Executive Summary

There has been a great deal of debate over the past several years about the tax burden in Oklahoma. Some parties to this debate claim that Oklahoma has one of the lowest tax burdens in the nation. Others have argued that the tax burden on Oklahomans is closer to the middle. Both sides offer statistical information to bolster their claims, which tends to leave the question of Oklahoma’s tax burden unanswered. This study brings additional information to the debate.

Rather than rely on average measures of tax burden across an entire state, the approach of this work is to estimate the tax burden that is placed on specific decision making units. This technique is referred to as the simulation approach. It is applied here to specific households in an effort to determine how Oklahoma’s tax burden compares to that of other areas. The analysis covers tax year 1997 and estimates taxes at the federal, state, and local levels in an effort to capture the effects of tax interaction and the burden borne by each household.

The 1997 total tax burden is estimated for eight different households of varying characteristics. Rather than estimating a statewide average sales and property tax rates, households were assumed to reside in specific cities. All eight households were placed in a total of 40 cities across 13 different states. A large majority of these cities, 32, were taken from Oklahoma and the six states that share a border with Oklahoma. The remaining eight cities were selected because they were comparable in population to Oklahoma City or Tulsa.

The results of these simulations show that most households located in Oklahoma cities face a tax burden that is relatively high when compared to the other cities in this study. These results seem to run counter to previous works that show Oklahoma with a below average tax burden. Possible explanations for the apparent discrepancies include the fact that this study focuses only on taxes paid by households versus business taxes, this study only considers households in urban or suburban locations, and that federal taxes are included in the tax estimates formed in this work.

Regardless of the cause, the fact remains that households in Oklahoma cities face a relatively high tax burden. This finding has serious implications for the future of the state. All other things constant, households prefer to reside in locations with lower taxes. By placing a high tax burden on households, Oklahoma is effectively discouraging relocations to the state while also encouraging those already in the state to relocate elsewhere.

Such a tax system, where households face a relatively high tax burden, hampers Oklahoma’s ability to attract startup firms, especially in high-tech areas. It also discourages the new wave of extremely mobile and highly paid workers, such as computer consultants, from choosing Oklahoma as their residence. Also likely to be deterred from remaining in Oklahoma are highly skilled college graduates whose higher tax burden is frequently not offset by higher wages.

Discouraging these types of households from locating in Oklahoma is something that the State can ill afford. Per capita personal income (PCPI) in Oklahoma is at 80 percent of the national average, indicating that the average Oklahoman earns 80 cents for every dollar that the average U.S. citizen earns. This is a deplorable situation that no Oklahoman deserves to face and if it is to change, every factor that hampers income growth needs to be addressed. This research clearly indicates one such factor that is likely to be one of the causes of the state’s low income: the high tax burden placed on households in Oklahoma cities.

Comparing Tax Burdens Across Geographic Locations: A Simulation Study

I. Introduction

Much has been said in recent years about the tax burden faced by the people of Oklahoma. Some claim that Oklahoma has one of the lowest tax burdens in the nation, citing per capita tax burden measures. Such a measure reveals that Oklahoma had the 43rd highest state and local tax burden in fiscal year 1996. Others claim that Oklahoma has a tax burden in the lower-middle range based on state and local taxes and fees per $1,000 of personal income. In fiscal year 1996, Oklahoma ranked as the 36th highest state in this measure. Both of these measures rely on data from the United States Bureau of the Census.

Examining tax burden based on the data from the Census Bureau provides an estimate of either the taxes paid by the average person in a state or the average taxes paid per every $1,000 of personal income. Such information is very useful because it allows policymakers to compare the resources used by state and local governments across states regardless of differences in the size of each state's population or economy. These comparisons, however, suffer from the typical weakness of any average measure, they provide no information about how the tax burden differs across taxpayers within a state.

The current study represents an effort to begin filling this information void. Rather than relying on some average measure of government resources for a state, this study actually estimates the taxes paid by specified taxpayers in the economy. This approach is often referred to as a simulation approach.

