By Bill Schonacher
Oklahoma is a land of possibility. It can grow into a thriving economy that stands at the forefront of American industry. It can be a premiere destination for top companies to expand and relocate and a place where exciting, new companies begin their story. But that growth won’t happen until integral parts of the state’s tax system are improved.
A three-pronged apportionment formula determines how much income Oklahoma businesses are taxed on. It’s inhibiting the state’s economic growth by deterring businesses from coming to Oklahoma because the three-factors make the tax code more complicated. The time has come to move to a simpler formula and get the Sooner State on track to greater prosperity.
Apportionment
An apportionment formula is used to calculate a corporation’s income by state. It then pays taxes on the income earned in Oklahoma.
The state’s current three-factor apportionment formula weighs three things: Oklahoma sales, Oklahoma payroll and Oklahoma property.
Calculating it is confusing, outdated and discourages businesses from physically locating property and employees in the state. Moving to a single factor apportionment, based entirely on sales made in Oklahoma, results in a more equitable way to tax businesses and eases the tax burden on businesses investing in property and payroll in Oklahoma. It would also make Oklahoma more competitive since twenty-eight states use the single-sales factor formula, including some of Oklahoma’s top competitors – North Carolina, Indiana and Illinois.
To be clear, it does not eliminate the payroll and property taxes paid by a business – it just doesn’t use them to calculate a business’ total income tax.
Throwback rule
Oklahoma’s apportionment formula also uses something called the “throwback rule.” Sales revenue from another state that does not tax the income from the sale – states like South Dakota and Wyoming – are added to the corporation’s Oklahoma income. The income is being “thrown back” to Oklahoma, placing the Oklahoma business with a higher tax burden, even though some of the sales didn’t occur in Oklahoma. In short, Oklahoma is taxing sales it doesn’t have the right to tax. Just because a state chooses not to tax sales, that doesn’t mean Oklahoma has the right to tax it.
Fortunately, two bills introduced in the Oklahoma Legislature this session offer complimentary solutions that would make the state’s tax code more competitive and pave the way for future growth. House Bill 1645, written by Rep. Cody Maynard, R-Durant and Sen. Brent Howard, R-Altus, eliminates the burdensome throwback rule. House Bill 1375, written by Rep. Jeff Boatman, R-Tulsa and Sen. Dave Rader, R-Tulsa, replaces the three-pronged apportionment formula with a single-sales factor formula.
We know that states who have invested in pro-growth tax strategies, like apportionment reform and elimination of a throwback provision, have done much better economically than those who have not. They have seen increased investment and in-migration, leading to more robust economic growth.
Eliminating the throwback rule and moving the state to a single-sales factor apportionment formula might not seem like the most exciting tax reform, but it will substantially increase business investment in jobs and facilities in Oklahoma and strengthen Oklahoma’s economy. Oklahoma is on the cusp of greater prosperity for its citizens. Now is the time to turn possibility into reality.
Bill Schonacher is the CEO of IBC Bank and chairman of the The State Chamber of Oklahoma Board
