These are the key findings of “Money for Something: Job Creation and Job Quality Standards in State Economic Development Subsidy Programs”, a 51-state “report card” study published today by Good Jobs First, a non-profit, non-partisan research center based in Washington, DC.

“With unemployment still so high, taxpayers have a right to expect that economic development investments create significant numbers of quality jobs,” said Good Jobs First Executive Director Greg LeRoy. “The days of ‘no strings attached’ are largely gone, but the fine print in many states is still full of gaps and loopholes.”

Oklahoma was found to do the 6th best job of applying job standards to major subsidy programs, coming behind only Nevada, North Carolina, Vermont, Iowa, and Maryland.  Among Oklahoma’s individual subsidies, the Quality Jobs and 21st Century Quality Jobs Programs earned the highest marks, with 109/100 and 95/100 points respectively.

Other Oklahoma subsidies did not fare so well. The lowest performing Oklahoma program was the Investment/New Jobs Income Tax Credit, which received only 25/100 points. This credit was placed under a two-year moratorium in 2010 and is now under review by the Task Force for the Study of Tax Credits and Economic Incentives. At a meeting of the task force, Rep. David Dank called the lack of caps, controls, or transparency for the Investment/New Jobs credit “a disgrace for the state.” The program has an estimated $140 million in awarded but unused credits, with no limits on when companies can claim them.

To prevent the wasting of public money on handouts to businesses that may have little to no return for the state, we should extend the strong eligibility standards of the Quality Jobs program to every subsidy that is offered, or eliminate them entirely. And even the most well-designed subsidy should have a sunset provision and an annual cap so it doesn’t break the budget. (For more on this, see OK Policy’s issue brief on making tax breaks more accountable.)

A tax break not mentioned in the Good Jobs First report but especially relevant to Oklahoma is the gross production tax rebate for oil and gas producers. We pay out millions of dollars in these rebates with no job creation requirements and no guarantees that we are not paying oil and gas companies to do what they would have done regardless of the handout.

Money for Something rates the performance standards and job quality requirements of 238 key subsidy programs from the 50 states and the District of Columbia that together cost more than $11 billion a year. Each program is rated on a scale of 0 to 100 (with extra credit for advanced features). The scores for the programs in each state are averaged to derive a state score. The report offers these policy recommendations:

• Every subsidy should contain job creation, job retention or training requirements. Those should be strengthened by provisions barring employers from shifting existing jobs from other facilities and mandating that the jobs be kept in place for a minimum period.
• Every job or training position in a subsidized facility should be covered by a wage standard, preferably tied to labor market averages and structured in a way that raises pay above market levels. They should also offer health coverage in which the employer contributes to the cost of the premium. These rules should also apply to part-time, temporary and contract workers.
• Decent job standards do not guarantee that a program’s benefits will outweigh its costs. Sometimes the only sensible course of action is to eliminate a program altogether.

Note: Standards such as those rated here mean little if they are not enforced. In a companion report to be issued soon, Good Jobs First will grade the states on their enforcement practices.

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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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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.

The first major overhaul of the Rural and Small Business Tax Credits was undertaken in 2006. The intent was to close the loopholes and ensure real investments were taking place. However, by 2008, lawyers had figured out another loophole by utilizing nonrecourse financing and meaningless guaranties to pump up the amount of tax credits being taken. Again, the statutes were amended to close the loophole.

By 2010, the dollar amount of Rural and Small Business Credits being issued was growing dramatically. The problem now was that virtually any investment in a small business or in rural Oklahoma would qualify. Suddenly, assisted living centers and other types of projects that would easily qualify for traditional financing started claiming the credits. Why shouldn’t they? The State was offering free money to all takers. Absolutely no mechanism existed to ensure these credits were being used in a manner that would bring more revenue into the State than it cost. In fact, one of the last deals that got in under the wire before the legislature placed a moratorium on the credits was a small employer in Southeast Oklahoma that was bringing at most 35 jobs to the community. In return for those 35 jobs, the cost of the credits to the State was projected to be around $10 to $12 million. That is a cost of over $285,000 per job!

Clearly, the Rural and Small Business Tax Credits are not the answer to encouraging investment in Oklahoma. What is the answer?