The simulation approach to measuring tax burdens has been used by numerous other researchers (Public Affairs Research Council of LA., Inc., 1994; Wisconsin Department of Revenue, 1993). The common focus throughout all of these studies is their focus on differences in the taxes placed on businesses across different taxing jurisdictions. No studies have been found that apply the simulation approach to measuring differences in the tax burden placed on households across different taxing jurisdictions.

It is the aim of this study to examine the tax burdens placed on households. To accomplish this, the taxes levied against households in calendar year 1997 are estimated. These tax burden estimates are calculated in different taxing jurisdictions in an effort to provide information about the burden that taxes place on households across these different locations.

II. Method of Tax Burden Estimation

The simulation approach to estimating tax burden requires that the household be explicitly defined. This study examines a number of different households for two reasons. First, examining multiple households provides more information about the differences in tax burdens across taxing jurisdictions. Second, it is logical to study several different households in this approach since a great diversity of households exists within an economy and incorporating more households allows for a clearer identification of differences in tax treatment within the different taxing jurisdictions.

A total of eight households are simulated in this study. Table 1 describes each of these households. As indicated in the table, the households vary in size from one to four people and in annual income from $15,000 to $140,000. Five of the eight households have children, one of the households contains retirees, two of the households are comprised of a single working age person, and one household is a single parent with one child. The housing arrangements range from a four bedroom, two bathroom house of approximately 2300 square feet to an apartment. Finally, the vehicles owned by these households range from a new Lincoln Towncar to a nine-year-old Chevrolet Cavalier.

It should be noted that these households are not intended to be strictly representative of households in Oklahoma, the United States, or any other state. The households were selected for two purposes. The first was to represent some typical households. The second principle that guided the decision making in choosing the households for analysis was the recognition that certain households are of more interest to policymakers in terms of their location decision. Especially important to state policymakers for economic growth reasons are the new wave of highly mobile workers vital to the growth of high wage industries such as high-tech, bio-tech, and financial services. Households comprised of these types of workers are typically higher income, generally pay more taxes, and also have a greater propensity to save, invest, and pursue entrepreneurial activities.

Having defined the households simulated in this study, attention now turns to the method used to simulate tax burdens. In order to see a clear picture of the differences in tax burdens across locations for households, everything except taxes is held constant. That is, the households maintain the same income, housing, vehicles, and consumption patterns across all of the locations studied. This simplifying assumption is necessary to ensure that the differences in estimated tax burden are caused only by the different tax structures of the household locations.

An example of how this assumption causes some sizable differences can be found in the housing situation. It was assumed, for example, that Household 1 had an income of $140,000 and lived in a house with four bedrooms, two bathrooms, and seven total non-bath rooms (i.e., four bedrooms, kitchen, living room, and a den or formal dining room). The assumption that Household 1 lives in this type of house regardless of location results in different house prices across locations due to differences in housing markets. These differences in housing prices are likely to cause some differences in tax burden, especially in the property tax.

The alternate approach to the housing situation was to determine the housing patterns of similar households to those simulated located in the selected cities and place the simulated households in city specific housing situations. This approach, however, would have weakened the results of this study since factors other than location would no longer be held constant. For this reason, this alternative approach was not used. The housing situation and all other factors of the households were held constant across locations.

In order to get a full picture of the tax burden on households their location was specified at the city level. This was important because property and sales taxes differ by city and county. In order to estimate a tax burden without placing households at the city level, a single sales and property tax rate would have to have been estimated for each state examined. Estimating such an average would have been difficult and likely misleading. The optimal solution is utilized here, estimating the tax burden for households placed in specific cities.

There are 40 cities in which the eight households are placed and these are listed in Table 2. The first six cities are in Oklahoma. The next 26 cities are located in the six states that border Oklahoma. The states (and the number of cities in parentheses) are Texas (7), Arkansas (3), Missouri (5), Kansas (4), Colorado (4), and New Mexico (3). These cities are likely competitors against Oklahoma cities since they represent either the major metropolitan areas within the region or cities of comparable size to the selected cities in Oklahoma. The final eight cities are from various other states and were chosen on the basis of their size and competitiveness with Oklahoma cities. Two of these cities are in Michigan, and two more in Tennessee. The final four cities are in California, New York, North Carolina, and South Carolina.

