December 3, 2015

Once in Place, Sales Tax Breaks Nearly Impossible to Touch

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Buried deep in the Oklahoma tax code is a sales tax exemption for railroad spikes. Once it got hammered into place, it never budged.

The tax break was created in 1993 for the benefit of one spike manufacturer, Wellington Industries, so it would relocate from Texas to Sand Springs. Tax code reformers later targeted it for review, but it survived. Oklahoma Tax Commission officials said they weren’t able to calculate how much it costs the state today.

It’s got plenty of company, though. According to Tax Commission data, the state’s 4.5-cent sales tax has 150 specific statutory exemptions. They range from the obscure, such as an exemption for commercial spaceports, to the colossal, such as two exemptions for raw materials and wholesale goods.

The state sales tax and its companion “use tax” on goods purchased out of state brought in $2.6 billion last year.

They left far more than that on the table. The 30 largest exemptions alone reduced 2014 fiscal year tax collections by an estimated $8.1 billion, the tax commission said. An estimated $7.1 billion of that amount was attributable to the exemptions for goods purchased by manufacturers or by “resellers” who operate at the wholesale level. Tax analysts generally agree those exemptions make good sense.

That still leaves 148 exemptions adding up to at least $1 billion. Yet when state officials recently drafted a list of 75 business tax breaks to be evaluated by a newly created Incentive Evaluation Commission, they included only a handful of sales tax exemptions.

That’s partly because sales tax breaks have tended to be a “third rail” of Oklahoma state finance. Once in place, they’re almost impossible to touch without getting hurt.

“I got beat up pretty good,” said former state Sen. Jim Wilson, D-Tahlequah, who tried unsuccessfully three years ago to raise money for education by removing the sales tax exemption for newspapers and magazines. “Even the Tahlequah paper beat me up on that. I was surprised at the backlash.”

Business tax breaks will be under scrutiny again in 2016 because the state is facing a record budget gap of as much as $1 billion next year. State agencies already are being advised to expect a significant decline in legislative appropriations for core services such as health and education.

Earlier this year the Legislature voted to set up a new Incentive Evaluation Commission to help identify business tax breaks that might not be living up to expectations. It will begin operations in January.

The initial list of possible reform targets is noticeably light on sales tax exemptions. Several state officials insisted that nothing was officially off the table for now. But they acknowledged that sales tax breaks were particularly difficult to tackle, particularly for elected lawmakers.

“The perspective that most legislators have is that eliminating a sales tax exemption is equivalent to charging consumers with a new tax,” said Senate Finance Committee Chairman Mike Mazzei, R-Tulsa. “I don’t know that they’re impervious, but they’re very difficult.”

The Oklahoma Legislature created the state sales tax in 1933. It started out at a penny on the dollar and grew to 4.5 cents by 1990. Cities and counties charge additional levies, and the combined total tops 10 cents in some locations. The sales tax has gotten more scrutiny in recent months because of a proposed statewide penny sales tax for education.

The $8.1 billion estimated cost of the 150 existing exemptions is inflated by two huge exemptions: sales of tangible goods to manufacturers and to resellers, which reduced tax revenue by an estimated $2.0 billion and $5.2 billion, respectively.

Tax analysts said that doesn’t mean they should be eliminated. If the sales tax were applied to sales of raw materials and wholesale goods, it would create a phenomenon called tax “pyramiding.” Consumers would pay far more for finished products at the retail level. For that reason, the two big tax breaks are widely accepted and generally not considered when policymakers discuss tax code reform.

“In principle, those are appropriate and justified exemptions, the idea being that you only tax sales to the end user,” said David Blatt, executive director of the nonprofit Oklahoma Policy Institute in Tulsa. “Most states exempt sales for resale and sales to manufacturers.”

Many of the other big-ticket exemptions also enjoy widespread support. For example: sales of prescription drugs and residential utilities, which reduced last year’s revenue collections by about $124 million and $133 million respectively.

When it comes to single-industry sales tax breaks that have a significant revenue impact, a relatively small number of recipients stand out. For example:

–Sales tax exemptions for agricultural goods, including livestock, cost the state an estimated $185 million in 2014.

–Sales tax breaks for railroads, airlines and aircraft maintenance operations reduced state tax collections by $61 million.

–An exemption for essentially all forms of advertising in Oklahoma cost the state $47 million last year.

–The exemption for sales of newspapers and periodicals, the first sales tax break mentioned in state law, lowered state revenue by $11 million.

–The waiver of sales taxes on tickets to professional sporting events, including the Oklahoma City Thunder, cost the state $3 million last year.

The fact that some tax breaks are politically popular doesn’t mean they should get a free pass, Blatt said.

“I think Oklahomans can rightly ask why we exempt ticket sales to professional sporting events while we continue to tax groceries,” Blatt said. “If you look at who’s buying season tickets to the Thunder compared to who’s buying groceries, it’s hard to justify.”

Blatt, Mazzei, Wilson and other officials interviewed for this story said they were convinced that it was nearly impossible to take on tax credits on a piecemeal basis. If the state wanted to eliminate them or scale them back, it would need to do it in the form of comprehensive tax code reform, they said.

“It’s probably impossible,” said Wilson, who served the maximum 12 years in the House and Senate and now chairs the Northeast Oklahoma Regional Alliance. “They’ll give it a lot of lip service and talk about it. But they’re not going to successfully remove any [major] tax breaks.“

Oklahoma Press Association Executive Secretary Mark Thomas, who attended the 2012 committee session when Wilson’s bill was scuttled, said newspapers might be willing to give up their tax break, but not if they’re standing on the firing line by themselves.

“Our fundamental policy here is that if the state were to eliminate every single tax exemption on the books, we’d feel like we had to go along,” Thomas said.

