In Monday’s State of the State address, Governor Henry laid out the broad parameters of his FY ’11 Executive budget. The Governor’s speech likened our current fiscal storm to the severe weather the state has faced recently and so often in our past.  While the Governor stated clearly that continued budget cuts are unavoidable due to the dramatic plunge in revenues that has hit the state during the current fiscal year (FY ’10) and that will continue next year, he earned loud, bipartisan applause when he declared:

We all will be asked to sacrifice. But we cannot balance the budget at the expense of the most vulnerable among us.

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Are tax breaks for businesses a legitimate tool of economic development, or a form of corporate welfare? The fact is they can be either. The challenge is telling the two apart and ensuring through clear legislative language and ongoing oversight that policies that provide tax credits or other preferential treatment to businesses are meeting their goals.

Last week, a Joint Legislative Task Force created by legislation authored by Rep. David Dank and Sen. Randy Brogdon met to begin examining transferable tax credits. These are  tax incentives where one company qualifies for a tax  and sells that credit for cash to another company that wants to reduce its tax obligations.

According to a presentation by House staff attorney Mark Harter, the “general rule is that a tax credit can only be used by the person or entity who performed some economic activity or who invested money in some way.” Yet the Task Force heard that two of the state’s most notorious transferable tax credits – for non-stop coast-to-coast air service (Great Plains Airline) and for space transportation vehicle providers (Burns Flats spaceport) – provided much weaker standards. In those cases, taxpayers ended up on the hook for tens of millions of dollars for projects that failed (literally) to get off the ground.

But even where eligibility requires performance of certain economic activity, either job creation or capital investment, oversight and compliance is often uncertain. Rep. Dank was especially critical of the state’s coal credit intended for the purchase of Oklahoma mined coal. Businesses and individuals claimed anywhere from $5 million to $12 million in coal credits in 2007. Yet, according to Rep. Dank (quoted in the Journal Record, subscription only):

But there is no evidence that these were ever used to produce more coal or to hire more miners. Instead, tax credits given to the coal industry in Oklahoma were sold to companies that had nothing to do with coal, reducing revenues to the state with no economic gain.

The next meetings of the Task Force will no doubt dig deeper into how particular credits have been used, or misused.

Over the past several years, the state has made genuine progress in improving accountability and transparency of tax incentives.  An Incentives Review Committee, created by statute, has been reviewing major tax credits and making recommendations; their work was responsible, in part, for the decision to allow one of the most expensive and controversial incentive programs, the Venture Capital Credit, to expire at the end of 2008. As we discussed in this blog post, implementation of the Taxpayer Transparency Act (SB 1) led earlier this year to the launch of a searchable online database that generates lists of all individuals and businesses that claimed tax credits (so far information is available only for 2007).  And for the first time ever in the state, the Legislature this session passed a tax credit bill, SB 929,  that included a “clawback provision” allowing for the state to demand repayment of credits in the event that companies failed to uphold their obligations – as promptly occurred when Mercury Marine announced it was pulling up stakes from Stillwater and returning over $1 million in payments.

So what more can be done? One interesting idea was proposed recently by Good Jobs First, a national policy organization that focuses on corporate accountability:

We also need responsible budgeting. Let’s also require each state to enact a Unified Development Budget: an annual report to the legislature itemizing all forms of spending for jobs—both appropriations and tax expenditures. Tax breaks typically dwarf appropriations by ratios of 4 to 1, 6 to 1, 8 to 1 or more, so we need the whole iceberg up on the table for an annual check-up.

While Oklahoma has made strides in making available information on tax incentives with the Taxpayer Transparency Act and biannual Tax Expenditure Report, it remains difficult, if not impossible, to find comprehensive information on the full array of tax credits, especially regarding credits claimed on taxes other than the income tax (insurance premium tax, gross production tax, ad valorem tax).  A Unified Development Budget such as proposed by Good Jobs First could go a good ways towards helping pull the various pieces together into a single picture – and ultimately help policymakers with the tough but essential goal of reaching informed decisions about which tax credits are working to promote good jobs and investment, and which are purely handouts to special interests.

OK Policy has released a new fact sheet looking at Oklahoma’s gross production taxes on oil and gas,which takes a special look at the tax exemptions offered for different forms of production. Over the past five years, producers have claimed $339 million in exemptions, or rebates, from the gross production tax, with almost three-quarters of the rebates claimed for deep well drilling and horizontally drilled wells, according to data supplied by the Oklahoma Tax Commission.

Most gross production tax exemptions are set to expire on June 30, 2009. The Legislature is considering two bills – HB 2062 and SB 313 that would extend the exemptions through 2012. So far, both bills have sailed through the legislative process with a minimum of debate. However, the titles have been stricken from the bills and they look headed to conference committee, which ensures that the Legislature will have at least one more opportunity to consider the matter before any extension of the tax exemptions is sent to the Governor.

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If you are thinking about doing most anything in Oklahoma that could possibly be seen as encouraging economic development, chances are you’re eligible for a tax credit. The state offers tax credits for everything from  investing in small business venture capital companies and film production companies to purchasing poultry litter. Until very recently, however, public information about who is claiming these credits and in what amounts was all but non-existent. (The Oklahoma Tax Commission publishes a bi-annual tax expenditure report, but that provides only aggregate amounts and provides no data for many credits.)

The state of disclosure of tax credits has now taken a giant leap forward. In 2007, the Legislature passed SB 1, the Taxpayer Transparency Act, authored by Sen. Randy Brogdon and Rep. Paul Wesselhoft. The bill required the Office of State Finance to set up a website to allow the public access to comprehensive information on state government. The website was to include detailed information on all recipients of  government funds not only through direct budgetary expenditures, but also incentive payments and tax credits. Expenditure information has been available since early 2008 on the Openbooks.gov website.  Last month, tax credit information was added.

Anyone can now go to the site and either call up information by credit or search by taxpayer’s name for 35 income tax credits for the 2007 tax year, along with an unspecified “other credit” category. The database contains over 5,500 entries on both individual and corporate filers who claimed a credit in 2007. The amounts claimed range from a high of $2.4 million for the rural small business capital credit claimed by Donald and Joyce Harvey to $1 claimed for assorted credits by some dozen taxpayers. The largest corporate recipient of a tax credit is listed as Terra International, Inc., which claimed a credit of $2.1 million under the Investment/New Jobs incentive program.

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