The Oklahoma tax code contains hundreds of credits, deductions, and other special breaks that cost the state billions of dollars each year. In the last few months, a legislative task force has uncovered numerous tax credits and deductions that lack public transparency, adequate monitoring, or any clear proof that Oklahoma was getting its money’s worth.

For political reasons, it is sometimes easier for lawmakers to change the tax code rather than fund a state program to do the job directly. Yet monkeying with the tax code is often a less efficient way to achieve a goal. For example, in 2007 Sen. Mike Mazzei proposed a tax credit that would reimburse 20 percent of the cost of health club memberships. The measure, which did not pass, was intended to combat obesity. Yet there was no way to ensure that the credit was not wasted on those who would have joined a health club without it. If we instead invested those funds in public health programs to promote physical fitness, we could ensure that the money is spent on those who need it.

Tax breaks for businesses come with the same problem – even if business leaders claim they need tax incentives, we can never know for sure if we are paying them to do what they would have done anyway. Transferable tax credits make the inefficiency even worse. Recipients sell these at 70 to 90 cents on the dollar, so as much as 30 percent of the funds are immediately wasted.

Nevertheless, Oklahoma is unlikely to eliminate all tax expenditures any time soon. For the tax breaks that we decide to keep, the following reforms would help ensure they are productive (for a more detailed explanation of some of these ideas, see this OK Policy issue brief).

#1: Clear eligibility standards for receiving tax breaks and consequences for failing to meet targets.

Any credit aimed at creating jobs needs to ensure that it meets quality standards like good wages and health insurance. In the past, some credits have gone for jobs with an average wage of just $24,000, which means the workers may have to rely on public programs like Medicaid and food stamps just to get by. Other tax credit programs were revealed to be using public money to invest in out-of-state corporations.

In addition to clear standards to prevent such abuses, all tax expenditures should include a strong “clawback” provision that allows the state to get money back if a recipient does not live up to the deal. Unfortunately, even the strongest clawback provisions won’t matter if lawmakers don’t enforce them. Last session, the legislature passed SB 935 to extend the period that companies would be eligible for a tax break after they failed to meet job creation requirements. For clawback provisions to be credible, the legislature needs to stand strong and demand accountability, not change the rules when promises don’t work out.

#2: Sunset provisions and caps on the amount that can be claimed, with reauthorization tied to a performance review.

The legislature approves a new budget every year, and Oklahoma’s balanced budget requirement means we must prioritize spending carefully during hard times. Yet once most tax expenditures are created, they automatically take effect year after year without any new action from state leaders. Because tax expenditures are taken out before the revenue used for balancing the budget is counted, they in effect become the first priority for all state funding. The result is that, with the exception of a few that were suspended, most tax expenditures were funded in full even as appropriated programs received deep cuts.

The absence of a cap on how much can be claimed in tax credits and deductions also creates a serious risk if the state does not correctly predict how much a tax break will cost. Estimates of how much the state is currently liable for in tax credits vary from $250 to $500 million. Credits can be used years after they are issued, so we never know exactly what the impact will be until the bill comes due.

To fix these problems, all tax expenditures should include a sunset provision of three years at the least. To continue beyond this period, they must be reapproved by the legislature and governor, contingent on a clear performance review process that weeds out expenditures not performing to expectations. The legislature should also set caps on all tax expenditures that must be reapproved every year, just like other budget items.

#3: Industry-specific incentives should promote areas where we can expect growth and future returns, not struggling industries that would not survive without long-term public support.

Some tax breaks are targeted to particular industries that the legislature wants to promote in Oklahoma. Like a student who chooses to pursue a degree in a field with the best future job opportunities, Oklahoma should prioritize growing industries.

For example, the aerospace industry already employs tens of thousands of people in Oklahoma in well-paid positions, and signs are that it will continue to grow. It makes sense for lawmakers to promote Oklahoma as an economic center in this area through the aerospace engineer tax credit.

On the other hand, the Oklahoma coal industry is long past its peak with little prospects for revival. Direct employment by Oklahoma mines is today less than half of what it was when the coal tax credit was created in the early 90s. Certainly we should help out the hard-working miners who are affected by this decline, but we can accomplish that better by investing in training and assistance to move those workers into more prosperous sectors.

It comes down to this: tax expenditures are like any other kind of state spending and deserve the same scrutiny. Unfortunately, tax breaks often become blind spots in our monitoring of how public dollars are spent. Especially in a time of continuing budget shortfalls, the bar should be set much higher.

