May 30, 2011

Legislators to Review State Tax Breaks

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One hundred years ago, the Oklahoma Legislature approved what appears to be the state’s first special-interest tax break.

The Old Soldiers bill, passed March 11, 1911, allowed poor and crippled Civil War veterans and their widows to give “illustrated lectures and magic lantern exhibitions” without paying the customary hawkers and peddlers license fee.

State lawmakers have been whittling away at the tax code ever since.

Audio clip: Rehabilitation Tax Credit

At last count, the state was providing 480 exclusions, credits, deductions, deferrals, incentives and other special tax breaks. Some are huge, such as the pass-through of itemized federal income tax deductions. Some are minuscule, such as the sales tax exemption for railroad track spikes.

“It makes my head hurt,” lamented Larkin Warner, retired regents professor of economics at Oklahoma State University and a member of a state tax break review committee.

“These doggone legislators, every year, they chip away at the integrity of the tax base,” Warner said. “They’re responding to pressures on the part of some of their constituents. But the overall result of it is a mess.”

Many of the tax breaks are broad-based and enjoy considerable support among lawmakers, economists and tax authorities. An example: the sales tax exemption for prescription drugs, which reduced state revenues by $143 million last year.

But some of the tax breaks are sizeable and, in the view of some key lawmakers, highly suspect. Two already have been targeted for extinction: the Small Business and Rural Venture Capital Formation credits, which promised benefits greater than the amount of money put up by investors, and cost the state $48 million in 2010.

Although the Oklahoma Tax Commission has no official estimate of the cost of state tax breaks, unofficial estimates discussed in the Oklahoma Legislature put this cost as high as $5 billion a year. The state’s budget for 2011-12 is $6.5 billion.

“A lot of these credits are giveaways,” said House Revenue & Taxation Chairman David Dank, R-Oklahoma City. “We’ve got these high-powered lawyers who sit down here in these ivory towers and don’t do anything but think about how they can get into the public coffers. And they make a lot of money for doing it.”

In the final days of its 2011 session, the Legislature approved a special task force study of tax breaks to be conducted during the summer and fall. The panel will consist of six lawmakers, including Dank, and four statewide officials, including State Treasurer Ken Miller.

“We need to take a comprehensive look at the way government is financed in Oklahoma,” said Miller, an Edmond Republican. “If you were going to start out fresh and design a tax code that would encourage economic growth and development, you would not design the system that we have.”

Even if most of the popular, broad-based tax breaks are preserved, the questionable ones still add up to hundreds of millions of dollars a year.Dank estimated the Legislature could boost state revenues by $250 million a year if it got rid of a dozen or so ineffective, inequitable or obsolete tax breaks. Senate Finance Committee Chairman Mike Mazzei, R-Tulsa, another task force member, said he believes selective pruning could yield as much as $500 million annually.

Some reform advocates are conservatives who would like to use the additional revenue to reduce or eliminate other taxes. Some are moderates or liberals who would prefer to restore funding for state services that have been hit hard by repeated rounds of budget-cutting. Some advocate a combination of both.

The call for reform is being endorsed by a loose-knit coalition of politicians, policy advocates, budget analysts and concerned citizens.

Among the possibilities they cite:

  • Two mining companies and one electric utility are the main beneficiaries of a special tax incentive for purchases of Oklahoma-produced coal. The coal credit cost the state nearly $30 million over three years, and subsidizes an industry that employs only 200 or so Oklahomans. It is one of several “transferable” credits that can be sold to and used by other taxpayers who have nothing to do with the subsidized activity.
  • Oklahoma is one of only six states that allow their citizens to deduct state income tax payments from their taxable income. New Mexico eliminated the deduction last year. If Oklahoma did the same, state revenue would increase by $68 million annually, according to the Oklahoma Tax Commission.
  • Many favored industries and interest groups are exempt from the sales tax, including barge operators, TV and movie producers, and people “engaged in the business of raising worms, fish or insects.” Items on the exemption list include professional sporting events, museum admissions, and sales of horses, robots, aircraft parts, oil drums, precious metals, and vitamin supplements in a chiropractor’s office.

“There is not a single villain here,” said David Blatt, director of the Oklahoma Policy Institute, an independent think tank based in Tulsa.“There are lots of characters—legislators, lobbyists, court decisions…We have created so many deductions, credits, deferrals and rebates that the system is coming up short.”

During the 2011 legislative session, Dank and Mazzei tried unsuccessfully to eliminate 22 tax breaks with a combined annual impact of $54 million.

“What many of us are concerned about are the inefficient and obsolete tax preference items that go to special interest groups or projects that really don’t generate a net economic benefit to the state,” Mazzei said.Tax break critics now are pinning their hopes on a bipartisan tax reform initiative that has yet to take shape.

“We have a lot of people in this state that are very forward-thinking, that really want to see Oklahoma do well and that aren’t just trying to rip everybody off,” said Tom Daxon, a former state auditor and inspector and state finance director.

“I think if we made a straight-up appeal to those people, most of them would help us. We could make some real progress.”

Keith Gaddie, a University of Oklahoma political scientist who conducts public opinion polls, said a well-crafted reform plan could be a winner.

“The idea of closing selected tax credits and loopholes is very popular,” Gaddie said. “The idea of picking winners and losers through tax credits is not a popular approach.”