In an effort to develop a complete picture of the tax burden borne by these eight households in these 40 cities, the local, state, and federal taxes placed on households are estimated. This includes income taxes, property taxes, sales and use taxes, motor vehicle taxes, and motor fuel taxes. It is important that all levels of taxes be estimated for the households due to the interaction between various taxes. One example of tax interaction is the deductibility of state and local income and property taxes from Federal taxable income for taxpayers who itemize.

If only state and local taxes were estimated, the true tax burden on households would not be reflected. For example, a particular household could have a higher state and local tax burden in state A, but a lower federal, state, and local tax burden in state B because state and local governments in state B rely more on sales tax revenues and less on income and property tax revenues than does state A. The inclusion of federal taxes will result in relative increases in the tax burden on households in locations where there is less reliance on income and property taxes. Alcohol and tobacco taxes are ignored since these taxes are voluntary and can be avoided by households.

The data used to estimate the tax burden on the eight households comes from a variety of sources. A private accounting firm in Oklahoma City, Luton & Company, calculated the income taxes for all the households in the 40 cities. The estimation of income taxes relied on the assumptions regarding the households as well as the property and motor vehicle tax estimates.

To estimate property taxes on real property, a survey was conducted of realtors in the designated cities to obtain information concerning prices of housing with the desired characteristics. Using the information collected from these realtors, county assessors were contacted regarding assessment rates and millages. Estimation of motor vehicle taxes required personal interviews with the taxing authorities in the different cities and states. In many cases, more than one agency had to be contacted about the taxes on motor vehicles due to the fact that different taxes originated from different levels (city/county/state).

Motor fuel and sales taxes were estimated with data from the Consumer Expenditure Survey (CES). The CES provides information on the buying habits of American consumers, including data on their expenditures, income, and household characteristics. This data is publicly available from the United States Bureau of Labor Statistics. For the estimation of sales taxes, CES data was segmented to provide information about the expenditures, by product class, made by households of varying characteristics. Once this information was estimated for the eight types of households in this study, the appropriate tax rates were applied to the taxable expenditures in the different locations to arrive at the sales tax estimate. The expenditures for fuel in the CES were used to arrive at an estimate of motor fuel consumption and thereby, motor fuel taxes. For more detailed information regarding the method used to estimate the tax burden on households, readers should contact the Research and Fiscal Policy Division of the Oklahoma Office of State Finance.

III. Results

Tables 3 through 10 detail the estimates of the various taxes and the sum of all taxes for Households 1 through 8, respectively. Tables 3 through 10 also rank the cities for each household on the basis of the total tax burden. The last column of each of these tables indicates the amount of taxes paid as a percent of total household income. The cities from Oklahoma have been bolded in these tables to aid in their identification. Due to the large amount of information and the limited space available here, the discussion of the results will focus on the total tax burden and a few points that require further explanation.

Table 3 indicates that the total estimated tax burden for Household 1 (married, two children, $140,000 income) ranges from $34,360 to $38,559. This represents between 21.3% and 27.5% of total household income. The last line in Table 3 presents the average taxes across all 40 cities which is $34,360 or 24.5% of income. The Oklahoma cities rank 3rd, 4th, 5th, 7th, 8th, and 15th in total tax burden for Household 1. The tax burden in cities from Oklahoma exceeds the average tax burden for Household 1 by $788 to $2,232. Table 3 indicates that Oklahoma cities have relatively high tax burdens for this type of household. In fact, the only two cities in the study that have higher tax burdens than all Oklahoma cities for Household 1 are Syracuse, NY and Fresno, CA.

Table 4 presents the estimated taxes on Household 2. The only difference between Household 1 and Household 2 is the source of the earned income. Household 1 was assumed to earn all of its income in the state of residence. Household 2 was assumed to earn $40,000 in the state of residence, $40,000 in Texas, and $40,000 in Colorado. When the household’s state of residence was Colorado or Texas, then the income earned in the state of residence was assumed to be $80,000.

