Billion-dollar budget hole causes confusion over multitudes of tax breaks
Oklahoma Gazette February 17, 2010
By Scott Cooper
Oklahoma had a dollar for every tax credit and tax exemption in the books, there might not be such a thing as a budget shortfall. The state tax code provides so many deductions and incentives that a dog-training, mushroom delivery driver who moonlights as a volunteer firefighter and lives in an energy-efficient home would send any tax preparer to the medicine cabinet.
View the complete spreadsheets of tax credits and exemptions
Did you contribute to a political campaign? You can get a tax break. Did you produce a film in the state? There's a credit. Have you purchased a ticket to an Oklahoma City Thunder basketball game? You may have noticed there was no sales tax attached.
"There are more incentives than you can shake a stick at," said Larkin Warner, Oklahoma State University professor emeritus of economics and a member of a state tax credit review committee.
In 2008, an estimated $5.5 billion was handed out, exempted or reduced from the state's piggy bank due to Oklahoma's tax laws. That's more than half of the state's total budget, and more than four times the size of 2011* fiscal year's projected budget hole of $1.2 billion. The inclination for lawmakers is to cut spending.
* Possibly intended 2010 fiscal year's projected budget hole of $1.2 billion?
But is there another way?
"The default principle has been when you have budget shortfalls, that all of the sacrifices fall on programs that are funded directly through the (legislative) process," said David Blatt, executive director of the nonprofit Oklahoma Policy Institute think tank. "None of it falls on the vast array of benefits and preferences we do through the tax code."
Some of the tax credits and exemptions are universally accepted by conservatives, moderates and liberals - things like the personal exemption on income taxes or a credit for child-care expenses.
But in this monster of an economic crisis, when jobs and some of the core functions of government are at risk, political forces of all three ideologies are beginning to question the goodie bags the state hands out each year.
The state of Oklahoma, in this sort of backdoor (non-appropriated) method of tax credits and tax exemptions, gives away hundreds of millions of dollars," said state Treasurer Scott Meacham, a Democrat. "People say they want to reduce the income tax rate. If we eliminated all of those (tax credits) or put some type of cap on all of those, we could significantly reduce the income tax rate in Oklahoma."
Tax credits have their fair share of defenders decrying anyone using the term "giveaway."
"Most of our incentives are performance-based; they require certain action before the incentives are extended. Therefore, they are not giveaways," said Ronn W. Cupp, senior vice president for government affairs with The State Chamber of Oklahoma.
Even members of the Republican Party and the far right, normally a group practically sworn to defend tax cuts and credits, are putting on their reading glasses for this subject.
"Some of them have outlived their usefulness. Some of them are not creating jobs and need to be eliminated," said Rep. Jeff Hickman, R-Fairview, chairman of the state House Subcommittee on Revenue and Taxation. "I think there is going to be a desire to do that. A lot of them we inherited and have been on the books for a long time."
Through data from state agencies, an Oklahoma Gazette analysis shows $5.53 billion in various tax incentives going out the door in 2008. That figure can be broken down into three categories: $1.26 billion in tax credits and deductions taken on personal and corporate income taxes; $4.21 billion in sales and revenue tax exemptions and rebates; and $57.9 million in tax credits used against insurance company premium taxes.
According to the Oklahoma Tax Commission's "Tax Expenditure Report," published in even-numbered years, there are 455 tax exclusions, deductions, credits, exemptions, deferrals and rebates. Tax credits and income tax deductions take up 117 alone, with sales and use tax coming in at 149 exemptions.
Of the hundreds of incentives on the state books, 40 are tax credit programs where the state government gives out payments to qualifying companies. The credits can be used to offset tax liabilities or be invested back into the company. In 2008, more than $145 million in state credit payments were made. Some programs give credits for wind turbines, ethanol and dry fire hydrants.
It's the credits that have become front and center as government's top officials try to hammer out a budget deal.
coverState-Rep-Ken-Miller-2-10-10-40mh.jpg"That is something that needs to be looked at continuously," said Rep. Ken Miller, R-Edmond. "Tax credits are not meant to be corporate welfare, but an economic development tool used to produce high-wage jobs and diversify our economy. What we need to do as legislators is make sure that those tax credits continue to meet their intended purpose."
In his 2011 budget proposal, Gov. Brad Henry suggested the elimination, capping or suspension of 18 tax credit programs. The governor estimates the moves could save more than $102 million.
While the billions of dollars handed out by the state for various tax incentives and deductions seem staggering, there are some things to keep in mind. Large chunks of the credits and exemptions are for routine items like the standard itemized deduction, personal exemption and state earned-income credit applied when filing income taxes. Those three account for more than three-quarters of $1 billion.
Oklahoma residents also may see dollars come their way or avoid paying some, if not all, taxes if they are blind, breed specially trained dogs, adopt, serve in the military, were a prisoner of war, have a physical disability or are over the age of 65.
But the bulk of tax dollars leaving the state coffers or stopped from coming in are from sales and revenue tax breaks. Each year, state laws exempt or reduce billions in taxes owed to the state. And this category grows bigger every year.
In 2008, the state lost an estimated $1.6 billion in sales to manufacturers, the largest of any tax incentive. This category is comprised of a hodgepodge of exemptions in the manufacturing sector, 16 in total. They range from the sale of property to a manufacturer to packaging materials sold. It also has a specific citation on exemptions for deposits of returnable cartons, crates, pallets and containers used to transport mushrooms from a farm for resale.
Another huge tax exemption comes from resale items, such as used cars and electronics. Mushroom would better describe this exemption as the amount taken doubled from $773 million in 2006 to $1.5 billion in 2008.