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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.
• Tax preferences are needed to encourage economic development.  Oklahoma, like other states, has adopted a plethora of tax credits, exemptions, and incentive payments that support certain kinds of economic activity. Tax preferences are generally justified as worthwhile when targeted to economically risky endeavors, emerging companies and sectors, export-oriented companies, and companies that will create high-paying jobs. In some cases, the explicit argument is that in a world of mobile capitol and competitive localities, businesses will locate or move elsewhere in the absence of incentives.  As long as other jurisdictions are offering incentives, failure to “play the game” is tantamount to unilateral economic development disarmament.

Yet if tax expenditures can serve a necessary and justifiable means to accomplish certain public policy goals, they also raise serious problems and concerns, which include:

• Hidden Expenditures. Tax expenditures are largely invisible.  Unlike direct spending programs, tax expenditures do not require annual appropriations or legislative review.  Even with greater disclosure in recent years, it remains hard to get consistent and reliable information about the cost and beneficiaries of tax breaks.
• Efficiency. While incentives are intended to get an individual or business to do something it would not otherwise do, it is often hard to establish whether a tax advantage makes a decisive difference in influencing behavior.  Good Jobs First, among the most vocal critics of state incentives policies, emphasizes that, “A mountain of evidence suggest that development subsidies are often abused by companies that would have done exactly what they did anyway.”In many instances, only a portion of the total cost of an incentive will produce an incremental increase in the behavior being promoted; the remainder is “wasted” as a pure subsidy or giveaway. This is also true of tax breaks intended to influence individual behavior: for example, at least some of those claiming a tax credit for first-time homebuyers would have purchased a home irrespective of the tax break.
• Accountability. While tax incentive programs are generally created as a way to promote specific public goals, such as capital investment or the creation of high-paying jobs, there are frequently weak accountability provisions to ensure that goals are met.  Many incentive programs impose few, if any, requirements that companies must meet to qualify for benefits, provide little ongoing monitoring or auditing, and rarely include oversight provisions or sanctions that can be imposed on companies that fail to uphold their commitments. As a result, some states have adopted “clawback” provisions as a component of incentive programs that require companies to refund all or part of their incentives if they fail to meet specified job or investment targets, or leave the state after receiving incentives.
• Neutrality. Tax neutrality is the widely recognized principle that tax policies should “not interfere with the natural flow of capital toward its most productive use.” The practice of offering preferential tax treatment to certain individuals, businesses, and organizations rather than others tends to substitute political choices for market decisions in the allocation of resources.  In many cases, there does not appear to be any clear or consistent reason why some economic sectors or activities are granted preferential tax treatment while others are not.  These provisions can create competitive differences between similarly-situated firms and individuals. For instance, two waste recycling firms operating in the same county may be subject to different tax treatment based on one having received tax incentives to relocate, while the other has not.
• Equity. While certain tax expenditures, such as the standard deduction or the earned income tax credit, provide preferential treatment for lower-income individuals, many of the largest tax expenditures, such as deductions for home-mortgage interest, pension contributions, and college savings, primarily benefit upper-middle class Americans. This is because many lower-income families do not have income tax liability against which to claim deductions, or do not have sufficient income to allocate to preferential forms of spending.  A study by the Urban Institute-Brookings Institute Tax Policy Center found that households in the top fifth of income received twice as much benefit from federal tax expenditures as did households in the bottom fifth.In Oklahoma, data supplied by the Oklahoma Tax Commission revealed that some 72 percent of households claiming a tax deductions for contributions to the state’s 529 college savings program in 2005 had annual income over $75,000, a group that represents  just 14 percent of total Oklahoma households (see the Chart on page 6 of this issue brief).
• Fiscal Impact. The fiscal impact of tax expenditures is significant. Nationally, the Tax Policy Center study calculated the cost of tax expenditures claimed by individuals at $760.5 billion in 2007, more than the total budget for either national defense or non-defense discretionary spending. The total cost of tax expenditures for which the OTC was able to determine the cost  exceeded $5.6 billion in 2008, which was not much less than that year’s  total appropriated state budget ($7.1 billion). This total is revenue that is unavailable to sustain public services in Oklahoma or to lower tax rates. More significantly, perhaps, the cost of particular tax expenditures is generally unlimited. Typically, deductions and credits can be claimed in unlimited amounts so long as the credit’s eligibility criteria are met. If an exemption or incentive proves popular, it can have a large and unanticipated impact on the budget. An example cited in a recent national report is of an Arizona tax credit for vehicles that can run on alternative fuels; the credit was expected to cost $3 million to $10 million per year but ended up costing $680 million in its first year.In Oklahoma, when businesses uncovered a way to exploit a loophole in the Venture Capital Tax Credit, the cost of the credit soared from $2 million to $66 million in one year.