Upon first glance at Table 4, there appears to be no differences from Table 3; however, closer examination reveals this to be untrue. The average tax burden on Household 2 is $34,575, some $215 more than for Household 1. The tax burden estimates that are most affected by the assumption of income earned out of state are the Texas and Tennessee cities. This is caused by the income earned in Colorado and the resulting state income tax that increases the tax burden in these cities. Comparing the bottom of Tables 3 and 4 clearly demonstrates this result. Household 1 faced a tax burden of $29,384 in Nashville, TN while Household 2 faced a burden of $30,897, more than $1,500 higher.

In spite of these changes in tax burden caused by the change in source of earned income, the tax burden on Household 2 in cities from Oklahoma remain unchanged from the burden on Household 1. Also, the ranks of the Oklahoma cities remain the same as for Household 1. The differences between Oklahoma cities and the average, however, change slightly. The tax burden in Oklahoma cities for Household 2 now exceeds the average tax burden by $573 to $2,017. In terms of taxes as a percent of total household income, Oklahoma cities exceed the average by 0.41 to 1.44 percentage points.

Table 5 details the estimates of tax burden for Household 3 (single, $60,000 income). The total tax burden on Household 3 ranges from $14,739 to $18,690. Expressed as a percent of total household income, the burden ranges from 24.6% to 31.2%. The cities from Oklahoma are ranked from 16th to 21st. The average tax burden across the 40 cities is $16,869, or 28.1% of household income. The Oklahoma cities’ Household 3 tax burden exceed the 40 city average by $279 to $407.

It is worth noting that for Household 3 the property tax estimate is $0. This is a result of the assumption that Household 3, a single person, rents an apartment. This assumption is not strictly ad hoc. The CES contains detailed information about the housing situation of survey respondents. As part of this study, the information regarding housing was captured for each of the eight households in the study. The assumptions of housing situation were based on the information gained from CES data for each household in an effort to produce households that are as representative of reality as possible.

The absence of a property tax for Household 3 is a result of several factors. First, arriving at an estimate of property tax on a piece of rental property is difficult, if not impossible, especially if the rented property is an apartment. Second, once an estimate of property tax on rental property is found, determining the proportion of the tax that is paid by the renter is an equally implausible task. The difficulty with estimating the proportion of the tax that is paid by the renter is that such an estimate requires knowledge of both the supply and demand schedules. Third, the supply of rental property is relatively inelastic in the short-run since supply is relatively fixed due to the nature of construction and the length of time involved to produce new additional units. The more inelastic the supply schedule for a good, the less of any tax that will be paid by the buyer of the good. Since the supply of rental property is relatively inelastic, it then stands to reason that the property owner pays more of the property tax than does the renter.

Based on the difficulties involved and the prediction of theory that little property tax would be paid by renters, the choice made here was to assume that renters paid none of the property tax. An alternative assumption could have been made setting the proportion of the property tax anywhere in the interval [0,1]. Based on the belief that supply of rental property is relatively inelastic, the assumed proportion should be toward the lower end of this range and if supply is perfectly inelastic, then the assumed proportion should be zero.

The tax burden estimates for Household 4 are detailed in Table 6. As was the case with Household 2 compared to Household 1, Household 4 differs from Household 3 only in the source of its earned income. Earned income for Household 4 is $60,000 with $20,000 earned in the state of residence, $20,000 earned in Texas, and $20,000 earned in Colorado. When the household’s state of residence is Texas or Colorado, then the income earned in the state of residence is $40,000 and that earned out of state is $20,000. All other characteristics of Household 4 are identical to Household 3.

The estimated tax burden for Household 4 ranges from $15,626 to $18,690. Expressed as a percent of household income, this is 26.0% to 31.2%. The average tax burden for Household 4 across all 40 cities is $17,062, $193 dollars higher than for Household 3. This average tax burden is 28.4% of household income. The Oklahoma cities rank 16th through 21st, the same as with Household 3.

