November 28, 2011

Tax Task Forces Work to Enact Crackdown

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A legislative task force assigned to evaluate state tax incentives is closing in onabout a dozen tax credits that have been reducing state revenue collections by wellover $150 million annually.

At the same time, a second task force established to examine the overall structureof state taxes appears likely to raise the stakes by suggesting broader changes thatcould help finance a partial reduction of income tax rates.

Even more pressure may be applied by Gov. Mary Fallin, who is expected to call for atax credit crackdown and income tax reduction in her next state of the state address.

If enacted, the proposals would represent a significant shift in state tax policy.But opposition to specific proposals is likely to be fierce, and the outcome mightdisappoint those who hoped that closing loopholes would generate enough moneyto reverse recent cuts in state spending or get rid of the state income tax altogether.

“This Legislature is going to have some tough votes,” said Rep. David Dank,chairman of the first task force. “The easy part’s done.”

House Speaker Kris Steele said the recommendations of Dank’s panel would receivepriority consideration.

“This is not a window-dressing or smoke-and-mirrors sort of committee,” saidSteele, R-Shawnee. “It’s very legitimate and very serious. The members are diggingdeep… It will be a top priority moving into next session.”

Dank’s task force will hold its ninth meeting on November 30. It is expectedto adopt a set of criteria for evaluating tax credits that were created to stimulateeconomic development and job creation. Top lawmakers contend some of themhave produced marginal results, outlived their usefulness or been subject to abuse.

Of the nearly 50 tax credits under consideration, the task force has singled out abouta dozen for special scrutiny. Most are transferable, which means recipients cansell them to other people who had nothing to do with the plant openings, businessprojects or investments the credits were intended to finance.

Those credits have been reducing state revenue collections by an estimated $174million a year, according to calculations by Oklahoma Watch.

No one agency in state government is in charge of evaluating all tax breaks orcalculating their annual revenue impact. Oklahoma Watch’s estimates are basedon data from the Oklahoma Tax Commission, Insurance Department, CapitalInvestment Board, Film & Music Office and Incentive Review Committee. Becausethose agencies keep records in different fiscal and tax year formats and release themat different times, the annualized totals are not exact.

Dank, R-Oklahoma City, said his task force had not yet obtained an official revenueimpact estimate, but he thought the Oklahoma Watch calculation appearedreasonable.

“We’re talking about at a very minimum $150 million, in my opinion,” Dank said. “Itcould go in excess of that, but I don’t see how it could go any less.”

Among the specific credits on the task force’s short list:

  • Three capital investment credits with a combined annual impact of exceeding$60 million. At one point in time, sponsors told investors they could receiveas much as $2 in credits for every $1 invested.
  • A tax credit for firms that mine or burn Oklahoma coal, $10 million.Oklahoma Watch calculations show that the cost of protecting severalhundred industry jobs has topped $15,000 a year.
  • Credits for the rehabilitation of historic buildings, $10 million; Oklahoma-based movie production, $5 million, and energy-efficient new homeconstruction, $4 million.

Two of the capital credits are scheduled to expire at the end of this year, butDank said he intended to include them in his tally because some lawmakers haveexpressed interest in renewing them.

Dank said he would ask the task force to adopt the new review criteria atWednesday’s meeting. Votes on specific credits, if they occur, would be deferreduntil a tenth and final meeting in December.

Dank said he also planned to call for a vote on proposals to eliminate transferablecredits, assign dollar caps and sunset dates to all credits and authorize the stateauditor and inspector’s office to begin scrutinizing incentive programs.

“I think we should be auditing all tax credits,” said State Auditor and InspectorGary Jones. “There are different things out there where people are getting literallyhundreds of millions of dollars, and we can’t even tell you what they did. There’sabsolutely no transparency. As far as accountability, that’s a joke.”

The second task force, headed by Sen. Mike Mazzei, R-Tulsa, will hold its fourth andfinal meeting on December 1 in Tulsa.

Unlike the Dank panel, which looked mainly at job creation incentive credits,Mazzei’s task force is considering broader changes extending across the entire taxcode, with an eye toward future reductions in the state personal income tax.

Mazzei said the panel wouldn’t shy away from targeting specific tax breaks forelimination. “We’ll include all tax preference items,” he said, “tax credits, taxdeductions and sales tax exemptions.”

Although he declined to cite specifics, Mazzei has said he thinks the Legislaturecould eliminate loopholes that cost taxpayers as much as $500 million a year.

Yet even if lawmakers could reach that high bar, it’s only a fraction of what it wouldtake to offset the cost of eliminating Oklahoma’s personal income tax. The 5.25%income tax is expected to generate $1.8 billion during the current fiscal year. That’sslightly more than a third of the state’s $5.2 billion general fund budget.

Although the combined cost of all of the state’s tax breaks exceeds $5 billion, manycredits, deductions, exemptions and incentives apply to broad swaths of taxpayersand enjoy widespread support.

Among the incentives that key lawmakers have no intention of ending:

  • sales tax exemptions for goods sold to manufacturers and resellers, whichreduce state tax collections by a whopping $3.2 billion annually.
  • sales tax exemptions for drugs and medical devices, $143 million; farmproducts and livestock, $123 million, and residential utilities, $118 million.
  • gross production tax exemptions for horizontal and deep wells, $112 million.
  • the Quality Jobs program for new manufacturing employment, $59 million.

Dank acknowledged that many rank-and-file lawmakers are likely to balk ateliminating specific tax breaks supported by powerful interest groups.

“There’s going to be a lot of pressure on a lot of different credits placed on a lot oflegislators,” Dank said.

Some legislators are reluctant to shift more of the tax burden onto some categoriesof taxpayers. Proposals to reduce the income tax already have generated oppositionfrom those who say an offsetting increase in the state sales tax would hit hardest atlower-income taxpayers who spend a bigger share of their incomes on retail goodsthan wealthier people.