• Local Impact. Tax policies adopted by the state legislature can have a large impact on the revenues available to local governments. With a few exceptions, the sales tax base for municipal and county governments is set by the state legislature, so that every new sales tax exemption adopted at the Capitol erodes the sales tax base of cities and counties across the state. On property taxes, while the Legislature cannot directly enact new exemptions, it can and does send proposals for statewide property tax exemptions to votes of the people.

As much as tax preferences can be faulted on all these grounds, incentives and subsidies will still be defended as necessary tools for states competing against one another to attract or retain investment and jobs.  But as Arthur J. Rolnick, the Senior Vice-President of the Federal Reserve Bank of Minneapolis has contended, this competition “interferes with interstate commerce and undermines the national economic union by misallocating resources and causing states to provide too few public goods.” Even if the subsidies war as a whole leaves no winners other than the companies that can wring concessions from state and local governments, states are unlikely to withdraw unilaterally. Accordingly, Rolnick is among those who have called on Congress to exercise its Commerce Clause power to put an end to  the economic war  among the states. Conservatives and libertarian supporters of free-market principles have also consistently urged states to abandon the use of subsidies as a form of economic development.

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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 looked at what the Legislature did and did not do this session to try to stop the runaway train of tax expenditures.  Click here for our issue brief exploring tax expenditures and principles for improving accountability and transparency.  Our quick take on May general revenue collections shows that while revenues are rebounding, they are still way down from pre-downturn levels.  The state is collecting almost 25 percent less in personal income tax in FY ’11 than in FY ’07, reflecting both an impartial economic recovery and the ongoing impact of income tax cuts and tax breaks.  Go to our website to view an updated version of our Budget Trends and Outlook presentation.

Also this week, we blogged about how budget cuts have forced OKDHS to make changes to a child care subsidy program that will increase hardships for struggling low-income working families, threaten access to quality child care, and harm child care providers who serve low-income children.  The Center on Budget has a round-up of state action on Insurance Exchanges, a requirement of health care reform.  Oklahoma Assets will host the third in a series of webinars on asset-building next Thursday, June 23rd on Individual Development Accounts (IDAs).

In the Know, Policy Notes

• The Education Trust has a report on how most university financial aid policies do a poor job of helping low-income students.
• The Economix blog explains how Britain has been able to reduce its child poverty rate by half since 1994, even as child poverty in the United States has gone up.
• A new study by the Economic Policy Institute shows that the EPA’s new rules on power plant pollution would not hurt job growth but would in fact slightly increase the number of jobs in coming years.
• A report by the Dallas Federal Reserve finds that the U.S. risks falling behind in the global race for talent if immigration laws are not reformed.
• Health Beat gives an overview of growing threats to Medicaid that could deny benefits to the youngest, poorest, most disabled and oldest Americans.

Numbers of the Week

• 1,196 – Adult Protective Services investigations completed by OKDHS, February 2011
• 16 – Number of states since 1996 to exempt qualified medical marijuana patients and providers from criminal penalties; Oklahoma is not one of them
• 60 percent – Percent of the state’s surface water that is used for public water supply; the rest is used mainly for thermoelectric power generation and irrigation
• 179,684 – Number of Oklahoma residents who were born in another country, 2009; compared to 131,747 foreign-born residents in 2000
• 5.6 percent – Oklahoma’s seasonally adjusted unemployment rate for April 2011; 6th lowest in the country

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The unwillingness so far of state leaders to rein in tax expenditures is a serious problem. As OK Policy pointed out in a pair of issue briefs[1, 2], Oklahoma’s tax code is full of holes created by numerous exemptions, deductions, and credits. The estimated cost of all these tax breaks is $5 billion a year. In an issue brief released last year, OK Policy also laid out several principles for how to make tax expenditures more transparent and accountable and distinguish good tax breaks from bad.