Table 7 presents the estimated tax burden of Household 5 (married, retired, $70,000 total income). The total tax burden for Household 5 ranges from $12,257 to $17,134 over the 40 cities. As a percent of household income the tax burden ranges from 17.5% to 24.5%. The average tax burden across the cities for Household 5 is $15,054, or 21.5% of household income. The cities in Oklahoma rank 19th, 21st, 22nd, 23rd, 30th, and 32nd. The total tax burden for these cities ranges from $14,226 to $15,217, or $163 above to $828 below the 40 city average.

The tax burden of Household 6 (married, two children, $45,000 income) are represented in Table 8. The total tax burden ranges from $6,197 to $9,090. As a percent of household income, the range is 13.8% to 20.2%. The average tax burden across the 40 cities is $7,557, or 16.8% of income. Oklahoma cities rank 4th, 5th, 7th, 8th, 9th, and 17th for Household 6. The total tax burden for this household in Oklahoma cities exceeds the 40 city average by $197 to $771.

Table 9 presents the tax burden estimates for Household 7 (married, one child, $25,000 income). The total tax burden for this household ranges from $2,217 to $3,302, or from 8.9% to 13.2% of household income. The 40 city average total tax burden is $2,809, 11.2% of income. As with Households 3 and 4, Household 7 has no estimated property tax burden since this household is assumed to reside in rental housing.

For Household 7, Oklahoma cities rank 3rd, 4th, 5th, 6th, 7th, and 10th. The Oklahoma cities total tax burden exceed the 40 city average by $314 to $400. As a percent of household income, the total tax burden in cities in Oklahoma are between 1.25 and 1.6 percentage points higher than the average.

The tax burden estimates for Household 8 (single, one child, head of household tax filer, $15,000 income) are represented in Table 10. Interestingly, the total tax burden for Household 8 is negative regardless of location. This is primarily due to the Earned Income Tax Credit on the Federal tax return.

The total tax burden for Household 8 ranges from minus $770 to minus $23. Stated differently, taxes augment income for Household 8 by 0.15% to 5.1%, depending on location. The average total tax burden for Household 8 across the 40 cities is minus $321, or an income increase of 2.1%.

The Oklahoma cities rank 7th, 9th, 10th, 11th, 12th, and 14th for Household 8. The total tax burden faced by Household 8 in the Oklahoma cities exceeds the average by between $106 and $183. As a percent of household income, Household 8 receives between 0.7 and 1.22 percentage points less income augmentation in Oklahoma than the average across all 40 cities.

Tables 11 through 18 show a slightly different comparison of tax burdens. For Oklahoma and its six border states, an average tax burden was calculated for each household across the studied cities. These average tax burdens are shown in these tables. The tax burden for Oklahoma’s non-border states is not calculated due to the small number of cities for which the tax burden is estimated in these states.

The average tax burden is calculated as a simple arithmetic mean since each is specific to a household that is identical in every way except location and tax burden. These tax burdens do not represent the average tax burden across an entire state. What is represented is the average tax burden in the selected cities within the seven states for the specific households examined in this study. This information allows inferences to be made about the relative tax friendliness of these seven states.

Table 11 presents the state average tax burdens for Household 1 in the seven state region. The total tax burden ranges from $32,657 to $36,089. Expressed as a percent of household income, this range is from 23.3% to 25.8%. Of the seven states, Oklahoma places the highest average total tax burden on Household 1. The estimated tax burden in Oklahoma exceeds that of Texas, the state with the lowest tax burden, by $3,432, or 2.5 percentage points in terms of household income.

The estimated state average tax burdens for Household 2 in Oklahoma and the six border states are represented in Table 12. Household 2’s total tax burden ranges from $33,193 to $36,089. As a percent of total household income, the range is from 23.7% to 25.8%. As was the case with Household 1, Oklahoma has the highest average tax burden on Household 2. The tax burden faced by Household 2 in Oklahoma exceeds the lowest state's, New Mexico, by $2,896, or 2.1 percent of household income.

