July 11, 2011

State to Probe Legitimacy of Tax Credits

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A newly-created task force will launch a study of state tax breaks by examining a taxpayer subsidy that has helped finance the rehabilitation of historic buildings, such as Tulsa’s Mayo Hotel and Oklahoma City’s Skirvin Hilton.

The 10-person panel also plans to review two insurance industry tax breaks when it holds its first session on Friday, July 15, at the Capitol.

Rep. David Dank (R-Oklahoma City), task force co-chairman, said the historic building and insurance tax credits are the first of many that the panel intends to scrutinize between by the end of the year.

“We’re going to analyze each one of those and determine which ones are serving a purpose for taxpayers and which ones are just giveaways,” said Dank, who chairs the House Revenue and Taxation Subcommittee. “We couldn’t be more serious.”

The Task Force for the Study of State Tax Credits and Economic Incentives was authorized in the waning days of the 2011 session and signed into law by Gov. Mary Fallin. Its members include State Treasurer Ken Miller, State Auditor and Inspector Gary Jones and key House and Senate lawmakers of both parties.

Although previous studies of tax subsidies have not produced dramatic results, Dank said he was “100 percent confident” that this inquiry would lead to passage of legislation next year to scale back some of the tax breaks currently on the books. The impact on state revenue could be more than $200 million annually, he said.

Created in 2006, Oklahoma’s historic building rehabilitation credit reduced state tax collection by $26.9 million over a four-year period ending in 2010, according to Insurance Department and Tax Commission records.

The state suspended the credit for two years as part of a 2010 budget-balancing deal, but the benefits are still accruing to developers and will be payable again beginning next year.

The state credit mirrors a federal tax break that allows people who finance the rehabilitation of certified historic structures to recover part of their investment through their tax returns. The state credit equals 20 percent of qualified rehabilitation expenditures, and the federal credit provides another 20 percent, for a total of 40 percent.

Unlike the federal subsidy, however, the state credits are transferable, which means the original investors can sell them to other people or firms that had nothing to do with the restoration projects.

Most of Oklahoma’s credits are sold to big insurance companies, which use them to reduce the premium taxes they pay to the state. State tax officials say the companies buy them at a discount, paying 85 to 90 percent of their actual value.

“There is a marketplace out there,” said Insurance Department spokesman Shawn Ashley. “There are people who broker these credits.”

According to Insurance Department records, Tulsa-based Community Care HMO has been the most aggressive purchaser of building rehabilitation tax credits. Over a three-year period ending in 2009, it used them to reduce its state tax payments by $10.3 million. The company did not respond to a request for comment.

Last year, then-Attorney General Drew Edmondson issued an opinion declaring that the rehabilitation credit was constitutionally “infirm” because the purchasers could not be held accountable if the credits were claimed improperly.

Edmondson noted that for any economic development tax credit to be constitutional, it must “promote a public purpose affecting the inhabitants of the state as a community, and not as individuals.”

Dank said the rehabilitation credits raise an important public policy question: Does it make sense to require taxpayers across the state to subsidize private-sector development projects located primarily in Oklahoma’s larger cities?

Advocates say it does.

“These are large historic buildings in downtown commercial districts that have been vacant, derelict, deteriorating, sometimes for decades,” said Deputy State Historic Preservation Officer Melvena Heisch. “It gets them back on the tax rolls, provides jobs, and in some instances, housing.”

Other Tulsa-area projects receiving the credits have included the Atlas Life Insurance building, the Tribune building, the Philtower and the Wells building in Sapulpa.

Tulsa developer Paul Coury, who participated in the restoration of Tulsa’s Ambassador Hotel, said the federal and state credits are essential to the rehabilitation of iconic buildings in Oklahoma.

“If they don’t exist, projects don’t get done,” Coury said. The Skirvin wouldn’t have gotten done without it. The Mayo wouldn’t have gotten done without it. They would still be sitting there.”

Tulsa preservation architect Michael Hall of GH2 Architects LLC said the same was true of the Atlas Life project that he oversaw. Completed last year, the $14 million rehabilitation converted the old office building to 119-room hotel. Hall said the federal and state credits allowed the developer to recoup about $5 million.

“My sense is it would not have happened if not for the credits,” Hall said.

The task force also intends to look at two other tax breaks provided to the insurance industry: the Life and Health Guaranty Fund Credit and the Property and Casualty Guaranty Fund Credit. Together, they reduced state tax collections by $10.9 million last year.

The two credits allow insurance companies to recover the contributions they make to special funds that reimburse policy holders if an insurer becomes insolvent. The funds are similar to the FDIC protection provided to bank account holders.

Until 2002, insurance companies made those contributions from their operating funds without receiving any reimbursement from the state.

Because 57 percent of insurance premium taxes are earmarked for firefighter, police and law enforcement pensions, the guaranty fund credits reduce the state’s annual contributions to those underfunded retirement programs.