Lawmakers consider 'sunset' law to eliminate tax exemptions, credits

By The Associated Press

Published: February 15, 2008

OKLAHOMA CITY - Museums have one. So do volunteer fire departments. Even manufacturers of low-point beer have one.

Hundreds of tax exemptions, credits and deductions have been granted by the Oklahoma Legislature over the years to stimulate economic activity or to benefit charitable organizations and nonprofit groups.

But lawmakers say what they give away in tax breaks they can also take back.

Legislation pending in the state Senate would require hundreds of tax incentives to be reviewed to determine whether they are still effective and should be retained or have outlived their usefulness and should be taken out of the state's tax code.

The goal of the so-called "sunset" bill is to recoup revenue that has been lost through tax breaks and use it to pay for other incentives, namely additional income tax cuts. In the past three years, lawmakers have passed the largest tax cuts in state history, reducing the top personal income tax rate from 6.65 percent to 5.5 percent.

Officials estimate that more than $2 billion in state tax collections are lost each year through various exemptions, deductions and credits. They include 117 separate income tax exemptions, more than 130 sales tax exemptions and a variety of exemptions from property, motor vehicle, gross production and other state taxes.

Tax incentives in effect in 2005-2006 are listed in an Oklahoma Tax Commission tax expenditure report. They include:

—A $773.7 million tax exemption in the sale of articles to persons who resell them. Tax Commission officials said the incentive generally goes to retailers who buy items at a wholesale market and then resell them in their retail store, where sales taxes are collected.

—A $28.2 million nonrefundable income tax credit for taxes paid to another state by residents for personal services compensation.

—A $13 million sales tax exemption in the sale of newspapers and magazines.

—A $12 million exemption in the sale of water, sewage and refuse services.

—An $18.5 million sales tax exemption in tuition and fees paid to private education institutions accredited by the Department of Education.

—A $46.9 million property tax exemption for new, expanded or acquired manufacturing facilities.

—A $94 million sales tax exemption in the sale of natural or artificial gas and electricity for residential use.

—A $57.5 million exemption in the sale of certain medications, including insulin and medical oxygen.

—A $33.2 million sales tax exemption in certain agricultural sales, including the sale of livestock, animal feed and farm machinery.

—A $43.1 million tax exemption for the use of tangible property by commercial airlines or railroads.

—A $3.3 million exemption for motor vehicle registration fees for vehicles operated by a farmer and used primarily for farm use.

—A $106 million rebate of gross production taxes from oil and natural gas produced from deep well, horizontal and other kinds of drilling projects.

"There's a lot here," said Sen. Mike Mazzei, R-Tulsa, co-chairman of the Senate Finance Committee and author of the sunset bill.

"Basically, this just forces us into a review process. Let's start the pipeline and let everything get pushed through the process."

The measure authorizes a nine-member Incentive Review Committee administered by the Tax Commission and the state Department of Commerce to review hundreds of tax incentives over the next eight years. Tax credits and exemptions to seniors, veterans, the disabled and low income Oklahomans would be excluded from the review.

Rep. Randy Terrill, R-Moore, chairman of the House Revenue and Taxation Subcommittee and House sponsor of the legislation, said the measure is a good management tool to force authorities to justify virtually every tax credit in the code.

"The effectiveness of the tax credit has never been reviewed," Terrill said. "Or they've never been examined to see if they have outlived their usefulness.

"In the absence of these sunsetting provisions, some of these tax credits would go on in perpetuity."

But Democrats in the House and Senate question whether the GOP plan is constitutional and whether former tax breaks should pay for more income tax cuts.

House Democratic Leader Danny Morgan of Prague said lifting the exemptions would raise new revenue and fall under the provisions of State Question 640, a constitutional amendment passed by voters in the 1990s that requires agreement by three-quarters of the House and Senate to increase taxes.

"If you remove a tax exemption you are in effect putting a tax on that. That is in effect a tax increase," Morgan said.

He said Democrats may be in favor of removing some obsolete or ineffective tax exemptions.

"But we want to make sure it's done properly," Morgan said. "I think some of our members would be very interested in trying to make a challenge."

Mazzei said the review should focus on whether tax incentives have promoted job growth and created jobs that have raised Oklahoma's per capita income ranking.

"The criteria should be net benefits exceed net costs," he said.

With a per capita personal income of $32,398, Oklahoma ranks 33rd among the 50 states and the District of Columbia in per capita personal income, according to Bureau of Economic Analysis figures for 2006.

Mazzei said he hopes to find up to $200 million in obsolete tax breaks over the next two years to pay for cuts in state income and capital gains taxes.

The income tax rate is scheduled to drop to 5.25 percent on Jan. 1 providing that state revenue grows by at least 4 percent. Terrell said the reduction would cost $40 million to $45 million in the fiscal year that begins July 1 and about $100 million when fully implemented.

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