President Ronald Reagan, a big supporter of the Earned Income Tax Credit

In all of the major income tax proposals this year (including the plan announced yesterday by Senate Republicans), the Earned Income Tax Credit (EITC) has been targeted for elimination. That’s strange, because lawmakers have made no clear argument for why we should lose this credit. They’ve spoken about the need to end handouts to “corporate special-interests,”  but the EITC goes to low-income working families.

It’s also strange because the EITC has a long history of support from conservative leaders. For example, at the State Chamber of Oklahoma’s tax policy forum earlier this month, Arthur Laffer said he would favor a “negative income tax” that pays credits to those earning below a certain amount.

The negative income tax idea has a long conservative pedigree, beginning with Milton Friedman. According to Friedman, the most efficient and effective way to solve poverty is to give poor people money. This preserves their ability to make market choices and reduces the need for bureaucracy to run more complicated assistance programs, such as food stamps and rent subsidies. To maintain the incentive to work, the payment is reduced by a fraction for each dollar the family earns. Rising wages would eventually eliminate the credit, but not so quickly that it makes more sense to stay unemployed. Read the rest of this entry »

Lost amid much of the tax cut discussion has been the fact that proposals coming out of the legislature would actually increase taxes on hundreds of thousands of low- and moderate-income families. That’s because they could lose a host of broad and effective tax credits designed to encourage work, support basic nutrition, and support families with children. A new video produced by OK Policy shares personal stories of what the impact could be.

We encourage you to watch the video and share it widely. Then head over to OK Policy’s take action page where you can learn more about what you can do to protect these important credits.

[UPDATE: A previous version of the graph left out the Child Tax Credit from the list of broad-based credits that make up the 68 percent.]

In a recent interview with KWGS, tax reform task force co-chair Senator Mike Mazzei argued:

The folks that really should be displeased with our tax reform are not individual taxpayers at these low income levels, but the corporate folks that are going to lose a lot of their special interest breaks that have helped them subsidize their profit margins. When you asked about winners and losers earlier, those are the folks that are going to lose in this style of tax reform.

This claim is false. Based on the task force’s own numbers, broad-based tax preferences make up more than two-thirds of the funds targeted for elimination. That’s why Sen. Mazzei’s plan would raise taxes for a majority of Oklahomans. It’s why the real losers under this plan are not corporate special interests; they are families with children and low-income seniors. Read the rest of this entry »

Ken Miller is State Treasurer and a member of the the Task Force for the Study of Tax Credits and Economic Incentives.  This originally appeared as an article in the November Oklahoma Economic Report and is reprinted with permission. For an earlier blog post on tax credit reform by Task Force co-chair David Dank, click here, and see this piece laying out OK Policy’s position.

Critics contend that if politicians are good at anything, it is studying something to death. While this legislative interim has been full of task forces and studies, many promise to be more than just simple academic exercises. True, some are meant to garner attention for a favored issue. Others are meant to bolster an opinion. And some are honest undertakings in search of good policy.

And there are some with elements of each of the above. Facing a December 31 report deadline, the Task Force for the Study of Tax Credits and Economic Incentives is preparing final recommendations.

It is this task force member’s hope that rhetoric and ideology will play a subordinate role to sound policy and economic reality. The task force recommendations can impact our business climate for years to come and must take into account the competitiveness of states in attracting industry and economic growth. Read the rest of this entry »

Photo by flickr user zeuxis.pixelsurgery used under a Creative Commons license.

An idea floating around in the tax reform debate has been to swap tax credits for a reduction in the top income tax rate. That’s one of the motivations behind the tax credit task force, which has looked at reigning in a number of business and economic development tax credits.

Oklahoma also provides another kind of credit, directed not to favored industries, but to all taxpayers below a certain income level. Some lawmakers seem tempted to eliminate these as well. They should think again. Read the rest of this entry »

Recently Maj. Gen. Rita Aragon, Oklahoma’s Secretary of Veterans Affairs, suggested that school gyms, playgrounds, and athletic fields should be opened to the public after hours. She argued that these “shared-use agreements” for public facilities would reduce obesity, especially in poor communities that may not have access to private gyms, parks, or safe sidewalks.

