Flipping tax cuts to tax increases

TaxesOKChanging the plain meaning of words is an art form attorneys practice with regularity, but a current argument before the Oklahoma Supreme Court could cost you thousands in additional taxes – retroactively.

As the Oklahoman Editorial Board wrote early this week, “This debate is not merely academic. If the court rules that SQ 640’s provisions apply to tax cuts, a group of 35 state lawmakers note that could result in automatic tax increases across Oklahoma as past tax cuts are overturned. Among the potential changes: Most Oklahomans could see their income tax burden increase by 27 percent as the rate surges from 5.25 percent to 6.65 percent.”

10 Oklahoma legislators held a press briefing at the state Capitol with Jonathan Small of the Oklahoma Council of Public Affairs to discuss how much an OK Supreme Court ruling applying State Question 640 -- OK's tax limitation measure, passed by voters in 1992 -- to tax reductions would cost citizens.

10 Oklahoma legislators held a press briefing at the state Capitol with Jonathan Small of the Oklahoma Council of Public Affairs to discuss how much an OK Supreme Court ruling applying State Question 640 — OK’s tax limitation measure, passed by voters in 1992 — to tax reductions would cost citizens.

In 1992, Oklahoma voters approved State Question 640 to add a taxpayer-protection provision to the state Constitution. The constitutional amendment requires bills creating or raising taxes, or creating new revenue streams for the general purpose of funding government, to originate in the House of Representatives, as well as be submitted to a vote of the people or receive three-fourths approval by both legislative bodies. In addition, the legislation must be passed prior to the last five days of the legislative session.

The constitutional amendment was a direct response from citizens following tax increases and spending hikes. Everyone — supporters and opponents alike — understood the provision would make it harder to raise taxes. That was the point. That is what a plain reading of the law says. That is what voters approved at the ballot box 22 years ago.

Oklahoma Supreme Court

Oklahoma Supreme Court

Recently, state Supreme Court heard arguments regarding the constitutionality of Senate Bill 1246, which cuts the state personal income tax if revenue targets are met. Those who oppose personal income tax cuts in Oklahoma are voicing their support for this challenge – Marxist minions and agencies promoting government spending increases.

Several have analyzed the legal arguments of the lawsuit before the Oklahoma Supreme Court regarding SQ 640. Even if the decision is not retroactive, the impact on this year’s and future years’ tax filings is significant, especially for certain individuals. OCPA provides a general overview of many of the previous tax cuts that could be ruled unconstitutional or challenged.

• 1998 reductions of the state’s personal income tax rate from 7.00 percent to 6.75 percent
• 2005 reductions of the state’s personal income tax rate from 6.65 percent to 6.25 percent
• 2006 reductions of the state’s personal income tax rate from 6.25 percent to 5.25 percent
• 2005 manufacturing exemption against the state’s corporate income tax for distributors
• 2014 setting of the state’s gross production tax rate at 2 percent for all new oil and natural gas wells drilled in the state, for the first three years of a well’s production
• 2005 repeal of Oklahoma’s estate tax
• 2005 tax relief for all disabled veterans filing personal income tax returns in Oklahoma
• 2006 tying of the state’s standard deduction for taxpaying families to match the federal standard deduction
• 2006 tax relief for all private-sector retirees filing personal income tax returns in Oklahoma
• 2006 tax relief for all veterans filing personal income tax returns in Oklahoma
• 2008 tax credits for aerospace engineers and aerospace employers
• 2014 extension of tax credits for aerospace engineers and aerospace employers

Clearly the vast majority of Oklahomans are going to be negatively impacted on a prospective basis by a ruling of unconstitutionality, even if the Court does not rule the tax cuts will be undone on a retroactive basis.

OkTaxSandwitchA retroactive ruling would be an administrative nightmare. For example, would the beneficiaries of estates now be considered to be subject to collection of the back taxes the estates would now owe? Would those retirees who have been living in Oklahoma now be subject to recapture of the tax on the income that was excluded by the increase of their deductions from $5,500 up to the current $10,000?

The following are some examples of the impact to certain types of individuals who benefit from current tax provisions that were the result of legislatively enacted tax cuts that failed to meet the three requirements of State Question 640.

* Disabled veterans could see tax increases of $500
* Surviving spouses of military service members could see annual tax increases
* Active military personnel could see annual tax increases
* Retirees could see tax increases of $1,000
* Middle-income families could see tax increases of $900
* Single mothers could see tax increases of $200
* Farmers and ranchers could see tax increases of $400,000
* Tax relief for aerospace, oil and gas and for coal production could be wiped away
* School districts and the teachers’ retirement system could sue the state (i.e., taxpayers) for millions in unpaid taxes that could be owed

Would the Oklahoma Supreme Court make this radical reversal?  The Oklahoman noted October 15, that the “justices pepper state attorney with questions” some of which seem to indicate they might.  Click here for the Oklahoman story by Rick Green.

TaxCutsStanley M. Ward, an attorney with Ward & Glass and “a draftsman of S.Q. 640” said in a release, “I know well what the intent was, namely, to prevent tax increases without a legislative super majority or a vote of the people. It absolutely was not designed to be applicable to tax decreases. Jerry Fent is a great lawyer and serves the public’s interest well. However, on this issue, his arguments are misguided, but creative.”

Let us hope the Oklahoma Supreme Court follows the best guides of reason, protects the people and supports tax limitations that have provided economic prosperity in Oklahoma even as a national economy continues to falter.

A previous story on this topic posted on Tulsa Today and is available here.