WHAT if they gave a tax incentive and nobody claimed it? That's becoming the case at the federal and state levels. Policies to encourage business activity are having little or no effect.
At the federal level, The Wall Street Journal reports businesses claim as little as 5 percent of eligible tax breaks. The incentives are often complicated, which means businesses need specialized accountants or lawyers to handle the paperwork. Resulting tax compliance costs were an estimated $150 billion last year, or at least 1 percent of national GDP.
As a result, large companies are more likely to benefit from tax breaks while many small or medium-sized companies don't bother trying. Any hoped-for stimulant effect on economic growth is muted or negated.
In Oklahoma, numerous credits on the books also draw few takers. The Oklahoma Tax Commission's Tax Expenditure Report for 2009-2010 shows that only seven businesses claimed a 20 percent tax credit for providing child care programs for employees' children.
During that time, a credit for water treatment facilities and pollution control devices went unclaimed. Not one business claimed a tax credit for providing health insurance to previously uninsured employees. A tourism promotion credit went unused. The list goes on.
Whether due to complexity or being too narrowly tailored, many state tax incentives generate little impact. And when they do, it's not necessarily positive.
In 2011, it was determined two incentive programs for small business and rural venture capital cost the state more than $275 million over three years. The programs created an estimated 1,428 jobs at a cost of $192,000 per job.
Those programs had a long history of controversy. In 2006, lawmakers amended them after it was learned investors could obtain $2 in state tax credits for every $1 invested by claiming credits with borrowed money. That was a guaranteed winner for investors at taxpayer expense. Both programs have since been deep-sixed.
If tax incentives have so little impact or, worse yet, negative impact, why do lawmakers continue to promote them? Because it allows politicians to claim credit for business activity.
Politicians also like to promote favored industries through the tax code. If Oklahoma-produced coal costs more to mine than Wyoming coal, create an incentive program so taxpayers underwrite the costs. If a particular industry doesn't exist in Oklahoma — such as spaceport tourism — create a tax credit for both the industry and space vehicle providers. (Those two Oklahoma credits also went unclaimed in 2009-2010.)
The tax code's complexity and inefficiency have led to calls for reform at the federal and state levels. Proponents argue low tax rates applied broadly with few exemptions would keep compliance costs low, provide predictability, and allow the market — instead of the government — to pick winners and losers.
The arguments for some incentives actually make the case for broad reform. In Oklahoma, some people employed in the aerospace industry can get a $5,000 annual tax credit for five years. This indicates that our 5.25 percent personal income tax rate is a deterrent for aerospace professionals. If the rate is too high for aerospace workers, how is it acceptable for other professionals or those with lower income?
The demand for such incentives is evidence that Oklahoma's economy may be better off with a lower tax rate and fewer carve-outs.