Table 13 depicts the estimated state average tax burdens for the seven state region for Household 3. The estimated total tax burden extends from $15,362 to $18,429, or from 25.6% to 30.7% of household income. For Household 3 Oklahoma ranks fourth in the seven state region with a tax burden of $17,207 which is 28.7% of income. Oklahoma’s tax burden on Household 3 is $1,222 lower than in the highest state, Kansas, and $1,845 higher than in the lowest state, Texas.

The state average tax burdens for Household 4 are shown in Table 14. These tax burdens varied from $16,201 to $18,429. This represents between 27.0% and 30.7% of the income earned by Household 4. In the seven state region, Oklahoma ranks as the fourth highest tax burden at $17,207. This estimated tax burden places Oklahoma $1,222 below that of Kansas, the highest state, and $1,006 above the lowest tax burden state, New Mexico. As a percent of income the tax burden in Oklahoma is 2.0 percentage points below that of Kansas and 1.7 percentage points above the burden in New Mexico.

Table 15 presents the estimated average state tax burdens of Household 5 across the seven state region. This total tax burden ranges from $13,404 to $16,407. As a percent of total household income the tax burden varies from 19.2% to 23.4%. In Oklahoma Household 5 faces a tax burden of $14,843 on average, which represents 21.2% of total household income. The tax burden in Oklahoma is $1,564 less than the highest tax burden state, Kansas, and $1,439 more than the lowest tax burden state, New Mexico.

The average state tax burden for Household 6 in the seven states is depicted in Table 16. The tax burden faced by this household extends from $6,745 to $8,108. As a percent of income, the tax burden ranges from 15.0% to 18.0%. Oklahoma has the highest tax burden among the seven states, exceeding the tax burden of the lowest state, Colorado, by $1,363. This difference represents 3.0% of household income.

Table 17 shows the estimated average tax burden for Oklahoma and the six border states. The table shows that the tax burden varies from $2,268 to $3,162. Expressed as a percent of household income, this ranges from 9.1% to 12.7%. Oklahoma is the highest ranking state in tax burden for Household 7. The tax burden in Oklahoma exceeds that of the lowest tax burden state, Texas, by $894, which is 3.6% of household income.

The tax burden estimates for Household 8 are presented in Table 18. The estimates range from minus $526 to minus $158. Incomes were augmented by between 3.5% and 1.1% through the negative taxes. Oklahoma is the second highest tax burden state for Household 8 with a tax burden of minus $181 which increases household income by 1.2%. The tax burden in Oklahoma is $23 less than the highest state, Kansas, and $345 higher than the burden in the lowest state, Texas.

IV. Conclusions

It is clear from the city and state rankings that Oklahoma is a high tax state relative to the seven state region for Households 1, 2, 6, 7, and 8. For Households 3, 4, and 5, Oklahoma is best characterized as a middle tax state. The two lowest rankings received for any Oklahoma city were 32nd in Enid and 30th in Lawton for Household 5. The next lowest city ranking is 23rd in Edmond, also for Household 5. With the exception of these three cities for Household 5, each household in an Oklahoma city faces an overall tax burden that is above the average across the 40 cities.

Based on these findings, it seems an accurate assessment to say that within the region households in Oklahoma cities do not face low overall tax burdens. The most astounding thing about this result is that it is true regardless of the household income level. High and low income households alike face a tax burden in Oklahoma cities that is generally higher than the tax burden faced by similar households in cities in other states.

The relatively high burden placed on households in Oklahoma has a serious impact on the attractiveness of the state in terms of households that arepotentially relocating into or out of the state. A household would rather reside in an area with lower taxes, all other things constant. If there is not something about Oklahoma cities that would compensate them for the relatively higher tax burden, then households will tend not to move into, or remain in, Oklahoma. Such factors exert an even larger influence on households that make location decisions on the basis of factors other than employment.

Individuals such as consultants, computer programmers, people launching a new business, as well as some others, have some degree of freedom in choosing where they live. Many of these people tend to earn relatively high incomes, which Oklahoma should be trying to retain and/or attract in its effort to increase per capita personal income (PCPI). Thus, the relatively high tax burden on households in Oklahoma may be one of the factors responsible for Oklahoma PCPI being only 80 percent of the national average. If the lagging incomes in Oklahoma are something that state policymakers wish to improve, they should consider the high tax burden that is being placed on households in the state.

