A history of Oklahoma taxation

This is an article I was asked to write for the Southwest Ledger

A history of Oklahoma taxation

By Dr. James W. Finck
University of Science and Arts of Oklahoma

There is nothing more American than taxes. They have been with us since our founding and are part of the reason for our separation from Great Britain. Before the French and Indian War, colonial legislatures raised revenue for their expenses. This gave the individual colonies a great deal of autonomy as their local leaders were the ones taxing them. However, after the War, England was in great debt, and when they sent the army to the colonies, they also sent bureaucrats who noticed that the colonists had not been paying all their royal taxes. As England began to impose new taxes on the colonists to pay for their share of the war debt, the colonists balked at the new fees. However, even more than paying higher taxes, the colonists were upset that Parliament was now levying the taxes instead of their local legislatures. Whereas before, the colonists had some power over taxation by electing their own legislatures, they were now powerless as those doing the taxing did not answer to them. The cry was “No taxation without representation,” but the real beef was the loss of their independence. As the colonists resisted the new taxes, the crown began to implement punishments until the colonists got fired up enough to rebel.

After the colonies achieved their freedom, taxation was still an issue. America’s first government, the Articles of Confederation, did not give the federal government taxation powers. The new states still protected their local autonomy and feared a strong central government. The Articles of Confederation proved ineffective, so the Founders created a new constitution, which gave the federal government the power to tax. Alexander Hamilton, the new secretary of the Treasury, created the first federal taxes. For the federal government, Hamilton focused on import tariffs, the sale of alcohol, and sales of land in the west to fund the government. The federal government did not need much money in the 19th Century as the federal government was relatively small with limited power. There was a change during the Civil War, when the federal budget increased to pay for the War and instituted a 3% income tax to cover the cost. Congress repealed the short-lived tax in 1872. By design, it was state and local governments in the 19th Century that had the most responsibility over their populations, meaning they carried most of the tax revenue. The principal form of taxation for state and local governments came from property taxes.

A significant change came at the end of the 19th Century with the birth of populism. Whereas Americans neither asked for nor expected government assistance during most of the 19th Century, populists felt the government was responsible for offering aid to its people. While always a vocal minority, they called for radical changes such as government ownership of railroads and low or no-interest loans for farmers. While still radical at the time, other issues gradually weaved their way into law with the progressives, and some would have an enormous impact on Oklahoma, namely the referendum and income tax. Progressives pushed for a graduated income tax as a way to distribute wealth. While the populist party only ran candidates in three presidential elections, some of their ideas came into vogue as progressives made them their own and, instead of trying to push everything all at once, gradually introduced them to a much more embracing population.

By the time Oklahoma became a state in 1907, the Populist Party had officially become extinct. Still, Oklahoma Territory had completely embraced populism during its heyday, and its principles of active government had not died in the state. Reading the Oklahoma Constitution is like reading a populist manifesto. When the president of the Oklahoma State Convention, William H.  Murray, gave his opening address at the convention, he stated, “Then let us place a limitation on the power to tax so that no citizen shall be compelled to pay more than two dollars on the hundred dollars for all State and County purposes, and in order to make up the deficiency let us levy an income and inheritance tax.” Though the state did not pass an income tax with the original Constitution, deciding to stick with the traditional property tax instead, they did write it into the Constitution as a possibility in the future. Section X part 12 reads, “The Legislature shall have power to provide for the levy and collection of license, franchise, gross revenue, excise, income, collateral and direct inheritance, legacy, and succession taxes; also graduated income taxes, graduated collateral and direct inheritance taxes, graduated legacy and succession taxes; also stamp, registration, production or other specific taxes.”

It did not take long for Oklahoma to institute new taxes. The next year, the first legislature of Oklahoma, in 1908, passed a series of new tax laws, including an excise tax on oil and gas, a new graduated land tax, an inheritance tax, and a state income tax, the first state to do so. The oil and gas tax was the most hotly debated in the legislature. It was signed by Gov. Haskell, who felt it unfair and hoped future legislatures would fix the issue if it proved too burdensome on those industries. Though property taxes were not new, the new structure of this property tax was a graduated tax starting with land only over 640 acres. The inheritance tax was also graduated based on who received the property after the owner’s death. If the inheritance went to the widow or child, it was taxed at 1%; if to a brother, sister, or their children’s spouse, then it was taxed at 1.5%; if to aunts or uncles, then at 3%; if other family, then 4%; and, finally, if out of the family, then at 5%.

The income tax was meant to be the most significant and progressive tax. Only the territory of Hawaii had an income tax, according to The Tax Foundation, which calls itself the nation’s leading independent tax policy 501(c)(3) nonprofit. While that may be true, it also records Oklahoma’s income tax beginning in 1915, the same date as almost every online source reports. While the 1915 date is almost universally believed, the first state income tax in Oklahoma was passed on May 26, 1908. The problem with the 1908 law was that there was not a strong way to collect the tax, and it brought in very little money. The law collected the tax based on “gross income from salaries, fees, trade, profession, and property not taxed.” The key phrase seems to be “profession, and property not taxed.” Section 5 seems to clarify this meaning. It reads, “The above tax shall not be levied upon the income derived from property already taxed, not upon income of less than eighteen hundred dollars [$1,800 was for 1908 only as half the year had passed, starting in 1909 it was be $3,500]. The incomes above referred to are those derived from property not taxed in this state, from salaries, fees and commissions, public or private, from annuities, from trades or professions, and from any other source the incomes from which are not specifically exempted from taxation by law.” 

