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Senate approves plan to close loophole
Business tax credit raises fears of abuse
The Oklahoman, May 26, 2006
Randy Ellis, John Greiner And Paul Monies

SB 1577 : Would plug a tax credit loophole that could cost the state hundreds of millions of dollars if left unchecked.

The Oklahoma Senate on Thursday unanimously passed a bill designed to plug a tax credit loophole that could cost the state hundreds of millions of dollars if left unchecked.

The House of Representatives is expected to consider the bill today.

"Everybody has worked real hard to get these loopholes plugged," said state Sen. Ted Fisher, D-Sapulpa. "Tax Commission officials wrote the bill, and they say this will do the job."

State Sen. Cal Hobson, D-Lexington, told colleagues that lawmakers who accepted contributions from people who took advantage of the loophole should return the funds.

"Give the money back if you want the public to have any respect for this body and you as an individual," Hobson said.

State finds loopholes

The Oklahoman reported previously that Kevin Calvey, chairman of the House Revenue and Taxation Committee, accepted $21,900 in campaign contributions from Altus residents who benefited from the loophole in connection with an airplane manufacturing venture.

Although he accepted the contributions, Calvey has been one of the most vocal legislators in pushing to close the loophole.

"Maybe Cal Hobson doesnt have the moral integrity to do the right thing when contributors have different positions on issues, but this proves that I do," Calvey said. "They may not be happy about this legislation, but thats not the reason they gave me the contributions."

Calvey, R-Del City, said he believes the Altus residents gave him donations because he is a conservative Republican and said he sees no need to return the money.

Because of confidentiality laws, lawmakers may not be aware theyve received funds from taxpayers who took the credit. The Altus tax credit recipients became known because they have openly discussed their participation in the program, touted its economic benefits and pushed for its continuation.

Fisher said the goal of the bill passed by the Senate on Thursday is to retain legitimate uses of tax credit programs to promote economic development while eliminating abuses. Fisher said he believes the new legislation accomplishes that goal.

Tax Commission employees became alarmed last year after they received requests for pre approval of the tax structure for projects that contained a twentyfold increase in projected tax credits.

A tax credit reduces the amount of taxes a person owes by the amount of the credit.

Fisher and Tax Commission officials say they have no idea how much the tax credits will cost the state on projects already approved by the commission.

"There could be a couple hundred million dollars (in credits) floating around out there," Fisher said. "Its very scary."

The loophole initially was discovered in two tax credit programs designed to encourage Oklahomans to invest in new and expanding businesses.

Those companion programs are called the Small Business Capital Formation Incentive Act and the Rural Venture Capital Formation Incentive Act. Fisher authored the bills. They offer 20 percent or 30 percent tax credits on money invested in qualified projects.

Individuals can participate in the programs with borrowed money to obtain tax credits 200 percent or more of their investments  making financial gains at the expense of the state Treasury.

In some cases, the borrowed money apparently never was intended to go into new or expanded businesses and was used solely to boost the amounts of the tax credits, Fisher said.

While researching to fix the problem, lawmakers discovered a nearly identical loophole in an older program, Calvey said.

At Calveys insistence, the reform bill would close that loophole, as well. The older program was authorized by the Legislature in the mid 1980s, he said.

The program was closed to new participants in 1992, but companies using it were allowed to continue taking advantage of the law.

A Tax Commission official said two companies use the old tax credit, but commission confidentiality laws protect their identities.

However, Securities and Exchange Commission filings reveal that an affiliate of BOK Financial Corp., the parent company of Bank of Oklahoma, is one of the two companies authorized to buy and sell tax credits under the program.

The affiliate sold Oklahoma income tax credits worth $46.6 million to directors and entities related to the bank within the last five years, records show.

Tax credits issued under the old program are transferable, while credits issued under the newer programs are not. Calvey said he inquired about making all the tax credits nontransferable, but Fisher insisted the older program be allowed to keep its status. Fisher said he didnt think the older program had been abused.

A spokesman for BOK Financial said the company has not participated in the two new tax credit programs and believes the older program it participates in is "quite different from the small business credit provisions that have been the subject of the reported abuse."

Will it hurt development?

Calvey said he believes the new law will eliminate abuses of the tax credit programs while still allowing the state to use tax credits as an economic development tool. Calvey said he is concerned that some legitimate projects may be harmed by the reform bill, but believes it is better to "err on the side of caution" in protecting the state treasury.