State leaders met for months to discuss eliminating dozens of tax breaks, but under intense lobbying from special interest groups, legislators appear unwilling to make significant changes in tax credits and incentives, key lawmakers said Wednesday.
“There is no question that we started out bold in seeking legislation to do away with the credits,” said Rep. Earl Sears, R-Bartlesville, chairman of the House Appropriations and Budget Committee.
“Unfortunately that has just not been the case. Members have found that the credits that we thought maybe needed to go away, in their particular district or in their particular region, continue to make an impact. It has just not been that easy. So these hundreds of millions of dollars we thought we'd review and eliminate, has just not come to reality.”
That's not necessarily a bad thing, said Gwendolyn Caldwell, senior vice president of government affairs for The State Chamber.
“We felt it was very important to make sure that the business side of the tax credit issue was explained, what good things these tax credits bring, the jobs, the investments, the growth in Oklahoma,” Caldwell said.
“We've been supportive of the process. We've been supportive of the analysis.”
Income tax vs. tax credits
There was a glut of plans introduced in February to reduce the personal income tax in Oklahoma.
And almost all of those included the elimination of a number of tax credits and incentives. Gov. Mary Fallin provided a list of 44 tax credits and incentives she sought to eliminate with her tax-cut plan when it was first introduced.
But Rep. David Dank, R-Oklahoma City, said the reality three months later is that likely none — or very few — of those will be cut. Lawmakers are meeting behind closed doors this week to hammer out the details and compromises of two tax reduction bills that are still alive.
“That's not to say that there aren't members who want to do that,” Dank said. “The will of the Legislature just isn't there.”
Dank was chairman of a committee that met 10 times last summer in an effort to evaluate the state's tax incentive and credit system.
“The lobbyists are pretty much driving the train on the tax credits,” Dank said, noting specifically the efforts of wind energy, historic rehabilitation and coal production attempting to keep their tax credits.
“I had some of (the lobbyists) tell me last year they were retained for the session, but then were hired to stay on for the whole year because of our study.”
Sears described the lobbying effort as intense and effective this year to keep the tax credits on the books.
Cash in hand
There's a significant amount of money on the table.
Tax credits and incentives are significantly different from a tax write-off or exemption. If something is tax exempt — for example the interest individuals pay on their mortgage — then they get to not pay taxes on that amount of money.
Tax credits in Oklahoma, however, are a one-to-one payback in tax liability. So a $5,000 tax credit is $5,000 in the pocket of the person with the credit, as long as they have paid or owe at least $5,000 in taxes.
Credits for income taxes alone allowed companies and individuals to claim $225 million for fiscal year 2011, according to data from the Oklahoma Tax Commission. Not all of those were paid out, however, as a company or individual must have to pay enough taxes to cover the amount of credit.
Many corporations, small businesses and individuals don't pay any state income taxes, instead using the lucrative tax credits to get back all or some of the money they've paid into state coffers.
Caldwell said some of those incentives are vital to the Oklahoma economy.
Specifically she said the chamber was concerned that the following tax credits appeared on lists for elimination: the tax credit on Oklahoma investment and new jobs, the credit on electricity generated by zero emissions facilities and the credit for qualified historic rehabilitation expenditures.
“Those were all on one list or another, and that caused us a lot of concern,” Caldwell said.
She said the new jobs tax credit has brought huge investment to Oklahoma, while the historic tax credit has redeveloped ailing downtowns across the state, and the investment by wind farms in western Oklahoma could not have occurred without the ability to compete with incentives offered by Texas and Kansas.
“A healthy majority (of tax credits) are benefiting Oklahoma, but I would say also it's always good to revisit them and make sure,” Caldwell said.
Dank is not so sure those tax credits are good for Oklahoma.
“If you just take it as one, then maybe it doesn't seem, on the surface, as not such a bad deal,” Dank said.
But taken in conjunction with one another, the financial windfall for recipients is huge.
“You have to look at what are the people putting into the project that are absolutely going to benefit from it,” Dank said. “It's a giveaway culture that's been developed.”
To be eliminated
Three tax credits that expired at the end of 2011 look like they are headed off the tax books permanently, Dank said.
The credits for Oklahoma venture capitol investments, small business investments and rural small business investments expired without a fight, he said, but there is still time for lawmakers to slip an amendment onto a bill extending the life of the tax credits.
“That's a step in the right direction,” Dank said, of eliminating those three programs.
He said there was no cap in how much a company could claim, no oversight for how the money was invested and no evidence that it was creating significant jobs in Oklahoma.
In fiscal year 2010, corporations and individuals claimed $15.3 million in tax credits from venture capitol investments, according to data from the Tax Commission available on the Open Books website. However, just because a tax credit was claimed doesn't mean the individual had enough tax liability to use all of that credit.
According to the data, Bank of Oklahoma and Bank of Oklahoma's board Chairman George Kaiser, claimed $12.1 million of those venture capitol tax credits in 2010. The bank did not respond to questions about how much of those tax credits were utilized in that fiscal year.
For the Rural Small Business Venture Capital Credit, $71.7 million was claimed in 2010. Terra International Inc., a subsidiary of CF Industries that produces fertilizer in Woodward, claimed $19.3 million in the rural small business tax credits in fiscal year 2010. A spokeswoman for CF Industries declined to comment about the company's tax credits. The Small Business Venture Capital Credit, according to the data, had $15.8 million claimed in 2010.
Caldwell said she didn't think anyone was surprised that those tax credits may go away.
“I think those will expire, they'll be sunset, but I can't tell you that next year that somebody won't introduce legislation to try to bring them back in some sort of modified form,” Sears said.
Dank said he was disheartened when his bill proposing to end transferability of tax credits was killed this year. Transferable tax credits allow companies who are unable to use all of their tax credits — because they don't owe enough taxes to the state — to sell them to others at a discounted rate.
For example, if a company owed $25,000 in taxes but had $50,000 in tax credits, it could sell the remaining $25,000 to another company at 50 cents on the dollar. The buyer then could use those tax credits.
Another one of Dank's bills would have maintained a moratorium on 29 tax credits until lawmakers could analyze the costs and benefits of the programs. That bill failed in committee, as well.
So Dank and Sears are resting their hopes on a bill that sets forth criteria to evaluate tax credits.
House Bill 2978, has passed the House and Senate, and is now headed to joint committee, Dank said.
It sets up a review that all credits must go through, Sears said.
“Is it creating jobs, is it benefiting the state, has it had an audit, have they developed a plan to submit to the legislature so we can see exactly what it's going to do?” Sears asked. “Any tax credit that we have on the books if it is creating wealth, if it is creating jobs ... we would be fools not to continue those programs.”