White Paper
04-28-02

RE: Oklahoma Task Force on Tax Reform

After reviewing preliminary, published information on the recommendations of this Task Force for "tax reform" in Oklahoma, this committee has strong reservations about the current proposal. Several questions need to be addressed by the Legislature before our support can be given to this concept.

As a proposed, new sales tax on architectural services this concept would require a 4.5% per cent sales tax to be added to all architectural and engineering services, among a host of other services not now taxed. In return, personal income taxes would drop from a maximum of 7% to 4.5%. In total, the Task Force's projections show that total state income would not change after implementation of these changes.

At the global level, several questions arise.

1. This Task Force was organized at the behest of the Governor to find a way to adopt the "Texas Plan" for taxation, i.e. no personal income taxes in order to stimulate economic growth in Oklahoma. The current Task Force recommendations still leave 2/3 of existing personal income taxes in place. Does anyone really believe that this fact will stimulate business development in Oklahoma?

2. The current Task Force recommendations place additional costs and administrative burdens on the majority of businesses in Oklahoma, small businesses. Does anyone really believe that this fact will stimulate business development in Oklahoma?

3. Because the Task Force's recommendations are revenue neutral the only accomplishment, if enacted, would be a major shift in those paying state taxes. In order to provide tax savings for individuals in the form of lowered income taxes, Shawn Ashley of the Office of State Finance is quoted as saying that "$506 million of the $776 million in sales tax increases are business-to-business taxes - taxes on services provided by a business to other businesses, not individuals." The very businesses that are Oklahoma's economic base would have their taxes increased. Does anyone really believe that this fact will stimulate business development in Oklahoma?

4. The current Task Force recommendations maintain the existing personal income tax structure and its associated governmental bureaucracy. In addition these recommendations will create a mountain of additional paperwork, reporting, auditing and bureaucratic requirements on the thousands of businesses and individuals not currently assessed a service tax. The cost of the additional governmental employees and departments will offset a noticeable percentage of the planned increase in revenue. How accurate is the Tax Force's recommendation of net benefits?

5. The Task Force asserts that current architectural and engineering services in Oklahoma represent an economic base of $1,601,657,000. Architectural firms average $116,000 in billings per employee. Oklahoma currently has about 800 in-state, licensed architects, 400 of whom are sole proprietors and the rest in firms averaging 2 employees per licensed architect. Based on this ratio architectural services represent an economic base of $185,600,000. Using similar averages there would need to be over 12,200 persons engaged in the private-sector, taxable engineering services business in Oklahoma. This figure and the Task Force's total economic projections are highly questionable.

6. Because the Task Force's recommendations are revenue neutral the only accomplishment, if enacted, would be a major shift in those paying state taxes. In lieu of every citizen paying proportionately to support the well-being of the state, the users-of-services are theoretically being asked to pick up an additional 1/3 of the tab currently levied on state citizens. Due to the high proportion of new business-to business taxes to be generated with this proposal (see #3 above) Oklahoma businesses that already provide the jobs of its citizens are being asked to pick up another 2/3 of the new sales tax increases.

At the individual business level there are several additional questions. Because this is a new sales tax architectural and engineering service firms will have one of two choices. Either they absorb the cost of this tax or they add this cost to their current fee structure. Either choice is detrimental to new business development for both existing architectural and engineering firms and new firms wishing to reside in Oklahoma.

1. Many architectural and engineering firms have long-standing relationships with many of their clients. These relationships include a standardized fee structure in many cases. Because of the low profit margins of many small business architectural and engineering firms, those firms whose clients can not/or will not renegotiate those agreements will be forced to absorb the additional services taxes and they will simply go broke.

2. Many small architectural and engineering firms are specialized in certain fields and conduct a high percentage of their business with, usually, tax-exempt organizations such as schools, churches and federal, state, county and local governmental agencies. Will these agencies provide tax exemption certificates to architectural and engineering firms? Or, will architectural and engineering firms be forced to absorb the cost of the new service taxes when these services are provided to this group of clients? The Task Force's current estimate of an economic base of $1,601,657,000 for architectural and engineering services in Oklahoma will be highly eroded by such an exemption due to the fact that a great many architectural firms provide much of their services to currently tax-exempt organizations.

3. The Task Force's executive summary report deals with the "pyramiding" of subcontractor services with the following statement. "To deal with both of these issues, in taxing construction, both new and repair and remodeling work, it was decided to provide for a full resale exemption for all goods and subcontractor services and to charge a sales tax on the finished price of the new construction or repair or remodeling work (both residential and commercial)"

SUMMARY:

The recommendations of the Oklahoma Task Force on Tax Reform are revenue-neutral and originally designed to encourage business development in Oklahoma.

Unfortunately, this plan only shifts taxes from individual citizens, the recipients of the state's benefits, to the general business community, the creators of the economic base in Oklahoma. Oklahoma as a whole does not benefit. Economic studies have long shown that higher taxes on businesses act as a deterrent to business development. While this plan will undoubtedly be progressively favored by higher-income individuals, this plan is very unfriendly to the development of new and existing businesses in Oklahoma.