A “good” tax benefit is one that creates jobs in Oklahoma. The Rural and Small Business Tax Credits met this criterion but they were also abused and cost the state millions more than they produced in new revenues. In addition to creating jobs, then, it seems that a “good” tax benefit should meet the following criteria:

1. The benefit should be transparent. The public has the right to know who is taking advantage of these benefits, just like they have the right to know how the legislature is appropriating their tax dollars.
2. There should be accountability. People that take advantage of state tax benefits should be held responsible if they do not engage in the activity that is required to produce the credit.
3. There should be a front-end cost-benefit analysis to ensure that there is a reasonable probability that the issuance of the tax benefits will eventually bring in more state revenues than the cost in terms of lost revenues.
4. There should be a clawback of the cost of the benefits if the entity receiving them does not hold up its end of the bargain and fails to do what it has promised.

The Oklahoma Quality Jobs Program is an example of a “good” incentive program. It meets all of the criteria set forth above and has been very successful in attracting good jobs to Oklahoma. It is an incentive based on actual new jobs created. However, Oklahoma also needs an investment-based incentive to successfully compete with other states for capital and encourage additional capital investment in Oklahoma. However, to be effective the incentive must meet all of the criteria set forth above.

The opinions stated above are not necessarily those of OK Policy, its staff, or its board. This blog is a venue to help promote the discussion of ideas from various points of view and we invite your comments and contributions. To see our guidelines for blog submissions, click here.

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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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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 blogged about an unlikely request to area governors from Kansas City business executives – stop offering tax incentives.  Competing incentives incite an “economic border war,” where companies move back and forth across state lines chasing profits, but without benefiting the community or economy at large.  Oklahoma recently received an object lesson on the futility of state subsidy wars, but the problem is a nationwide phenomena.  We propose that it makes far more sense to invest in a strong general infrastructure and workforce, then in bonuses and incentives for particular businesses and corporations.

This past weekend the Tulsa World wrote an editorial citing Director David Blatt on the impact of repealing the Sales Tax Relief Credit on poor Oklahomans.  Click here for our blog post last week on a legislative proposal to repeal this credit.  The bill died this week after it was not heard in the House.

Yesterday’s blog explained how growing income disparities erode public structures and political community.  Inequality, as measured by the U.S. Census Bureau’s Gini index, has increased in Oklahoma over each of the past three decades, going from 0.419 in 1979 to 0.445 in 1989;  0.455 in 1999 and 0.460 in 2009.  However, Oklahoma’s Gini coefficient in 2009 (0.460) was below the national average (0.468) and we rank 32nd among the states.  Today on OK Policy blog, guest blogger Jeffrey Alderman, M.D. highlights the ever-shrinking pool of health care providers in Oklahoma.

Board Chair Vince LoVoi spoke up on behalf of OK Policy this week with a defense of our core values:

Foremost, we are nonpartisan and will never subscribe to labels, left or right, red or blue, Democrat or Republican. Second, we focus solely on the betterment of Oklahoma.  Our priorities are fiscal responsibility; the fair, adequate and efficient delivery of essential services; and economic opportunity for middle- and lower-income Oklahomans….To that end, we will share ideas with any Oklahoman who shares our goals, whatever label they may or may not wear.

Numbers of the Week

• 13,485,000 – Visits to state parks in Oklahoma in 2007
• $2,499 – Median credit card debt in Oklahoma, 2008; the national median credit card debt is $2,960
• 13,200 – Non-farm jobs added to the Oklahoma economy between February and March 2011
• 36.2 percent – Oklahoma families that are ‘low-income working families’ (income below 200% of the federal poverty line in 2007); 28 percent are ‘low-income working families’ nationally
• 130 – Years a prospective Mexican immigrant would have to wait to gain legal admission to the U.S. after applying for an unskilled worker visa.

Click here for source citations and archived numbers of the day.

In the Know is a daily synopsis of Oklahoma policy-related news and blog posts.  You can sign up here to receive In the Know in your inbox each weekday morning and the Weekly Wonk each Friday afternoon.

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At a time of severe fiscal constraint the effect to the states is that one state loses tax revenue, while the other forgives it. The states are being pitted against each other and the only real winner is the business who is “incentive shopping” to reduce costs. The losers are the taxpayers who must provide services to those who are not paying for them.

