Tracking state tax credits can create budget challenge for Oklahoma, December 6, 2015
Randy Ellis

Poorly designed tax credits that lead to unpredictable, multimillion dollar revenue drops are wreaking havoc on budget planning in Oklahoma and many other states.

It doesn't have to be that way, said Josh Goodman, a senior researcher for The Pew Charitable Trusts, a nonprofit, Philadelphia-based public policy think tank.

With better planning and carefully constructed laws, states can obtain the economic development benefits of tax credits while reducing much of the financial volatility and unpredictability on state budgets, according to a report released this week by Goodman's organization.

Oklahoma state Rep. Earl Sears, chairman of the House Committee on Appropriations and Budget, said he understands the problem well.

Credits that create jobs can be good for the state, "but we have so many of them out there that are not being tracked ...that it really does cause a problem," said Sears, R-Bartlesville.

"Right now I will tell you there are $1.7 billion in exemptions and tax credits (in Oklahoma) and of that $1.7 billion, $950 million to $1 billion is all tax credits," Sears said.

In an effort to eliminate some of the budgetary uncertainty, the Oklahoma Legislature passed a bill last session that calls for all tax credits to be reviewed regularly to determine their costs and effectiveness in creating jobs and economic development, he said.

"Those that are still creating jobs and economic development, we need to not only keep them alive and well, but see what we can do to enhance them," Sears said. "But we have so many of them out there ... and nothing to track them.... I am absolutely confident that some of them could go to the wayside."

Researchers noted that under one Oklahoma tax credit program - the Oklahoma Investment/New Jobs Credit program - businesses are allowed to carry tax incentives forward indefinitely.

"These taxpayers currently hold $250 million to $300 million in credits," the report said. "That number is expected to rise in coming years, but policymakers lack good information on when or whether companies will ultimately redeem the tax credits."

Lawmakers could have avoided that unpredictability of they had restricted when the tax credits could be redeemed, Goodman said.

Another Oklahoma tax incentive that frustrates budget planners because of its unpredictability is the Five-Year Ad Valorem Tax Exemption for Oklahoma Manufacturing or Research and Development Facilities, the report noted.

Businesses that build or expand facilities are allowed to file and claim that property tax exemption with county assessors without first notifying the state, the report said.

"The state then re- imburses local governments for the lost revenue," the report noted. "In 2014, the program's cost to the state increased to more than $60 million - nearly double what it had been three years earlier - leading Oklahoma lawmakers to reduce spending in other areas."

Some states have programs that require businesses to apply in advance of claiming the tax breaks, which helps state officials budget more accurately, the report said.

John Estus, spokesman for the Oklahoma Office of Management and Enterprise Services, said state finance officials worked closely with researchers for The Pew Charitable Trusts.

"From our perspective in the state budget office, we lack good information about what kind of return on investment the state is getting for these tax credits, but we have to believe at least some of them are working," Estus said. "What we hope to get out of this initiative is a rigorous review process of every economic incentive that will put good information in the hands of policymakers."

Oklahoma is not alone in its troubles.

Michigan Economic Growth Authority (MEGA) tax credits threw that state's budget out of balance by hundreds of millions of dollars in fiscal year 2015, researchers said.

"MEGA is expected to cost billions of dollars in coming years," the report said. "Many of the credits causing fiscal challenges were authorized in 2010 as part of long-term deals with distressed automakers, without protections to limit the program's cost."

A surprisingly strong recovery of the auto industry left the state with a hole in its budget.

Louisiana experienced its own budget strain when the cost of a 1994 tax exemption for horizontal natural gas drilling grew from $285,000 in fiscal year 2007 to about $239 million in fiscal year 2010, the report said.

"We've seen lots of states across the country where the fiscal impact of incentives has increased quickly and unexpectedly and that can cause budget challenges," said Goodman, The Pew Charitable Trusts researcher. "I think Oklahoma is in a similar position to a lot of states where there are sort of inconsistent practices in place right now.

"You have some incentives that have really strong protections to prevent them from costing more than intended and you have other incentives that don't have those protections," he said.

States should consider gathering and sharing high-quality data on the costs of incentives, Goodman said, adding that Oklahoma's new tax credit review law is a step in the right direction.

"Oklahoma deserves a lot of credit for approving a process both to study the economic results of your incentives, but also to consider the fiscal impact of your incentives," he said.

States can reduce budgetary volatility by taking steps like capping how much programs can cost each year, controlling when tax incentives can be redeemed, restricting the ability of companies to redeem more credits than they owe in taxes, and linking incentives to company performance, researchers said.

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