal tax law, he said, put state policy on “autopilot.”
“One of the reasons we’re having the problems is because we’ve put too much on auto-pilot,” Echols said.
Oklahoma law still requires state income tax filers’ deduction decision to conform with their federal returns. In other words, filers cannot take the standard deduction on federal taxes and itemize on state in order to boost their refund or lower their liability.
Blatt said some taxpayers could find itemizing deductions on federal returns advantageous, even if it results in a higher federal tax liability, so they can lower state liability by itemizing deductions.