To understand why that is important, consider that direct appropriations must be approved by the legislature every year.  Tax credits, deductions, and exemptions reduce state funds to accomplish policy goals in the same way as direct spending. But as the Center on Budget Priorities explained in a report on tax expenditure transparency, “Most tax expenditures are written into the tax code and thus will continue indefinitely — regardless of how costly they may become over time — unless the legislature acts to discontinue them.”

We have seen some signs that political will is building to take real action on this issue. Unfortunately, we still have a long way to go. Several bills this session highlight the potential and pitfalls along the way.

• One tax expenditure bill that came close to becoming law was SB 728. This bill by by Sen. Mike Mazzei, R-Bixby, and Rep. David Dank, R-Oklahoma City, would have created a sunset provision for all new sales tax exemptions so that they automatically end five years after they are instated unless the legislature acts to continue them. Mazzei has long opposed the many exemptions riddling the tax code, and for several years he has introduced bills to end or sunset most of them. This year, he tried to apply a sunset only for new sales tax exemptions while leaving already existing expenditures unchanged, presumably in hopes of finding enough support to pass it this time. The bill was at first approved unanimously in both the House and Senate, but then was not taken up again by the Senate after conference committee.
• SB 517, also by Mazzei and Dank, would have sunsetted twenty tax credits after 2013. The bill was projected to increase state revenue by $54.3 million. Unfortunately, 80 percent of that revenue would have come from ending the Sales Tax Relief Credit, which helps offset the regressivity of the sales tax for about one million low-income Oklahomans. Though many tax expenditures benefit favored industries, such as the coal credit, or reward specific activities, such as the credit for employers providing child care programs or services, a program like the Sales Tax Relief Credit is intended to partially ameliorate a regressive tax structure that already requires the poorest Oklahomans to pay a larger percentage of their incomes in state and local taxes than the wealthiest. A broad-based credit for the bottom one-third of the state’s population is a totally different beast from a credit going to a special interest. SB 517 passed the Senate unanimously with its title stricken but was not brought up for consideration on the House floor.
• A bill to improve the transparency of tax breaks did make it through the legislative wringer this session. HB 1284 will require anyone who receives a tax credit, including those who get a transferable tax credit that was originally awarded to another entity, will be required to make a report to the Oklahoma Tax Commission. Information about who receives credits and how much will then be made publicly accessible online. Some of this information is already available at the state’s OpenBooks website, but HB 1284 should help to fill some information gaps, particularly on insurance companies who take millions in credits against insurance premium taxes, which do not currently appear on OpenBooks.
• Lastly, HB 1285 created the Task Force for the Study of State Tax Credits and Economic Incentives. This ten person group is made up of the House and Senate Appropriations Chairs, House Revenue and Taxation Chair, Senate Finance Chair, House and Senate minority leaders, the State Auditor and Inspector, and designees from the Office of State Finance, the State Treasurer, and the Secretary of State. The Task Force is charged with examining the justification and economic impact of all state tax credits and incentives. The state already has an Incentive Review Committee made up of appointed citizens, but the Task Force brings the weight of key legislators and statewide elected officials. By directly participating in the creation of the report, these leaders will hopefully become committed to real action.

We will continue to debate whether the state should be rewarding particular industries or activities and whether that is best accomplished on the tax side or through direct spending. While tax expenditures are unlikely to be abandoned as an instrument of policy in the near future, we can at least improve transparency and provide better safeguards against tax breaks growing out of control, such as sunset provisions, front-end eligibility evaluations, and spending caps. With nearly all other state programs under heavy scrutiny for cost savings, it is past time for tax expenditures to get the same treatment.

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State government spends too much money.  It should spend less.  However, even this strong conservative realizes some government is necessary and further, we should pay for it currently.  As former Chief Justice Oliver Wendell Holmes observed, “Taxes are what we pay for a civilized society.”

Good tax policy dictates that when we tax, we should impose the tax on the largest possible base to keep the rate to a minimum.  Unfortunately, all the tax credits, exclusions and preferences that riddle Oklahoma’s tax code have led some to note that our tax code resembles Swiss cheese.

Perhaps we should consider a “TRACC” – tax realignment and credit commission – modeled after BRACC that successfully closed unneeded military bases at the federal level.  TRACC would be a bipartisan committee including both House and Senate members with participation from the Governor’s office.  TRACC would prepare a list of tax expenditures for elimination.  The legislature would then consider the list in a straight up or down vote, without amendment.