Aragon’s idea would be an effective and efficient use of public dollars based on a simple premise: the state identifies a public good and directly provides it. Contrast that with an obesity-fighting idea from a few years ago, when Sen. Mike Mazzei proposed a tax credit to reimburse 20 percent of the cost of health club memberships. This would have been more expensive than simply opening up schools and limited to those who could afford 80 percent of a health club membership. In addition, a substantial part of the credit would be wasted on those who would have joined a health club without it.

Sen. Mazzei’s tax credit was not made law, but it is emblematic of a common problem in public policy. Because we have stigmatized direct government action in many areas, we look for workarounds that are less efficient than if the state just went ahead and provided the service. This creates gaps in both efficiency and accountability.

Another example is how the state has encouraged rehabilitation of historic buildings. Lawmakers decided this was in the public interest, so they created a tax credit. However, because the credits were transferable, recipients sold many of them at 80 or 90 cents on the dollar. The buyers likely had no relationship to the rehabilitation project, so a significant percentage of the money was immediately wasted. Read the rest of this entry »

If all the recent talk about tax credits and exemptions and tax reform have left you scratching your head, you’re not alone.  Keeping up with the tax debate – and its accompanying jargon and terminology – can challenge even the most committed news-and-politics-junkie.  Fortunately, this glossary of key terms from the Institute on Taxation and Economic Policy can help.  The glossary accompanies ITEP’s updated ‘Guide to Fair State and Local Taxes‘.  Print it out and keep a copy handy for the next time you need to make sense of the state’s tax policies.  The glossary includes definitions like: Read the rest of this entry »

Rep. David Dank is co-chair of the Tax Credit Task Force. This is his opening statement to the Task Force’s meeting of November 9th. It is reprinted with permission and has been edited for length as indicated by [...] The full unabridged statement can be seen here. A column presenting OK Policy’s recommendations for tax reform that previously appeared on Oklahoma Watch can be seen here.

[…] The very first question we need to ask today is who we are representing here []

I think the only valid answer is, The Taxpayers.

Not the special interests who have benefited from many of these tax credits… and certainly not the few who have manipulated this system for personal gain.

I think we should also make a second thing clear today [] We are not against business. We don’t oppose growth. We believe that government policy can help create jobs. We don’t think all credits or incentives are bad.

What I think most of us believe after all we have heard here is that far too many tax credits and other incentives enacted in the past were created for the wrong reasons, and in the wrong way. Read the rest of this entry »

Scott Meacham is the former State Treasurer and former director of the Oklahoma Office of State Finance. He currently chairs the Oklahoma Chamber of Commerce’s Economic Development and Taxation Committee.

The Oklahoma legislature has struggled for decades with the best way to encourage capital investment in Oklahoma. Many ideas have been tried with varying degrees of success. The problem is that once the ideas are launched by the legislature, usually as tax benefits under Oklahoma’s tax code, they are all but forgotten. Tax benefits included credits against tax liability, deductions against income and, in some cases, direct payments from the State. No real processes exist to critically evaluate these programs and eliminate those that are not working. The result is that the least effective of these initiatives stay on the books and end up costing the state hundreds of millions in lost tax revenues.

The Rural and Small Business Tax Credit programs are one of the prime examples of bad tax policy run amok. The legislature launched these programs a decade or more ago with the stated purpose of encouraging venture capital investment in Oklahoma. The structure created was very complicated, with entities called Capco’s serving as a sort of investment pool where investors would make investments and receive hefty tax credits in return. The Capco would then invest the investor funds, perhaps along with borrowed money, in qualifying rural or small business ventures.

The problems started almost immediately as smart lawyers figured out loopholes and ways to provide tax benefits which in some cases exceeded the amount invested. With such lofty investor returns at the expense of state tax revenues, investors quit paying attention to the merits of the underlying investments, as they literally had nothing to lose. In one highly publicized case, the investors took their credits and no investment was even made. The State was left totally holding the bag. Read the rest of this entry »

Senator Tom Adelson is a state senator from Tulsa. Scott Meacham is the former State Treasurer and former director of the Oklahoma Office of State Finance. Preston Doerflinger is the current director of the Oklahoma Office of State Finance.