A final implication of this study is the impact of Oklahoma’s relatively high household tax burden on small business. According to the Small Business Survival Committee, a Washington, D.C. based organization specializing in small business issues, about 90 percent of small businesses file taxes as individuals (SBSC, 1998). This may imply that Oklahoma is not as friendly to small business as other states.

For small business, tax burden is more often an issue about survival than it is about location decision. A higher tax burden will tend to decrease the chance of a small business surviving, growing, and prospering. Small business is often referred to as the ‘engine of economic growth’ since most employment and income growth comes from this source. Hampering their progress will have serious negative impacts on the state’s economy. This can be ill afforded if the income gap is to be closed.

The results of this study contrast claims that Oklahoma is a low or lower middle tax state which are based on commonly referenced average tax measures. There are several possible reasons that explain the differing results. First, Oklahoma has relatively low business taxes. The two major taxes paid by businesses, the corporate income tax and the property tax, are both lower in Oklahoma relative to most other states. Evidence of this is easily found among the numerous studies that have examined state competitiveness and tax burdens (American Council on Intergovernmental Relations, 1995; Government of the District of Columbia, 1997; Minnesota Taxpayers Association, 1998; Oklahoma Office of State Finance, 1998; and Washington State Department of Revenue, 1997 to list only a few). Since the overall tax burden in Oklahoma is below the national average and business taxes are well below national averages, a reasonable expectation would be that taxes on households in Oklahoma would exceed the national average.0

A second explanation for the differences in findings is the composition of the cities in the study. The Oklahoma cities chosen for study are relatively urban or suburban. There are no rural areas represented in the study. It is possible that taxes are higher in urban and suburban areas than in rural areas or that urban residents pay a higher share of the taxes in a state. If this is the case, adding rural areas would tend to lower the average tax burden when combining all Oklahoma cities. For this reason to explain the qualitative differences between the simulated tax burdens and average tax burdens, one must believe that Oklahoma is a relatively more rural state than the states to which we are compared in this study. The urban/suburban/rural composition of Oklahoma is not examined here, it is merely offered as a possible explanation for the observed differences between the results of this research effort and the numerous studies, including some from the Office of State Finance, that have examined average tax burdens.

A third possible reason that the tax burdens simulated above are relatively high while the average tax burden for Oklahoma is lower could be that this study includes federal taxes. Most studies that examine average tax burdens across states will form their measures on the basis of state and local taxes or some similar measure. It is possible that including federal taxes increases the overall tax burden in Oklahoma cities. This argument seems more plausible when it is considered that Oklahoma has relatively low property taxes. Since property taxes can be deducted from a household’s Federal taxable income on the Federal income tax return, lower property taxes would tend to increase the federal income tax bill, ceteris paribus, thereby possibly explaining part of the higher estimated tax burden in Oklahoma cities. However, in some cases where the household is assumed to pay no property tax (Households 7 and 8), the tax burden in Oklahoma cities is relatively high.

A final potential explanation for the differences in results is the fact that the simulated tax burdens presented here and the average tax burdens discussed in the opening paragraph of this report are inherently different and should not necessarily be expected to show similar qualitative results. The average tax burden measures depict the average across an entire economy while the simulated tax burdens only show the burden on a specific taxpayer within the economy. While the state as a whole may be below average, there is no reason to expect that all taxpayers within the state will also be below average.

This study has examined the tax burden placed on households by actually simulating several households and then estimating their tax burden. These tax burdens were estimated in 40 different cities across 13 different states with the majority of cities located in Oklahoma and the six states that border Oklahoma. The results of this work have shown that households located in the Oklahoma cities are generally taxed at a relatively high rate, a finding that is counter to the common perception that Oklahoma is a low tax state. Finally, conclusions were drawn from these results which showed how relatively high taxes on households could negatively impact the rate of economic growth in the state. Based on these inferences, a policy of lowering taxes on households should encourage economic growth.

Tables 1 - 18 and References

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