If TRACC could meet a target of $300 million, roughly twice the ongoing static impact of reducing the marginal rate on the individual income tax to 4.95%, we could lessen the need for budget austerity and provide helpful tax stimulus.  In other words, conservatives would get to apply half the proceeds toward reducing the marginal rate on the income tax while their liberal brethren could use half for state appropriations along with another $85 million immediately because the income tax reduction would not take effect until the middle of the fiscal year.

A bold step?  You bet!  Oklahoma could fill a big part of its budget hole and also send the rest of the country a message that we are making ourselves more competitive for entrepreneurs who want to pursue business opportunities.  While the rest of the country stumbles, Oklahoma moves boldly forward.

Before my more liberal friends think about seizing this as an opportunity to spend the entire $300 million, this would be my best offer.  After all, the rate is already scheduled to drop to 5.25% when revenues rebound.  But, if our liberal counterparts are willing to meet us half way, we might be able to do something positive for Oklahoma.

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While the merits of granting tax preferences can be debated as a matter of principle, the reality is that they are unlikely to be abandoned entirely. There is a chance now to build on important progress made in recent years in increasing disclosure and scrutiny of tax expenditures to really get a handle on which tax breaks are worthwhile and effective, and which are wasteful giveaways.

Just as our issue brief was hitting in-boxes, the Oklahoma Gazette hit the stands with a front-page feature story by Scott Cooper examining several aspects of the total $5.5 billion that the state grants in tax benefits each year . The article features strong quotes from both Republican and Democratic elected officials affirming the need to subject tax breaks to much more careful scrutiny at a time of gaping budget gaps:

“Some of them have outlived their usefulness. Some of them are not creating jobs and need to be eliminated,” said Rep. Jeff Hickman, R-Fairview, chairman of the state House Subcommittee on Revenue and Taxation. “I think there is going to be a desire to do that. A lot of them we inherited and have been on the books for a long time.”…

“That is something that needs to be looked at continuously,” said Rep. Ken Miller, R-Edmond. “Tax credits are not meant to be corporate welfare, but an economic development tool used to produce high-wage jobs and diversify our economy. What we need to do as legislators is make sure that those tax credits continue to meet their intended purpose.”

“The state of Oklahoma, in this sort of backdoor (non-appropriated) method of tax credits and tax exemptions, gives away hundreds of millions of dollars,” said state Treasurer Scott Meacham, a Democrat.

Some elected officials have been willing to target specific credits and exemptions for elimination or suspension. Governor Henry in his budget proposed outright elimination of two investment tax credits intended for rural and small businesses that have grown exponentially in cost and have come under mounting suspicion of possible wrong-doing. The Governor also proposed a one-year suspension of over a dozen income tax credits as part of his strategy for bridging next year’s budget gap. As we noted in our brief (p.4), legislators this session have introduced some 20 bills that would provide for increased disclosure and review of tax expenditures or that would suspend, eliminate, or narrow existing provisions. Meanwhile, Democratic State Senator Tom Adelson this week held a press conference in which he called for the elimination of tax preferences with an estimated fiscal impact of $250 million as a way to help ease budget shortfalls  – earning an immediate rebuke from the Oklahoma Press Association and Tulsa World for suggesting that newspapers and advertising sales lose their tax exemptions.

Will all of this increased attention translate to policy changes that would address the concerns about transparency, accountability and cost of tax expenditures? It’s certain that the defenders of particular tax breaks will fight hard to maintain their preferences, and that the hard work of subjecting credits and exemptions to oversight and evaluation will pose a real challenge for legislators. But the conclusion of Scott Cooper’s Gazette piece provides genuine grounds for hope:

However, because of the harsh economic conditions and the state’s looming budget deficit, change could happen. Miller, who is running for state treasurer, quoted one of his colleagues when saying this economy is like the winter storms Oklahoma recently endured: It caused the removal of tree limbs that needed to be cut down anyway for power to be restored.

“This situation we have now,” Miller said, “provides the political will to actually accomplish some needed changes.”

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This post addressing tax expenditures is the fourth and final of a series recommending changes to our budget and tax system.  Our proposals are all intended to enhance the Legislature’s ability to manage budget downturns without having to implement deep cuts to vital state services or enact tax increases. Previous posts recommended enhanced and expanded budget forecasting, strengthening reserve funds, and putting on hold multi-year revenue commitments.

