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.

There is unanimity among task force members that all incentives should meet the three-way test of public purpose, consideration and controls.  The panel has concluded the state grants too many tax incentives, many of which need to expire, and that all incentives need stricter controls, accountability and sunset dates.

There is no such unanimity on the issue of transferable tax credits, which can be sold to a third party when the original recipient does not earn enough taxable income. Only one other state, Iowa, has recently considered eliminating tax credit transferability.  The recommendation, made by a similar task force, was not adopted by its Legislature.

As with all incentives, the criteria should boil down to a cost-versus-benefit analysis.  If our Legislature determines that an economic benefit, like infrastructure improvement or job creation, is worth a predetermined cost in tax revenue, it is difficult to understand in concept why it matters which company claims the tax credit after the three-way test has been met and the induced benefit received by the state.

It has been argued that it matters because among the largest purchasers of tax credits is the insurance industry, whose remittances are earmarked for pension funding. However, such logic is just as flawed as saying that the state income tax rate cannot be lowered because its remittances are earmarked for education. Also perplexing is why the secondary market for credits has been met with demagoguery by those who usually favor mutually beneficial voluntary exchange.

Although no new transferable tax credits have been granted in the last seven years, certainly there were poorly structured ones allowed in the past. But there have been beneficial ones as well. Facts fail to confirm the claim that all transferable tax credits, regardless of structure, are inherently bad. Everyone is entitled to their own opinion, but not their own facts and it is the latter that is currently missing from an informed decision.

Another area of divergent thought relates to accountability.  Some task force members want the State Auditor’s powers expanded to judge an incentive’s worthiness.

Others are not yet convinced the case to grow government and spending has been made, or if it is even an appropriate use of the Auditor’s office. The Tax Commission seems the more appropriate agency for such determination and is already auditing most incentives.

Further, if three-year sunset provisions are implemented, it seems wasteful for taxpayers to fund additional annual or biannual audits on expiring incentives. Facing sunset, the beneficiary will have to make the case for extension to legislators who stake their reputation with each push of a button.

Should it be determined existing audits are not enough, the panel should consider having tax credit beneficiaries pay the cost of outside independent audits. It bears remembering the courts provide the ultimate remedy for violations of the constitution and public trust.

Like those that have gone before it, this interim has seen its share of studies with varying degrees of worth. With well thought-out recommendations and proper legislative follow-through, the incentive task force will help breathe new life into job-creating tax reform, better budget prioritization and a stronger Oklahoma economy.

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Rep. David Dank is co-chair of the Tax Credit Task Force. This is his 0pening 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.

Many were enacted virtually in secret.

Some had no checks and balances.

And as we know from reading the Attorney General’s opinion, a number of them were and are constitutionally infirm, which is really another way of saying they were simply illegal [..]

I know you have heard me refer to the culture that ruled this Capitol for too long… the ‘go along to get along practices’ and the ‘special deals’ slipped into legislation ten minutes before adjournment [..]

The simple truth is that a few of these tax credits are like the huckster who took a bucket of manure, covered the top with an inch of honey and sold the whole thing as a full bucket of honey. It wasn’t until the sucker got home with it that he found out what he had actually bought.

Well, the report we will issue by December 31 is a golden opportunity to reverse that culture and to shine some much-needed light on the public business we do here, all the way to the bottom of the bucket. I trust we will take advantage of that opportunity.

I said that today’s business should address the criteria we will apply to draft our report and draft some legislation. Let me propose some possible criteria, and then I will ask the members to add their own.

