Discussion of taxing digital subscriptions raises questions about replacing revenue from income and property taxes.
OKLAHOMA CITY — Oklahoma lawmakers discussing taxes on streaming services and software subscriptions also debated whether cutting income or property taxes could leave residents paying more taxes on their purchases.
Rep. Scott Fetgatter, R-Okmulgee, questioned whether the Legislature could agree on such a trade. Cutting taxes draws support, he said. Finding votes for a replacement is another matter.
“There is no world that I feel I can see a path to tax reform in the state of Oklahoma. None. Zero,” Fetgatter said.
The exchange came during a Sept. 28 study requested by the Oklahoma Municipal League and hosted by Rep. Mark Lepak, R-Claremore. The subject was taxing digital products and subscriptions that have replaced many purchases once made in stores.
Lepak said the study was not intended to answer how Oklahoma would replace its income tax. He also said lawmakers should consider taxing digital services on its own merits.
“This policy shift deserves consideration, even if decoupled from the idea of eliminating the income tax,” he said.
No tax change was adopted. But the discussion reached beyond subscriptions to the larger debate over taxes and the services they pay for.
From store purchases to subscriptions
Dave Andren, the Municipal League’s director of research, described the change: People who once bought CDs now subscribe to music services. DVDs have given way to video streaming. Businesses that bought boxed software now pay to use programs online.
The purchases have changed, but cities still need money for police, fire protection, streets and other services.
“The economy has changed, but our policy has not,” Andren said.
The league argues that the shift to untaxed digital subscriptions has weakened the sales tax base on which cities rely.
Corey Jager, tax policy manager with the Oklahoma Tax Commission, said lawmakers would need to decide what to tax and which exemptions to retain. Categories discussed included music, video, digital books, audiobooks, video games and software.
Jager estimated that taxing digital products could bring in about $40 million annually for the state. County and municipal collections would be additional.
That figure is preliminary. The commission used Louisiana’s projection, adjusted for Oklahoma’s population and sales tax rate. It was not based on a specific Oklahoma bill, and collections would depend on the products lawmakers included.
Businesses would also need time to prepare to collect the tax, Jager said, and the commission would need time to write rules and provide guidance.
Cutting taxes, paying for services
Fetgatter, who chairs the House Appropriations and Budget Finance Subcommittee, said he supported tax cuts, including eliminating property taxes. His concern was what would follow.
Income taxes fund state government. Property taxes support public schools, counties and other local entities. Reducing either raises questions about how those services would be paid for.
There is also a hurdle to raising replacement revenue. Under Oklahoma’s Constitution, revenue bills require voter approval unless they receive support from three-fourths of the membership of both legislative chambers.
Lepak said Oklahoma needs a comprehensive review of its tax system.
“We have a 21st century economy we’re living in that was built on an economy from 100 years ago,” he said. “Perhaps we should consider making some changes to better align the reality of an economy to the day we’re living in.”
He also said economic growth could increase collections even as rates fall. Spending efficiency should be part of the discussion, he said.
Fetgatter pointed to deteriorating streets in his district and questioned what counties and schools would do without property tax revenue.
Lawmakers need to address those consequences alongside the tax cuts, he said. They could reduce services, keep the taxes or find another way to collect the money.
