Oklahoma freezes standard tax deduction amounts Preemptive move to avoid potentially costly Trump tax reform changes

Federal tax reform is still a ways off, but the prospect of an Internal Revenue Code rewrite already has prompted Oklahoma to change one of its tax laws.

Oklahoma tax return

Republican Gov. Mary Fallin on (R) May 12 signed legislation that will decouple the Sooner State’s standard deduction from the current federal standard deduction.

The reason for the change? If the Trump Administration’s proposal to double the federal standard deduction eventually becomes part of the tax law of the land, Oklahoma stands to looks a lot of tax revenue.

Federal, state tax ties: Oklahoma’s tax system, like that of many states with income taxes, is closely connected to taxpayers’ federal filing data.

In the 41 states and Washington, D.C., that currently tax their residents’ incomes, those state filings to a large degree conform to many features of the federal tax code. They use similar definitions of what is considered income, what can be deducted and how certain tax transactions are treated.

And in Oklahoma’s case, that includes tax laws that automatically change when there are adjustments, such as the annual inflation tweaks, to the federal code.

Conscious tax decoupling: That’s why H.R. 2348 was introduced in the Oklahoma House. It separates the state’s standard deduction amount from that used on returns sent to Uncle Sam.

The new law is effective with the 2017 tax year and freezes the state’s standard deduction at the current levels, which are the same as the inflation adjusted 2017 federal standard deduction amounts. That’s $6,350 for single filers and for married taxpayers filing separately; $9,350 for head of household filers; and $12,700 for jointly filing married taxpayers.

The bill moved quickly through the state legislature, narrowly passing in the House on May 2 and getting overwhelming support of the state Senate two days later. Fallin signed the measure into law last week.

Budget benefit, but at what cost? In debating the change, supporters of the decoupling characterized it as a “safety measure” that will help raise new revenue and fill a projected $878 million hole in Oklahoma’s budget by raising an estimated $4.4 million

It also “protects Oklahoma from seeing a really large revenue loss,” especially if the federal deduction amount is changed, Gene Perry of the Oklahoma Policy Institute told Tax Analysts.

Opponents of the change, however, say the separate Oklahoma standard deduction amounts put the tax burden heavily on the backs of working families. Without some sort of indexing, as Oklahomans earn more, their frozen standard deduction amounts will provide less tax benefit.

Many states are struggling with similar fiscal shortfalls. As the federal tax reform process progresses, it will be interesting to see how many decide to follow Oklahoma’s example and separate themselves from the federal tax code on budgetary grounds.

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