Oklahoma Considers Flat 4.75% Income Tax Rate in New Bill: Here's the Potential Impact for Taxpayers and the State

Oklahoma lawmakers are considering a bill that would simplify the state's income tax structure, potentially reducing rates for some residents while increasing taxes for others.

Senate Bill 304 would establish a flat 4.75% income tax rate and increase standard deductions to $13,550 for single filers and double that for married couples. Currently, the state uses a tiered system.

"The lower tax rate is really not the big deal," said Paul Hood of Hood CPAs. "The big deal is doubling that standard deduction. A lot of people, that larger standard deduction would take it."

Hood suggests the legislation is part of a broader strategy to eventually eliminate state income taxes.

"They're piggybacking another bill that says every time the state of Oklahoma hits a certain milestone, that rate drops even more," he said.

Hood expressed uncertainty about the bill's impact on itemized deductions, warning that eliminating these could potentially "hurt a lot of people" if not carefully implemented.

"The thing that I don't know about is is the key is you either itemize or you take a standard deduction. Itemized means on your federal return, you take mortgage interest and charities and property taxes, and if that adds up above the standard deduction, you take it. I am not 100% clear because it says in the proposed law that you don't get the federal tax deduction. Well, what does that mean? So if they do away with itemized deductions. That's really going to hurt a lot of people, but I don't think that's what they're doing, because they still call it a standard deduction," said Hood.

The proposal aims to make Oklahoma more competitive with neighboring states like Texas, which has no state income tax. However, Hood cautions that local governments will still need to generate revenue through alternative means.

"States and cities, counties, they've got to get their money from someplace," Hood noted. "In theory, they'll get higher revenues from sales taxes, business payroll taxes, and by making the state more business-friendly."

The bill remains under consideration, with potential implications for Oklahoma taxpayers still being evaluated.