Oklahoma hands out millions of dollars in tax credits a year, mostly to stimulate economic activity, but state officials lack basic information to determine their budget impact.
State officials struggle to predict what Oklahoma’s revenue picture will look like, partially because they don’t know how many tax credits are being held by companies, which companies hold them or when they will be used.
Also, a moratorium on using some of these tax credits during recessionary years created a pent-up demand to cash them in as businesses rebound.
Although the Oklahoma economy has been performing well, general tax revenue for the 2014 fiscal year fell short of the official estimate by $283.8 million, or 4.8 percent. Corporate income tax revenues were below the estimate by $175.3 million, or 36.4 percent.
It’s hard to make accurate revenue estimates when state officials don’t have a good idea of how many tax credits will be claimed.
“The lack of any long-term planning or controls over tax credits that were granted in the past, must invariably cause estimation problems going forward,” Steve Tinsley, of the state auditor and inspector’s office, said in a special report to identify why the corporate tax revenue estimate was so far off the mark.
John Estus, a spokesman for the state Office of Management and Enterprise Services, said Oklahoma is one of seven states collaborating with experts in a Pew Charitable Trusts study to identify better ways to measure the effectiveness of all economic incentives, including tax credits. Participants include legislators and representatives from state agencies and businesses.
“We have involved the business community from Day One because this affects them more than anyone,” Estus said. “There is a middle ground to be found, and we believe this initiative will get us there.”
Estus said some states have found that offering rebates to businesses, rather than tax credits, allows for tighter controls and greater budget certainty.
A key goal of the Pew study is to develop a cost-benefit analysis for tax credits that can be supported by government and businesses.
In a broader sense, state Auditor and Inspector Gary Jones said he and the Oklahoma Tax Commission need more resources to properly monitor and audit tax credits for performance and compliance with program rules.
The state has had several high-profile problems with these programs, including tax credits wasted on rockets that never flew and an airline that went bankrupt.
Jones, state Treasurer Ken Miller and Preston Doerflinger, director of the Office of Management and Enterprise Services, all say more oversight is needed.
“I am not aware of any current tax credit beneficiaries operating in violation of the law,” Miller said.
“Though not illegal, it’s doubtful all current business incentives are providing a positive return on investment to the taxpayer.
“In some cases, the state doesn’t have sufficient information to determine effectiveness and budget impact, which is why I have supported caps and sunsets on all state business incentives.”
State Rep. David Dank, R-Oklahoma City, has been a leader in calling for tax credit reform, but he said entrenched special interests have stymied his efforts.
“On every tax credit that we give out, we should have a cost-benefit analysis,” Dank said. “What’s it going to cost us and what do we as taxpayers stand to gain out of it?”
Miller said an example of an incentive program that works well is the Quality Jobs Program.
Since July 1993, the state has provided more than $871 million in performance-based wage rebates through that program, said Don Hackler, a spokesman for the state Commerce Department.
“The positive thing about Quality Jobs is that it is performance-based,” he said. “If you do not create new jobs, you don’t get paid.”
He said incentive programs in general are key to luring and retaining growing industries.
“When we compete for a business, whether it’s a business that is expanding or relocating, we’re competing with every state in the union and every country in the world. Everybody has an incentive package they offer.
“Our package of incentives combined with pro-business rules and regulation and a lower cost of living make the total package for expanding or locating in Oklahoma very attractive.”
One of the fastest-growing industries in the state is wind power.
An interim legislative study is planned on wind energy tax credits, which will total $290 million between now and 2018, Dank said.
Under one tax provision, the state covers county property tax bills incurred by wind energy companies.
“We are paying Roger Mills County, with 3,700 population, $6.16 million a year,” Dank said. “That’s $1,700 for every person in the county.”
“A lot of this energy is going to Alabama, Mississippi, the Tennessee Valley Authority, Texas and other places.”
Backers of the wind industry, including Gov. Mary Fallin, say the industry supports more than 3,000 jobs in the state. Oklahoma is now No. 6 nationally for wind energy production.
Oklahoma has struggled with abuse of tax credit laws in the past.
In 1999, the Legislature authorized the diversion of money in complex tax credits to provide up-front financing to Great Plains Airline so it could provide direct passenger air service from Oklahoma to both coasts.
About $27 million in motor fuels tax revenue that normally would go to repair Oklahoma’s substandard roads and bridges ultimately was diverted to cover the state’s losses when the airline went bankrupt.
Also, a company that planned to operate a commercial spacecraft declared bankruptcy in 2010 after collecting $18 million in state tax credits.
The bottom line, Dank said, is for lawmakers to put the taxpayer first when considering tax credits.
“They sent us out here to represent them,” he said. “We need to have strict criteria before we give any tax credits — we need to sunset them, audit them, do cost-benefit analysis.
“We need to make sure the taxpayer money we give away is bringing more to the state, our economy and to our people, than what we’re giving them.”