Unused Tax Credits Are ‘Wild Card’ in State Budget

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Unused tax credits have created a big cloud over future state revenue collections, and officials say they can’t predict with certainty when or even if a storm might strike.

The tax credit overhang totaled $417 million by the end of 2014 according to an Oklahoma Watch analysis of data gathered for the first time by the Oklahoma Tax Commission. Comparable data for year-end 2015 won’t be available until early next year.


A Breakdown of State’s Tax-Credit Overhang

The data includes all state income tax credits that had been earned but not yet exercised as of Dec. 31, 2014, and that could be carried over for future use.

Tax Commission Executive Director Tony Mastin said he thought the credit overhang was manageable. He said the commission took into account past trends in tax-credit use when preparing annual revenue estimates on which the state’s budget is based.

“All they can do is use them to offset their income tax liability,” Mastin said. “And if they didn’t pay me anything last year, they’re probably not going to pay me anything this year either.”

Other state officials and observers expressed concern about the overhang, noting that it could worsen Oklahoma’s ongoing budget crisis if large tax credit holders decided to cash them in faster than expected.

“It’s a huge wild card,” said John Estus, public affairs director for the Office of Management and Enterprise Services. “ I don’t think there’s much specific consideration given to a lot of those because it’s so difficult to determine when or if they will be claimed.”

State Senate Finance Committee Chairman Mike Mazzei, R-Tulsa, said there were times in recent years when the use of a particular credit would soar unexpectedly, confounding revenue projections that had been based on previous trends.

“You never actually know what’s going to hit the blotter in any given tax year,” said Mazzei, a certified financial planner. “From a budgeting and financial management standpoint, I do think it’s a concern.”

OGE’s Credit Balance

One company alone, OGE Energy Corp., held more than $150 million in unused state tax credits on Jan. 1, 2016, according to its most recent financial statements. Most of them were received for making big capital investments in Oklahoma.

OGE told its shareholders in securities filings that it was unable to use its credits for several years because it had little or no state income tax liability. But it said it “anticipates future taxable income will be sufficient to utilize all of the losses and credits before they begin to expire.”

OGE Energy Corp. is the parent company of Oklahoma Gas & Electric Co., the state’s biggest electric utility.

The company reported revenues of $2.2 billion and net income of $271 million for 2015, but had no taxable income because of accumulated federal and state tax benefits earned in prior years.

In a document filed with the Securities and Exchange Commission, OGE said it ended 2015 with $128 million in unused Investment/New Job tax credits and $24 million in unused Oklahoma wind power credits.

An OGE spokesman said the tax credits helped keep electricity rates lower than they would have been otherwise.

Carryover Credit Smorgsboard

The Tax Commission data includes nearly two dozen income tax credits that can be carried over from year to year if the recipients are unable to use them during the year in which they are claimed. The number of allowable carryover years varies from credit to credit.

Oklahoma began the 2014 tax year with an overhang of $390 million in unused income tax credits, commission data shows. During 2014, taxpayers earned $168 million in additional credits. They exercised $140 million in credits that year. That left the state with an unused credit balance of $418 million heading into the 2015 tax year.

(The Tax Commission tally does not include insurance premium tax credits, which are tracked separately by the Oklahoma Insurance Department.)

By far the biggest carryover balance is the Investment/New Jobs Credit, designed to encourage manufacturing companies to finance job-creating plant expansions. If a company can’t use the credit during the year in which it’s earned, it can carry it forward indefinitely.

The Investment/New Jobs Credit accounted for $347 million, or 83 percent, of the state’s total tax credit overhang going into 2015.

The other top contributors to the credit overhang include the wind power tax credit, at $33 million; the clean-burning motor fuel property credit, $10 million, and the historic building renovation credit, $9 million.

Most of the bigger credits were issued to a relatively limited number of businesses. For example, only 889 tax filers used the Investment/New Jobs Credit in 2014, resulting in an average credit of $44,000 per return.

The Oklahoma Watch analysis did not include broad-based income tax credits received by individual taxpayers to subsidize low-paying jobs, child-care expenses and sales tax payments. They were excluded because they must be used during the year in which they are earned and do not contribute to the credit overhang. It also did not include business credits that can’t be carried over to future years.

Most of the credits included in the analysis, including the Investment/New Jobs Credit, must either be used by the company that earned them or distributed to shareholders, partners or members.

A few, however, can be sold to other taxpayers.

Big Credit Earners

The Tax Commission data provided to Oklahoma Watch did not identify individual taxpayers who held the carryover credits. Lengthy lists of individual credit recipients, however, are posted on a state data site.

Based on those data sets and, in OGE’s case, documents filed with the U.S. Securities and Exchange Commission, Oklahoma Watch determined that the biggest credit earners since 2007 include a combination of businesses and individuals:

  • OGE Energy Corp.
  • Quad Graphics Inc.
  • Valero Refining Co.
  • OneOk Inc.
  • Howard L. and Rhonda A. Hawks.
  • Koch Industries Inc.
  • Samuel and Nancy Gary.
  • CVR Energy Inc.
  • Central Farmers Inc.
  • AEP Utilities Inc.
  • Thomas E. and Mary L. Hendricks.

Individual taxpayers can acquire business credits by receiving corporate and partnership distributions or by purchasing transferable tax credits.

Mastin, the Tax Commission executive director, declined to discuss specific tax filers. But he said that the future use of credits by any companies that consistently have not been paying income taxes has little effect on state revenue forecasting.

“If they paid zero last year, I’m carrying that zero forward next year,” Mastin said. “If in fact they have some income that might cause them to pay taxes, but they also have a credit, it just puts them back to the zero that I had them at already.”