"This is a real perplexing one," Blatt said of the substantial increase. Sales and revenue tax exemptions show what is protected by politicians. The oil and gas industry had its gross production taxes protected to the tune of $88.16 million in 2008.
Boating also has its privileges. Any new residents of Oklahoma owning a boat do not have to pay excise taxes when registering the craft - an estimated loss of $207,792 to the state. And a boat owner can get a credit on their registration fee and excise tax for replacing a stolen or defective boat or motor. That saw the state reimburse $23,588.
The state also gave tax exemptions in 2008 for sales of vitamins by chiropractors, classic cars, cigarettes sold to veteran hospitals, horses, aircraft parts and repairs, funeral home transportation and tourism brokers.
"Every year I have been here, we have added new exemptions for different groups," said Meacham, who joined state office in 2003. "They will come to the Capitol, and there is usually some Christmas tree bill that adds all these people to the list."
One lawmaker is crusading to reform tax credits being sold and used to aid insurance companies. Rep. David Dank, R-Oklahoma City, created a task force last year to examine the use and alleged abuse of transferable tax credits.
At least seven such credits exist that can be used in any manner the recipient wishes. It could go toward paying off debt, tax obligations or investments in the company, or sold to anyone who could use them. And Dank found out that was usually insurance companies.
"Every insurance company in the state pays 2.25 percent premium tax. They have huge obligations to the state by virtue of that," he said.
According to figures from the stateinsurance department, nearly $58 million in transferable tax credits was used to pay 2008 insurance company premium taxes. That's more than one-third of the total premium taxes collected by the state that year.
Several of the credits came from programs outside the insurance industry. More than $10 million in coal credits (awarded to utility companies for purchasing the fossil fuel) were sold to and applied by Oklahoma insurance companies. Another $4.6 million came from historic building restoration tax credits.
With the governor, conservative Republicans and a progressive think tank all merging into the same lane on tax credits and exemptions, redoing some of the tax code may get a green light. But Meacham believes it will take some gut-checking.
"The Legislature hasn't had the intestinal fortitude to stand up to those interests to take them away," said Meacham, who is not running for re-election. "Now, times like this will change that dynamic and give you the opportunity to make those changes."
The governor's proposal to eliminate, cap or suspend nearly 20 tax credits is getting attention in the Legislature, but with questions.
"If they are meeting their intended purpose, and they are producing high-wage jobs, and they are growing the economy, then keep them," said Miller, chairman of the House Appropriations and Budget Committee. "If they are not, don't suspend them - get rid of them."
Some are finding it difficult to determine whether or not tax credits are working. Warner's group, the Incentive Review Committee, was statutorily created in 2004 for the sole purpose of examining the state's tax credit programs. But it has not been easy going for the researchers. Warner said the committee is given a staff, but no aides or funding for research. And with some of the information needed to analyze tax credits confidential, the task becomes even more difficult.
"There is always a fundamental problem in looking at economic incentives: Would the new expansion (have) occurred anyway without the incentive?" Warner asked. "You're not going to get anywhere by asking the folks who administer the incentives or the people who are receiving the benefits because they are going to say, ‘Yes, this played a very important role.'"
The State Chamber's legislative agenda opposes "attempts to reduce or repeal necessary economic development incentives for existing and new businesses." But Cupp agreed that if a credit is not working then it should be scrapped.
"If they can prove that they are not working or not being used, then that should be considered," he said.
Meacham, the governor's point man on the budget, said two credits are targeted for elimination (small business and rural business) because abuse has been found. He said a third credit - conversion or purchase of electric cars - needs to be capped and redefined so it no longer applies to golf carts. Some Oklahomans were able to get a golf cart for nearly nothing, thanks to both a federal and state tax credit.
Meacham did admit that some of the credits proposed for suspension are working. But he and the governor feel now is not the right time to be handing out some tax gift baskets. The tax review group issues a yearly report on its findings, which have included the elimination of some tax credits because they were not being used. However, the Legislature has not followed through on any, and Larkin said there has been pushback.
"We were looking at one related to incubator facilities that just wasn't being used," he said. "But when we started looking into it, it all of sudden became important. So you can't count on anything."
However, because of the harsh economic conditions and the state's looming budget deficit, change could happen. Miller, who is running for state treasurer, quoted one of his colleagues when saying this economy is like the winter storms Oklahoma recently endured: It caused the removal of tree limbs that needed to be cut down anyway for power to be restored.
"This situation we have now," Miller said, "provides the political will to actually accomplish some needed changes." -Scott Cooper
|View the complete spreadsheets of tax credits and exemptions:|
|2008 Sales tax and fee exemptions|
|2008 Oklahoma tax credit and income tax deductions|
|2008 Insurance premium tax credits|
|Gov. Henry's tax credit programs proposal|
|Eliminate|| ||Projected Savings|
|Small business capital credit|| ||$11,000,000|
|Rural business capital credit|| ||$37,400,000|
|Cap and restrict|| ||
|Electric car credit|| ||$9,500,000|
|Suspend for one year|| ||
|New jobs|| ||$28,500,000|
|Agricultural producers|| ||$2,500,000|
|Small business guaranty fee|| ||$227,000|
|Child-care providers|| ||$198,000|
|Rehabilitation expenditures|| ||$671,000|
|Gas used in manufacturing|| ||$79,000|
|Biomedical research contribution|| ||$364,000|
|Electricity generated by zero-emission facilities|| ||$1,200,000|
|Small wind turbine manufacturers|| ||$775,000|
|Volunteer firefighters|| ||$418,000|
|Breeders of specially trained canines|| ||$129,000|
|Energy-efficient homes|| ||$3,800,000|
|Railroad modernization|| ||$1,100,000|
|Stafford Loan origination fee|| ||$349,000|