“But if they’re going to give one to somebody for Thunder tickets or to somebody else for some other good cause, we’re just as good a cause as anybody.”

In Sand Springs, the Wellington Industries railroad spike plant is still getting its sales tax break 22 years after it was put on the books.

Gerdau S.A., a big Brazil-based steel company, acquired the plant years ago. A plant manager in Sand Springs said he wasn’t allowed to discuss operations there. He referred questions to Gerdau’s U.S. headquarters in Tampa, Fla. Officials there did not return a reporter’s phone call.

Sand Springs Mayor Mike Burdge said the plant was still a valued community employer. He did not criticize the tax exemption it received nearly a quarter century ago, but said he thought the state should do a better job of reviewing tax breaks.

“Those sales tax exemptions are really tough on cities,” Burdge said. “They ought to be looked at from time to time to see if they’re still serving their purpose.”

Top 30 Sales Tax Exemptions

In Fiscal Year 2014, the 30 largest sales tax exemptions listed here reduced the state's tax revenues by an estimated $8.1 billion. Click on an exemption to see more details.
ExemptionFY 2014 Estimate
Sales of goods to resellers $5,210,700,000
Sales of goods to manufacturers$1,967,822,000
Sales of residential gas & electricity$132,617,000
Sales of goods & services to local government and public schools & colleges$129,086,000
Sales of prescription drugs $123,928,000
Sales of agricultural crops, produce, livestock, feed & supplies$117,783,000
Sales of goods & services to the state & its subdivisions $103,774,000
Out-of-state purchases of livestock $65,365,000
Out-of-state purchases by commercial airlines & railroads $58,291,000
Sales of advertising$46,869,000
Sales of groceries to food stamp recipients$38,618,000
Sales to 100% disabled veterans$28,054,000
Tuition & fees paid to private schools $21,956,000
Sales of water, sewage & refuse services$14,664,000
Sales of certain Medicare- and Medicaid-qualified drugs, medical devices & supplies $12,023,000
Sales of newspapers & periodicals$10,516,000
Sales of goods by schools & PTAs $7,419,000
Sales tax holiday$7,299,000
Sales of goods to rural electric cooperatives $7,177,000
Sales of food in school cafeterias$6,787,000
Sales of goods & services to or by churches $6,135,000
Out-of-state purchases of manufacturing equipment $5,172,000
Dues paid to fraternal, religious, civic, charitable or educational societies$4,023,000
Sales of goods & services to private schools $3,406,000
Sales of aircraft repairs, modification, engines & parts$2,425,000
Sales of NBA & NHL tickets $2,246,000
Sales of equipment for oil recovery$1,907,000
Sales of horses $1,320,000
Credit for taxes paid to other states for goods purchased there$1,150,000
Sale of tickets to pro sporting events$721,000
Total$8,139,253,000
  • Nora

    I agree a massive overhaul is needed. I understand why we give business a tax credit to move to our state, but I think there should be a term limit. They do have lots of initial start-up costs. However, I would think after 10 years if they are still in business they should be able to start paying tax. I do not see a reason why newspaper and magazines are not charged a sales tax. That’s just crazy.

    Lots of exemptions to make sense in that if you taxed an item every time it changed hands it would get outrageous. Not charging on food stamps and medications again make sense. Not sure why advertising should be exempt though. Definitely see a logic for exempting anything going to schools and education (public or private). If public, they do not receive enough money to do what they need to anyway. And, even private education is not fully funded. Anything to better the education of our citizens should be exempt.

  • Gary Morrison

    This article is written from a decidedly ‘governmental’ point of view even though mention of the very sane and bottom line viewpoint that “The perspective that most legislators have is that eliminating a sales tax exemption is equivalent to charging consumers with a new tax,” is very briefly entertained. This IS the main point and if that statement is true, then it is a very encouraging and heartening thing about our legislators.

    The elimination of an exemption is not something the government has lost and must “regain”. The government never had that money in the first place, did not generate or earn those funds through any action of its own and is not at all entitled to them. It doesn’t ‘belong’ to the government in any way, shape or form. If indeed we do trust the government enough to grant them use of OUR money for some worthy collective purpose, then so be it. But it is not the elimination of something negative to remove an exemption, it is the plain and simple imposition of a negative in the form of new taxes that never existed before upon the backs of the actual owners of all the money.

    Government is inherently inefficient and must be watched and monitored carefully and constantly to ensure that funds are utilized for exactly that which they were intended for and that it is done well. This is where the focus should be, not on sneaky ways to raise taxes. Leave the damn exemptions alone. They are doing nothing but good. I see nothing wrong with any of them- especially the Space Port. I am all for a Space Port. That should generate huge amounts of revenue. When does construction of that facility begin exactly…?

  • Gary Morrison

    Who do you think you are to remove large parts of my post? Maybe the parts you removed are the most important parts. I’m still trying to decide but I’m beginning to think that your supposedly politically “neutral” rag is actually slanted to the Left. Especially since you removed the parts most critical of the Left. You are starting to lose credibility with me. Not that you probably give a damn anyway… But you might want to give a little thought to retaining and even expanding the SMALL readership you presently have. Just a thought… Highhandedly and summarily editing people’s posts is for sure not the way to do that.

  • patricia hossele

    I do not understand why the middle class people again carry the largest burden of the sales tax. we work buy groceries buy gas and none is tax deductible as with self employed wealthy people who can find loop holes in every way. the American people should not be taxed to eat. this is totally ridiculous that when we spend 100 dollars on food 10 dollars goes to tax us for having the nerve to eat. I was under the impression that our ok. government has passed a bill to eliminate the tax on food that would automatically kick in when the economy reached normal levels. where did that bill go.