September 25, 2011

Beneficiaries Justify their Tax Credits

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A panel of lawmakers charged with the scrutiny of tax credits and exemptions now sits firmly in the middle of a complex turf war.

As the Task Force for the Study of State Tax Credits and Economic Incentives continues its work, interested parties turn up the intensity. Behind the scenes, Chamber of Commerce representatives, lobbyists, business owners, attorneys and others are working overtime to ensure their pet tax credit or incentive survives the chopping block.

After all, the stakes are high – as high as the estimated $500 million in tax credits and exemptions on state ledgers.

“We have 5,500 members in the greater Oklahoma City metro we represent,” said Mark VanLandingham, The Greater Oklahoma City Chamber’s vice president of government relations and policies. “So, we probably have every member involved in this deal in one way or another, and naturally, everyone is concerned about the incentives they will be able to use in the future.”

State Rep. David Dank, R-Oklahoma City – co-chairman of the bipartisan, 10-member task force – said that concern is widespread and growing. He has witnessed the anxiety as various individuals and groups march before the panel to make their pitch as to why their tax credit or incentive should be preserved.

On Wednesday, the oil and gas industry will get its turn to be heard.

“I’ve gotten a number of calls, letters and emails from people who have a stake in these tax credits,” Dank said. “They’re scared … and maybe some of them should be.”

Former state Treasurer Scott Meacham, chairman of the The State Chamber’s Economic, Development and Taxation Committee, has his own definition of what’s taking place at the capitol: “Politics.”

“I don’t know that it’s any more intense than any other political battle,” Meacham said. “At the end of the day, it’s just politics – all politics ….

“This is a landscape where you have so many different constituencies. There are those who have gotten those benefits in the tax codes for the last several decades – literally – and they don’t want to give that up. The tax credits and incentives have become part of their business model.”

Meacham stressed that the state Chamber “wholeheartedly supports the task force and the need for transparency and accountability.” Overall, the state Chamber represents 2,100 businesses statewide – small and large; rural and urban.

“The state Chamber believes we need to have an effective incentives-based credit to ensure capital investment,” said Meacham, who is overseeing a Chamber subcommittee that will write and present a proposal for such a credit to the task force before the next legislative session.

“Naturally, we feel this credit should be subject to a cost-benefit analysis.”

Fred Morgan, the state Chamber’s president and CEO, holds the Aerospace Employer & Employee Tax Credit program up as the tax credit poster child. Morgan cites the credit for playing a role in Boeing’s decision to move more than 500 engineering jobs from California to Oklahoma.

Under the program, aerospace engineers who choose to work in Oklahoma can claim up to $25,000 in tax credits for the first five years of their employment. Employers, meanwhile, can also claim tax credits for the hiring, as well as additional tax credits for paying for the continued education of that aerospace engineer.

“We’re talking about 500 jobs – 500 jobs at six figures,” said Morgan, who went on to quote a study done by Boeing and The Greater Oklahoma City Chamber. “We’re told the cost to the state will be $3.5 million, but the return will be $270 million.”

Of course, not all tax credit programs have such a happy ending. A 2008 survey by the state Tax Commission continues to send aftershocks onto the tax credit battlefield. The survey focused on venture capital companies, small business capital companies and rural small business capital companies. Combined, more than $104 million in tax credits were claimed by 1,206 income tax filers in 2008 for the creation of 1,071 jobs.

Worth the price?

“Keep in mind, that was just a survey,” Dank said. “Companies were not required to report information. That’s been the problem for far too long, there’s been no accountability for most of these credits. When you go to ask a question, no one knows the answer.”

Advocates are thus scrambling to present their case.

The Greater Oklahoma City Chamber delivered an eight-page proposal of tax credit and incentive programs it recommends keeping to the task force. The recommendations are divided into three main categories – “premier incentives” which differentiate Oklahoma from other states; “basic incentives” offered by virtually every other competing state; and “industry specific incentives,” which “support the growth & development of industries important to Oklahoma’s economic future.”

The proposal identifies 15 specific tax credit and incentive programs, ranging from the universally popular Quality Jobs Program to the murkier Qualified Rehabilitation Expenditures for Historic Building Tax Credit and the Energy Efficient Residential Construction Tax Credit. In fiscal year 2010, for instance, more than $9.1 million in tax credits garnered for historic building rehabilitation were sold and used by insurance companies.

“Now I’m all for historic rehabilitation, but that doesn’t sit right with me,” said Larry Ferguson, a former state legislator from Cleveland who regularly attends the task force meetings. “Is that the true intent of those types of tax credits? I don’t think so.”

Mike Ogan, The Greater Oklahoma City Chamber’s director of business development, stands by the list of 15 tax credit and incentive programs he presented to the task force. He especially advocates the retention of the Prime Contractor Quality Jobs Program – an incentive program that rewards contractors for hiring Oklahoma sub-contractors.

“That’s a win-win for everybody,” Ogan noted. “Overall, we believe the incentive programs we have identified allow us to compete. In one way or another, we believe they are all important to our economic future.”

So the pressure mounts as the task force draws closer to its final recommendations.

Dank, meanwhile, offers this ominous warning: “The bloodletting has yet to begin.”

How the drama plays out is anyone’s guess.

“Will legislators ultimately have the stomach to make those changes?” Meacham said. “Will they be able to look that coal miner in eastern Oklahoma in the eye and say, ‘We’re cutting your tax incentive?’ We’ll see.”