All tax credits and economic incentive programs offered by Oklahoma should be audited to ensure no shenanigans take place at taxpayer expense, state Auditor and Inspector Gary Jones told a House committee Wednesday.
“You come up with these programs and people start looking at where's the loophole,” Jones said. “You should audit them for compliance every year. You should audit them every so often for efficiency.”
Jones said a preliminary audit by his office of the venture capital tax credit program focused on an Oklahoma bank and two of its subsidiaries. One subsidiary transferred $800 million to the other, potentially creating the opportunity for up to $160 million in tax credits.
Jones did not identify the bank or subsidiaries by name, but records show the bank was Bank of Oklahoma and the subsidiaries were CVV Partnership and Cottonwood Valley Ventures Inc.
“It is probably technically not illegal,” Jones said after meeting with the House of Representatives Tax Credit and Economic Incentive Oversight Committee.
But he said it may run afoul of the state's constitution, according to a 2010 attorney general's opinion that requires tax credits to serve a public purpose and benefit citizens. The Oklahoma Constitution prohibits the state from making a gift to a private business.
Sheila A. Curley, director of corporate communications for BOK Financial, said she believes Bank of Oklahoma has complied with the law.
“While we were not present to hear the full context of today's discussion, we can assure our legislative leadership that Bank of Oklahoma proactively supplies information and ensuing results as required by the Oklahoma Tax Commission,” Curley said. “We follow the full intent of this economic development program as outlined by our legislators.”
Committee Chairman Rep. David Dank said he's been assured by Attorney General Scott Pruitt's office that it is “fully behind the existing opinion that found so many of these tax credits constitutionally infirm.”
Dank, R-Oklahoma City, said he plans to again file legislation next year that would give the auditor's office the power and duty to conduct audits of financial records of a business that uses state tax credits to ensure they comply with requirements that allowed the credit to be used.
“Most of these tax credits are hardly being audited or monitored at all,” he said. “We have no idea what the recipients are doing with the money, who they are hiring, how much they are paying, or even if there are any economic benefits to the public at all. Ask for the cost-benefit analysis and you get blank stares.
“It's an absolute must that we audit these credits to see how they're spending the money,” Dank said.
Bank of Oklahoma and its subsidiaries used the program to make more than $1 billion in loans over the past 15 years. Loans went to entities ranging from the Roman Catholic Diocese of Tulsa to several Oklahoma Indian tribes, records show.
The Legislature terminated the program at the end of 2008.
Jones said the tax credits contain no audit clauses. The Oklahoma Tax Commission is only authorized to check if they comply with the requirements.
Jones said the transfer of money involving the two companies that are subsidiaries of the bank drew the attention of his auditors because seven of the eight members listed as officers of one subsidiary are employees of the bank and all four company board members are bank employees.
“What you're looking at in that particular instance is that the requirements are that you participate in a loan,” Jones said. “There's nothing that goes to state what actually participation is. The difference between a bank making a loan … and one of these venture capital companies participating is nothing more than a 20 percent tax credit that's given out. We can't differentiate whether or not that loan would have been made without that.”
The tax credits were transferable. When companies receive more credits than they owe in state taxes, they use the transferability feature, which allows them to sell their surplus credits to other corporations or individuals, usually for about 80 cents on the dollar. The buyers use the credits to reduce their own tax bills.
Jones said two other programs, the small business and rural tax credit programs, were authorized in legislation approved by lawmakers in 1986, long before current legislators, who are limited to serve 12 years, took office.
“Those who squawked the loudest, lobbied the most and sometimes passed out the biggest campaign contributions got the biggest tax credits,” Dank said. “I think all of us would agree that it is a very flawed system.”
The state missed out on collecting more than $275 million in revenue through tax credits that were issued from 2006 through 2009 under the small business credit program and the rural venture capital program. The programs created 1,428 jobs from 2007 through 2009, which amounted to about $192,000 per job, according to a 2011 Oklahoma Tax Commission report.
The small business program offered investors 20 percent credits on investments in qualifying projects and the rural program offered 30 percent credits. Both programs expired Dec. 31.
“There was too much skulduggery in those so I chose to let those sunset without any kind of hearing,” Dank said. “I want to correct the problems that exist now and move forward.”
‘Overhaul is needed'
Dank said at least $150 million in outstanding tax credits granted through the small business and rural venture tax credit programs still can be redeemed. He said that is money that likely will have to be taken from funding state services.
“That's one of the problems with all of these,” he said. “We don't really know in a lot of instances how much is left out there. ... They could hit anytime.”
Dank, who a year ago introduced legislation calling for sweeping changes after heading up a five-month study on tax credits and economic incentives, said a serious overhaul is needed.
“We need more safeguards, audit provisions, a stick to measure incentives by, and caps set on how long and how much an individual company can receive,” he said.
Contributing: Randy Ellis, Staff Writer
We need more safeguards, audit provisions, a stick to measure incentives by, and caps set on how long and how much an individual company can receive.”
Rep. David Dank