The situation in Kansas City is only the most dramatic example of a nationwide problem. When state governments come to the table ready to tailor their tax policies to the desires of a single industry or firm, it is like playing poker with our cards face up. When a company knows that claiming to need a tax incentive will help them pay less taxes, of course they will say they need it, whether true or not. The result is a destructive race to the bottom, where businesses play states against each other and even against their own employees.

We saw a recent example in Oklahoma with the Mercury Marine company. The company initially promised to bring more operations to Stillwater and convinced the legislature to offer them more than $1 million in Oklahoma taxpayer dollars. Meanwhile, the company used Oklahoma as leverage against its plant in Wisconsin, where the company had been founded.

After winning a $50 million low-interest loan to be paid for by a countywide sales tax increase, another $3 million in incentives from the city of Fond du Lac, and significant wage and benefit concessions from its employees, the company ended up closing down Oklahoma operations to go to Wisconsin. It’s unclear whether the company ever intended to move to Oklahoma, or if it was simply using us to extract money from its home state.

Even broader based tax reductions show little evidence of attracting new businesses. Nationwide, state and local taxes on businesses (corporate income taxes, sales taxes, and local property taxes) make up on average only about 1.8 percent of business costs. Tax variation between states and their impact on business profits are dwarfed by factors like cost-of-living, quality of the workforce, access to transportation and supply lines, and proximity of customers, not to mention cultural and historical ties to a particular location. As stated by economist Robert G Lynch in a report that examined hundreds of studies on this issue, “The bottom line is that state and local taxes, at their current low levels, may be largely irrelevant to business investment decisions.”

So what does determine economic outcomes? As a report on the effects of right-to-work in Oklahoma shows, the state’s economy closely follows regional and national trends regardless of state policy differences. Certainly state differences exist, but those are easily explained by economic differences unrelated to taxation. Rather than low taxes, today’s rising cities are attracting people with shorter commutes, more affordable housing, and the simple fact that there is more room to grow. According to a Forbes report on the fastest-growing cities (which included OKC):

Over the past decade, the biggest migration of Americans has been to cities with between 100,000 and 1 million residents. In contrast, notes demographer Wendell Cox, regions with more than 10 million residents suffered a 10% rate of net outmigration, and those between 5 million and 10 million lost a net 2.4%.

Often a region prospers because it happens to be home to industries on the upswing, or falters because it relies on industries past their prime (see: Detroit). Unfortunately economic growth can be fickle, but because of that, it makes far more sense to invest in a strong general infrastructure and workforce ready for whatever comes our way. For example, Oklahoma has benefited due to federal government expansion during wartime, not to mention significant public investments in Oklahoma City that make it a more exciting place to live.

Rather than going hat in hand to out-of-state businesses, ready to trade public resources for jobs that may only last until they get a better offer, those dollars are better spent on infrastructure, public safety, education, workforce development, and other measures that directly improve the quality-of-life and competitiveness of all Oklahomans.

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A new report from CFED and the Annie E. Cassey Foundation (AECF) calculates annual federal expenditures on asset-building policies to be $384 billion. Of this total budget, ninety per cent of benefits, or $348 billion, is delivered through the tax code, while just 10 percent, or $37 billion, takes the form of direct government expenditures. Most of the latter is in the area of scholarships and grants for post-secondary education. Conversely, the vast majority of the total federal budget in the areas of homeownership, savings and investment, retirement accounts and business developments takes the form of tax credits, deductions, and lower tax rates.

Here’s the thing. These policies to promote savings, investment and ownership primarily subsidize the wealthy, and offer few, if any benefits to low- and moderate-income households. Take, for example, homeownership. According to the report:

Federal asset-building policies allocate $137.6 billion toward encouraging homeownership, and
all but $1.1 billion of that is through tax expenditures. These policies disproportionately benefit
higher-income owners who have more expensive homes, allowing them to deduct more mortgage
interest and property tax payments and avoid more capital gains when they sell the home.

Homeowners with lower incomes often find the amount they could claim in their deduction
would not be large enough to make a difference in their tax liability. This explains, in part, why
only 27 percent of taxpayers claimed the deduction in 2008 despite the fact that 67 percent of
Americans owned homes, and two out of three of those homeowners held a mortgage. Analysis
of the data shows that nearly 80 percent of the value of mortgage and property tax deductions
accrued to the top fifth of taxpayers.