The most recent Tax Expenditure Report prepared by the Oklahoma Tax Commission (OTC) identifies over 450 separate provisions of state law that provide for some reduction in the amount of state taxes that would have been collected but for the preferential tax treatment benefiting some favored activity or category of taxpayer. The total cost of tax expenditures – $5.4 billion in FY ’08 for provisions that could be estimated by the OTC – equal more than 75 percent of total state appropriations ($7.1 billion in FY ’08).

The fact is, there is no way to know how much tax expenditures will affect state revenues during this fiscal year or the next. Unlike budgetary expenditures, which are subject to annual appropriations and to the availability of revenues, tax expenditures tend to be fiscally open-ended. In most cases, any person or business meeting the eligibility criteria can claim a credit, exemption, or deduction, without there being any cap on the total amount made available.

In order to provide more budget predictability and ensure that the impact of budget shortfalls is more broadly and equitably distributed, policymakers should consider subjecting at least some tax expenditures to caps and triggers. A cap would set a total dollar amount that can be claimed under the credit or exemption, while a trigger would make the tax preference subject to the availability of revenues.

There are already some precedents for the state implementing funding caps on tax preferences:

• Incentive payments under the Quality Investment Program created by SQ 725 are limited to $10 million in total, with no single company eligible for more than $5 million in subsidies.
• The total amount of tax rebates claimed on gross production taxes for deep well drilling below 15,000 is capped at $25 million. In situations where eligible rebate claims for deep well drill exemptions exceed the available cap, the statutes and OTC rules specify a process for allocating the rebates among eligible participants.
• Income tax credits for investments in agricultural processing cooperatives are limited to $2 million annually.

In terms of triggers, the Quality Investment Program, which is tied to the balance in the Rainy Day Fund, is the only credit that can be suspended or limited under current law based on the availability of revenues. Between 1998 and 2005, eligibility thresholds for the Sales Tax Relief credit were tied to a revenue trigger, so that in year when revenues were projected to fall, eligibility for the credit was restricted.

Increasing our scrutiny and evaluation of tax expenditures, and subjecting at least some to  fiscal caps, would constitute sound policy regardless of fiscal circumstances. But during this time of crisis, to claim that the priorities we’ve chosen to fund through the appropriations process can be slashed while the priorities we’ve embedded in the tax code are untouchable simply doesn’t make sense.

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We are an advocacy organization, however, so the Guide points out two major areas where we believe Oklahoma can and must do better. One is the ongoing fiscal gap between our ability to pay for services and our demand for those services. We’ll address that next week. For today, we’ll preview some of the Guide’s discussion of tax fairness.

This graph shows the percentage of income paid in taxes by each of  seven income groups. The regressivity of the system is obvious since the percentage paid in  taxes drops with each increase in income. Those who are in the lowest 20 percent of income earners–making $12,000 or less each year–pay 12 percent (one-eighth) of their income in taxes. The percentage of income paid in taxes falls slightly for each income group above the middle. Those in the top 1 percent–making $250,000 or more each year–pay 8 percent (one-twelfth) of their income.

As much as we argue about taxes, most of us don’t think poor people should pay more in taxes than rich, but that’s how we’ve set up the system in Oklahoma. The Guide does not make recommendations or demands, except to urge we get to work on the problem. It offers a range of options for consideration.

• Update the sales tax credit that low-income Oklahomans receive on their income tax. Increasing the amount of the credit and making it apply to higher incomes would be a targeted, fiscally responsible way of helping families in need keep pace with rising food costs. (Here’s our earlier fact sheet on this important tax relief measure.)
  
• Increase the threshold at which income taxes are first owed. Raising this level would reduce taxes for all income levels and would make a dramatic difference in taxes facing the lowest earners.
• Increase the income taxed at each tax rate. Once Oklahomans begin paying income taxes, they move up the progressive tax rate structure very quickly.
• Index the income levels at each tax rate. Oklahoma’s income tax would be lower for all taxpayers and more equitable to low-income taxpayers if it was indexed so that the income level at which a taxpayer reaches a higher rate increases each year along with inflation.
• Raise the top income tax rate. Oklahoma should explore a higher top rate that applies only at much higher income levels than the current 5.5 percent rate. This report from the Tax Policy Center shows Oklahoma’s top tax rate is in the middle group of states.
  