If the Oklahoma Legislature were to invest tens of millions of your tax dollars in start-up companies located out of state, how would that make you feel?  That’s basically the question Representative David Dank asked the Oklahoma Capital Investment Board (OCIB), a state public trust, during the August 25^th joint House/Senate hearing on state tax credits.

As co-chair of the Task Force for the Study of State Tax Credits and Economic Incentives, Representative Dank has held several hearings to review the effectiveness of state tax credits and incentives that are collectively costing Oklahoma hundreds of millions of dollars each year. One tax credit program that is drawing special scrutiny is OCIB.

The Oklahoma Legislature created OCIB in 1985 to attract private sector investment in Oklahoma start-up companies.  As conceived, the idea was to have the state invest in venture capital funds, whether located in Oklahoma or other states, and rely on the investment expertise of these venture capital funds to invest these dollars in Oklahoma companies.

The business model is a little more complicated.  OCIB borrows money from banks and invests these loan proceeds in the venture firms.  Banks are willing to make the loans because OCIB pledges tax credits issued by the state of Oklahoma to the bank as security for the loan.  So long as OCIB pays the loan back, the tax credits would not be sold.

OCIB thought these venture firms would earn a positive return on OCIB investments and use the profits from the investments to pay down the loan.  But things did not work out that way.  By 2005, OCIB had borrowed $31 million while the investments were worth $13.6 million.  So, OCIB had to sell the tax credits off to pay down the debt.

Who buys the tax credits? Businesses and wealthy investors who owe Oklahoma taxes.  Instead of paying state income taxes, they buy the credits from OCIB and reduce their tax bill dollar for dollar.  Since inception, OCIB has sold $27.5 million in tax credits.  That has a direct effect on the state budget.  Oklahoma has $27.5 million less to spend on core services – like roads and bridges, health, education, and public safety.

It’s an open debate on whether Oklahoma should directly invest in fledgling Oklahoma businesses.  Many states support new ideas generated within the state thru direct investment – in places like universities and institutions of higher research.  And there certainly would not be adequate capital for basic research and development without public sector involvement. Others point out that states directly favoring some types of business activity over others interferes with the allocation of capital in the private sector and raises borrowing costs for everyone else.

In fact, the authors of this article have friendly disagreement on the subject.  But we do agree on one thing – it’s simply wrong for states to gamble away tax dollars on out of state companies or to directly subsidize economic growth and job creation elsewhere.  That’s not what the people of Oklahoma elected their State Legislature to do. Read the rest of this entry »

Note: The Task Force for the Study of State Tax Credits and Economic Incentives, created by HB 1285, is meeting over the interim to scrutinize tax credits. This blog post excerpts an OK Policy issue brief from last year titled “Let There Be Light: Making Oklahoma’s Tax Expenditures More transparent and Accountable”. You can read the full brief or a 2-page summary of our recommendations.  Also see our blog post on the Task Force’s first meeting.

Tax expenditures are a widely utilized policy tool, with each legislative session seeing the introduction of dozens of bills calling for new or expanded tax breaks for individuals and businesses.  Proponents of most specific tax break proposals tend to make the argument in their favor on one or both of the two following grounds:

• Tax preferences are instruments for accomplishing worthwhile public purposes. If policymakers agree, for example, that encouraging individuals to save for a college education is a worthy goal, then allowing a tax deduction or deferral for some or all of one’s contributions to a 529 College Savings account may be the appropriate policy tool.  Tax policy can also be used as a way to target assistance and benefits to groups deemed worthy of support, because of such factors as age, income level, disability, military service, or occupation. Providing assistance through the tax code is often seen as a more effective, less expensive, and politically more palatable mechanism for providing support than operating a government spending program. Read the rest of this entry »

What’s up this week at Oklahoma Policy Institute? The Weekly Wonk is dedicated to this week’s events, publications, and blog posts.

This week at OK Policy, we reported on the first meeting of a legislative task force to evaluate state tax credits and economic incentives.  The meeting made clear that it will be a long and sometimes contentious process, but that this Task Force is serious about meeting the challenge.  We blogged on Wednesday about how the recent FAA shutdown proves business taxes aren’t always passed on to consumers. Read the rest of this entry »