The skewing of benefits to the wealthiest households is even more pronounced in the areas of savings and investment and retirement, where most low- and moderate-income households do not own the assets that benefit from preferred tax treatment.

Using a model developed by ITEP, the report shows the distribution of tax benefits from three of the largest asset-building policies – the mortgage interest deduction, property tax deduction and preferential rates on capital gains and dividends – which together account for nearly two-thirds of the federal asset budget. The results are displayed below. Among the key findings: the wealthiest five per cent of taxpayers received 53 percent of the benefits,  while the bottom 60 percent of taxpayers received only 4 percent. The lowest fifth of taxpayers, those with incomes under $19,000, collectively received almost no benefits at all.

As the Washington Post noted in an editorial on the report: “Something is wrong with this picture” when half the benefits of a $400 billion component of the federal budget goes to the wealthiest five percent of the population.

Overall, the CFED/AECF report describes federal policies as “upside down”:

We cannot avoid the sad irony that government policy aimed at building wealth is largely helping the rich get richer.

So, what can be done? The report suggests that what we must do is “work towards creating a more equitable and transparent set of strategies for saving money and building wealth.” One component of this strategy can be refundable tax credits for savings initiatives that benefit low- and moderate-income households. Proposals before Congress to amend the Savers Credit, for example, would accomplish this on a large scale, as would the creation of accounts at birth for every child. At the state level, we have discussed ways Oklahoma could expand participation in the state’s 529 College Savings program, which primarily serves higher-income households. CFED/AECF also suggest placing caps on the values of homes and other assets that can be deducted. A similar proposal at the state level recently advanced by the Institute for Taxation and Economic Policy would involve states doing away with or capping federal itemized deductions on the state income tax, which makes our state tax system much more regressive and provides tax benefits primarily to the wealthiest. Shifting resources away from tax expenditures towards direct budget outlays could also improve fairness and provide for greater transparency and accountability.

Hopefully the “Upside Down” report will spark a renewed discussion of what we are now doing to promote assets and what we should be doing. For as the report states:

At a time when the economic downturn has left many low- and middle-income families struggling to get by, we can ill afford a federal wealthbuilding strategy that primarily helps those who are already wealthy.

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One common argument for tax incentives is that in the competitive world of state economic development, states that fail to offer tax breaks to entice companies to invest or stay put will see investment and jobs shift elsewhere. Critics, such as Good Jobs First, view this “economic war among the states” as precisely the problem, amounting to a “ruinous zero-sum race to the bottom that benefits only footloose corporations while undermining state and local budgets, especially schools and infrastructure.”  Good Jobs First has blogged recently on two prominent examples where costly tax credit deals intended to lure jobs and investment have instead ended up leading to a major plant shutdown (Dell in North Carolina) and a criminal probe (film tax credits in Iowa).

Readers interested in a close-to-home example of the costs and drawbacks of state subsidy wars should check out a spirited new paper [PDF] by Jack Norman and Karen Royster, researchers at the Institute for Wisconsin’s Future, titled “The Twisted Saga of Mercury Marine”. Oklahomans may remember Mercury Marine as the marine engine manufacturing company that persuaded the Oklahoma Legislature to pass a bill this past session, SB 929, that made the company eligible for tax credits in return for keeping open  its plant in Stillwater. Mercury Marine then used this leverage to wrest concessions for its plant in Fond du Lac, Wisconsin, and promptly announced the closure of its Stillwater operations.

In addition to winning wage and benefit concessions from the union in Wisconsin to keep their jobs from moving to Oklahoma, the taxpayers of Fond du Lac and Wisconsin were persuaded to cough up as well. According to Norman and Royster:

• Fond du Lac is giving Mercury Marine a $50 million, low-interest publicly financed loan;
• To pay for the loan, Fond du Lac County Board imposed a countywide one-half percent sales tax;
• The Fond du Lac City Council approved a $3 million package of taxpayer-funded incentives;
• The state of Wisconsin is offering additional incentive package that has not yet been divulged.