• Provide property tax relief to low- and moderate-income renters. Much of the property tax on renters is passed along to tenants in the form of higher rent, but tenants have no tax relief.
• More carefully evaluate tax expenditures. Oklahoma’s system to determine the cost and evaluate the effectiveness of tax expenditures should be expanded to all tax breaks. Here are some guidelines from the Center on Budget and Policy Priorities.
  

At the same time, though, the guide reminds us that the vital goal of tax fairness must be accomplished in a way that does not rely too much on a single tax source and that keeps state and local revenues at a level to support essential public services.

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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.

The website is not entirely comprehensive – it lacks information on incentive programs, such as the Oklahoma Quality Jobs program (even though this information is called for in the Act), or for credits against taxes other than the income tax, such as the 5-year ad valorem manufacturing exemption or gross production tax rebates for various types of oil and gas drilling. The website in its current form is somewhat clunky to use, as a search by credit calls up multiple separate pages of 25 entries apiece without any simple way to see or download all the entries or to generate aggregate information on the number of recipients of the credit or the total amount claimed. But it’s a good start, and a vast improvement over what was previously available.

The website is guided by the powerful principle that by claiming a tax credit, a taxpayer is receiving public benefits similar to the recipient of a government contract or award. The site does, however, raise some genuine concerns about the balance between public disclosure and taxpayer confidentiality. Some may express alarm at discovering that an individual who claims a credit on their Oklahoma tax return for providing child care for their employees or completing volunteer firefighter training will now have this  information made available online. Some of these credits seem more akin to receiving a food stamp benefit – information the government would not disclose (at least not intentionally) – than to receiving a government contract or being on the state payroll.

The Legislature might well consider reviewing which tax credits are and are not subject to reporting under the Taxpayer Transparency Act, as well as consider setting some kind of dollar amount threshold under which information is not shared publicly. But while some additional work still needs to be done, the website represents important progress toward the goal of government transparency in Oklahoma. We hope that as more information on tax credits becomes available, it helps spark additional efforts to review of system of tax incentives and to implement some efforts to cap their cost, especially at this time of declining revenues and growing budget shortfalls. We’ll have much more to say on these subjects in the months ahead, and hope you’ll contribute to the conversation by clicking on “leave a comment” and offering your input.

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The Center’s main premise is that tax expenditures serve similar purposes to direct budget expenditures in using public resources to try to accomplish policy goals. However, they note:

States typically require extensive documentation of how much direct spending they do each year, and their budget processes entail evaluation of each item. Tax expenditures usually receive far less scrutiny. For the most part, policymakers do not regularly examine tax expenditures, nor do states document their effectiveness the same way they do for on-budget expenditures.

More broadly, to the extent that policymakers, the media, and the general public lack information about tax expenditures, they cannot fully participate in decisions about how to allocate state resources. In fact, in many states the policy debate encompasses little more than half of the state’s total expenditures because expenditures made through the tax code are not part of the conversation.

This is a serious problem. Most tax expenditures are written into the tax code and thus will continue indefinitely – regardless of how costly they may become over time – unless the legislature acts to discontinue them. (Appropriated expenditures, by contrast, typically last only as long as the one- or two-year budget cycle.) Without information on a particular tax expenditure’s costs and benefits, lawmakers cannot make an informed decision on whether continuing it is in the state’s interest.

Oklahoma, like most other states, prepares and publishes a regular tax expenditure report (PDF). This biannual document prepared by the Oklahoma Tax Commission lists all the instances of preferential tax treatment under Oklahoma law with estimates of the cost impact of the tax expenditure when this can be determined.

The Center evaluates state tax expenditure reports based on a number of criteria of what information should be provided about each expenditure. They judge Oklahoma’s report to fall short in important respects, failing to provide information on the expenditure’s year of enactment, purpose or rationale, program category, or number of beneficiaries. While the report aims to provide cost impacts of each tax expenditure, over two-thirds of expenditures are reported as N/A. Oklahoma and Maryland are singled out by the Center as “examples of tax expenditure reports weakened by repeated cost estimate omissions”.

OK Policy is hard at work at a paper that will both acknowledge some real progress the state has made in recent years in trying to increase the transparency and accountability of tax expenditure policies while making some recommendations on what more should be done. As the Center concludes:

The goal is not to eliminate tax expenditures, which are neither good policy nor bad policy per se. Tax expenditures are one of a policymaker’s tools for achieving policy goals; like other tools, they can be put to good use or abused, and like other tools, they should be transparent and accountable.

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