• First of all, I believe that we must end forever the creation of tax credits or other incentives that are transferable. Taxpayer dollars should never be traded around to the highest bidder in a shell game like some we have seen. Any tax credit should at minimum benefit only the recipient.
• Second, no tax credit or other incentive program ought to be enacted or changed by legislation created and introduced in the final days or hours of any legislative session [..]
• Third, any future tax credit needs to come wrapped in a clear and accurate fiscal impact study. We can no longer afford to enact tax credits with unknown future costs to the state budget. Tell us what it will cost from year to year.
• Fourth, any future credit must be designed to create or save jobs. That is the only acceptable reason for a tax credit in the first place, because that is the only way any tax credit will actually help build wealth and return the initial investment to the state. Economic growth is job growth. That has to be the central goal of any tax credit worthy of our consideration.
• Fifth, whenever a business comes to ask asking for our help to grow jobs, we need to look at all of the alternatives before we even utter the words ‘tax credit.’ We have discussed several times the job sustaining provisions of the Quality Jobs Act, as well as other state programs that can help keep people at work. A tax credit should be our last, not our first, resort.
• Sixth, the State Auditor should be required to thoroughly audit every tax credit, beginning in the drafting stage and continuing on a year to year basis. The Auditor was elected by the people to oversee how public dollars are spent, and this is one area that has cried out for oversight for a long time. We will never have the transparency and accountability we have spent the last few months talking about until we have a trusted authority examining these programs.
• Seventh, I firmly believe that we can no longer afford to enact open-ended tax credits. We are coming out of a severe budget crisis, but there will always be another one somewhere down the road. Any future tax credits need to have enforceable caps and limits.
• Eight, on that same theme, all future tax credits should be subject to sunset provisions. The Legislature should periodically examine and be required to re-certify any tax credit. Frankly, I am surprised that we did not turn up a tax credit for the makers of buggy whips that had been on the books since the delivery of the first horseless carriages in 1907 or so. No tax credit should be granted eternal like, and sun-setting will address that problem.
• Ninth, I believe we need to curtail the granting of tax credits on what has become virtually an automatic basis. Each project or separate credit needs to be subject to examination and individual approval. Without that we get projects like pizza parlors in buildings that just happen to qualify for a historic preservation credit.

Finally, I would encourage you all to remember where we started today. Our first obligation here is to the taxpayers. In the end they have paid for every dollar in tax credits granted by the State of Oklahoma, since a dollar lost to a tax credit, whether it is worthy or not, always winds up either coming out of the pocket of an individual taxpayer or leaving that taxpayer a dollar short in state services that didn’t get funded [..]

Now I would be anxious to hear your input…

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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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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 the Census Bureau released new state-level data on income, poverty and health insurance coverage in 2010.  The Tulsa World interviewed our Director David Blatt on the rising poverty rate in Oklahoma.  Yesterday’s OK Policy blog post – Poverty rises in Oklahoma; children especially bearing the brunt -  concludes that despite experiencing a comparatively less severe recession than most other states, the situation for those at the bottom in Oklahoma is more fragile than ever.

On Monday we ran another post in our ongoing series examining the federal health care law; IT incentives and investments under the federal health care overhaul are propelling an industry that still relies primarily on paper records into the 21st century.  Watch a ten-minute documentary on our blog featuring interviews with Medicare families struggling to keep up with health care costs and other necessary household expenses on a fixed budget.

A guest post from attorney Noble McIntyre makes the argument for increased spending on public safety education in Oklahoma.  OK Policy analyst Gene Perry was quoted in a NewsOK article about state subsidies for the coal industry.

In the Know, Policy Notes

• The Institute on Taxation and Economic Policy has 3 new fact sheets on why state tax cuts don’t create jobs.
• The Century Foundation analyzes exactly how the Affordable Care Act will both strengthen health insurance protections and save money.
• Stateline reports on how Arkansas has largely avoided the fiscal problems experienced by other states during the recession.
• The Policy Shop explains why spending cuts will hurt economic recovery more than tax increases.
• The AARP reports that material conditions have deteriorated significantly for older households during the last decade.

Numbers of the Week

• 42,000 – Number of children in Oklahoma who are eligible for Medicaid (SoonerCare), but are not enrolled, 2011
• 4,614 – Number of alcohol-related traffic crashes in Oklahoma in 2010; 6.6% of all traffic crashes in the state (69,805) were alcohol‐related.
• 15.1 percent – Percentage of Americans living in poverty in 2010; a family of four is living in poverty if their annual income is less than $22,113.
• $1,430 – Amount in payroll tax relief an Oklahoma household with $46,000 in annual income would receive under the proposed American Jobs Act.
• 85 percent – Percentage of recent bachelor’s degree holders who remain and work in Oklahoma one year after graduation.

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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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