This is a hefty price for a division of a larger company (Brunswick Corporation) which, Norman and Royster reveal, has seen its stock price fall 71 percent since 2005, laid off 5,300 North American workers,  forced pay freezes for current employees, and imposed steep pay cuts for new hires and employees back from layoffs – all the while continuing to  pay its CEO  in excess of $3 million in 2008.

At least in this instance, the Oklahoma Legislature prudently included a “clawback” provision in its subsidy bill which required Mercury Marine to return over $1 million in payments once it pulled up stakes for Wisconsin.  But while clawback clauses can provide some protection against being shaken down by a few businesses, might it not be time instead for Oklahoma to withdraw from the subsidies war? Oklahoma offers businesses a productive, hard-working labor force, a central location, a low cost-of-living, and among the lowest state and local taxes in the nation. Rather than further erode our tax base through deals that offer questionable returns, the dollars may be more productive if invested in the things that will make Oklahoma more broadly appealing to all businesses – for example, improving teacher quality, workforce development system, transportation infrastructure, and public health. That way we can stop allowing businesses to grab a slice of the pie before agreeing to sit down at the table.

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Tax incentives of this sort are terrible tax policy. They violate every principle of sound taxation. Here is why. Tax incentives create horizontal inequities. If Harley Davidson gets a tax break for moving into Indiana, what do you tell the corporation that has been there for years? Tax incentives violate the rule that the tax laws should have as minimal effect on economic decision making as possible. When state governments try to influence where companies should operate, it is not much different from a Soviet planned economy.

Most importantly: tax incentives do not work. State taxes are a small part of the overall cost of doing business. Companies make location decisions based on labor costs and access to markets. Wherever Harley Davidson decides to move it won’t be because of the tax incentives. Those incentives will just be a sweet, albeit unnecessary, bonus.

As we noted last time, Congress  could take action under the Interstate Commerce clause to put an end to bidding wars between the states, but is unlikely to do so. Instead, we contend that the best way to avoid the worst policy outcomes is to ask  the same questions of tax incentive programs that we should ask about  all government programs:

• Is this tax incentive the best possible use of our public money?
• What will happen if we don’t offer the incentive?
• Who benefits from the incentive?
• Are there cheaper ways of achieving the same result?
• Is this an appropriate arena for government action?

We intend to continue monitoring policy developments in this domain while working towards the release of a report and hopefully public event as we get closer to the next legislative session

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In the July 13 & 20 edition of Business Week, Jessica Silver-Greenburg asks Will Tax Breaks Boost State Jobs? She points out that incentives are a zero-sum game. Michigan might be better off for keeping a GM plant by spending $44 million in tax money, but the country is not.While state economic development officials defend the programs as essential to the state’s economic future,  Greg LeRoy of Good Jobs First, contends:

It’s a net-loss game for state and local governments. The only winners are the companies playing the tax game.

Warner also noted the ongoing analysis of state tax incentives by the Federal Reserve Bank of Minneapolis. In this 2007 testimony before Congress, bank senior vice-president Arthur J. Rolnick argued that incentives lead to wasteful competition between state and local governments that struggle to protect the public, educate children, and replace crumbling infrastructure. He called on Congress to  put an end to state subsidies.

It is now time for Congress to exercise its Commerce Clause power to end another economic war among the states. It is a war in which states are actively competing with one another for businesses by offering subsidies and preferential taxes.

We don’t expect Congress to end the incentive competition any time soon. So we hope Oklahomans will turn toward a thoughtful discussion of incentives. We should ask the same questions we ask about  all government programs:

• Is this tax incentive the best possible use of our public money?
• What will happen if we don’t offer the incentive?
• Who benefits from the incentive?
• Are there cheaper ways of achieving the same result?
• Is this an appropriate arena for government action?

The Incentive Review Committee has an important role to play in this discussion, but we need more involvement and a broader, more comprehensive approach. The state can help get the ball rolling by improving the transparency and accountability process for incentives. Earlier, we noted the recent addition of tax credits to the state’s Open Books web site, as well as the limitations. Now, we can learn in detail whose taxes are cut through the use of tax incentives. We hope to move toward a more comprehensive approach that tells us how much the credits cost altogether and what the state gains, if anything, through offering tax incentives. Then we can address those questions about whether we are using our public resources effectively.

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