With no case law on this tax to translate the law, it seems that income made from land already taxed was not taxable. So, if you were a farmer, as most Oklahomans were, and you paid property taxes, as all Oklahomans did, then you did not have to pay income tax off the money you made off said property. The exemption could be that under the new property tax law, only land over 640 acres was taxable. So “The incomes above referred to are those derived from property not taxed,” could reference incomes from farms first 640 acres could be taxed. However, the system worked. A 1913 article in the Washington Country Sentinel complained that only 13 people in the country had to pay income tax under the new law because they were the only ones making over $3,500. The article added not to fret for those 13 because none of those men were lying awake at night wondering how to pay for their next meal. Ultimately the primary issue was the lack of funds with the new taxes. According to a July 7, 1908 article in The Daily Ardmoreite, the State of Oklahoma was going to bring in only about half of what the territory did. Something would have to change.

The change came in 1915 when a new income tax law was passed. Most importantly, the new law had provisions to guarantee the state collected the tax, including harsh penalties for those who did not pay. The new law read, “Each and every person in this state shall be liable to an annual tax upon the entire net income of such person existing or accruing from all sources during the preceding calendar year, and a like tax shall be levied, assess, collected and paid annually upon the entire net income from all property owned, and of every business, trade or profession carried on in this state by persons residing elsewhere.” Some key differences in the laws were that everyone paid based on their net income, and there were several deductions, such as $4,000 for being married and $300 for each dependent. Another change was shrinking the number of tax brackets, something done again in 1917 to be more efficient.

1908 1915 1917 
IncomeMillIncomeMillIncomeMill
$3,500-$5,0005first $10,00010First $10,0007 1/2
$5,000-$10,0007 1/2$10,000-$25,00020$10,000-$25,00015
$10,000-$20,00012$25,000-$50,00030over $25,00020
$20,000-$50,00015$50,000-$100,00040  
$50,000-$100,00020over $100,00050  
Over $100,00033 1/2    
The mill rate is the amount of tax payable per dollar of the assessed value of a property

The new income tax law did help. In 1910, Oklahoma only collected $4,915 from income tax, while in 1916, it collected $400,000, yet it was still not what was hoped for. In 1917, Oklahoma collected $29,000,000 in taxes. $3,500,000 came from the oil and gas tax, which was at 3%; $23,500,000 came from property tax; $1,000,000 came from a new automobile tax; and finally, $500,000 came from property tax. Though it was an increase, it was still a small percentage of the state’s income.

The next major change came suddenly in 1929. The Great Depression altered every aspect of American life, and taxation in Oklahoma was no different. With the Great Depression, property values plummeted along with the revenue of those taxed. Most states would not reach their 1927 property tax values again until 1952. With the populist Democratic Gov. Alfalfa Bill Murray still in the Governor’s mansion, the Depression meant tax reform. In 1931 the state created the Oklahoma Tax Commission, whose job is to collect taxes and enforce tax laws.

1933 brought two significant changes. First, in July, a sales tax of 1% was passed after a tremendous amount of legislative wrangling. The Governor fought the bill, feeling that it would start with 1% but would grow as many thought it more equitable than the income tax. The other sticking point should sound similar today as the debate was between a general sales tax that covered everything or a selective sales tax that excluded food and clothes. The two proposals were a 1% general tax or a 2% selective tax, and the 1% won. Eleven other states would also pass a sales tax that year, making Oklahoma tied with the first states to do so. Later in 1935, just as Gov. Murray predicted, the tax went to 2% for the state but did remain that way until the 1980s.

The other legislation happened in August. With a reliance on gas, inheritance, corporate, income, and now sales tax, the people of Oklahoma, through a special election, decided to drop the property tax. The Nichols Amendment removed the state property tax and dropped county and town property taxes from 43.5 mills to 27 mills. Before the passage of the Amendment, counties could collect 8 mills, cities 10 mills, and schools 5 mills. The new law only allowed 15 mills to be distributed between the three. Schools did have the option of voting an additional 10 mills and could also vote 2 mills for colored schools, equaling the allotted 27 mills. This reduction was estimated to eliminate $2,500,000 in tax revenue.

Like the rest of the nation, Oklahoma economically recovered with the start of World War II. As the state recuperated, there also began a shift in Oklahoma politics. During the 1950s and 1960, the state became much more conservative, voting for Richard Nixon in 1968. Yet even today, as Oklahoma is one of the strongest conservative states in the nation, its roots were much different. Even with current tax codes, Oklahoma began its statehood years as a populist stronghold, and nowhere is this more seen than in its tax laws. Oklahoma was the first state to pass an income tax and joined with twelve other states as the first to levy a sales tax. Over the years, these rates have fluctuated, but it does not take away Oklahoma’s important role as a forerunner on much of modern taxation.

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