An easier target

An earlier version of this post appeared as a column in the Journal Record.

One day when I was in junior high, some friends and I came across a schoolyard fight between two of our classmates. A number of children were taunting one of the combatants, Bobby, and I must confess that I joined in the name-calling. After losing the scrap, an incensed Bobby looked around at those who’d been mocking him from the sidelines. Though not blameless, I had not been the loudest taunter in the crowd, or the cruelest – but I was one of the smallest. Bobby came charging over and socked me hard.

I was reminded of this incident by the Legislature’s actions this session regarding  tax breaks for the wind-power industry.

For years, the Legislature has wrestled with reining in tax breaks. Economic development incentives cost the state close to $700 million a year, according to recent estimates by legislative staff. It’s widely recognized that the expanding cost of tax breaks is a major reason the state faces a chronic budget shortfall and lacks resources needed for schools, public safety, health and other important services.

While a wide array of businesses and industries receive tax breaks, subsidies to the oil and gas industry dwarf all the others. Oil and gas producers benefited from more than $400 million in tax breaks last year, the lion’s share going to big energy companies drilling horizontal wells taxed at 1 percent instead of the traditional 7-percent rate on drilling. The Legislature last year had the opportunity to end that tax break, which had become unaffordable and unnecessary. Instead, it bowed to industry pressure and left it largely unchanged.

This year the Legislature set its sights on wind power, an industry that has grown substantially in Oklahoma over the past decade. One-seventh of the electricity capacity in Oklahoma (14.8 percent) came from wind power in 2013. The state’s 26 wind energy facilities, located in 15 counties in the Western half of the state, generated 10.8 million megawatt hours of electricity in 2013, which ranks Oklahoma fourth among the states for total wind-energy generated. Several additional wind farms are under development.

As the industry has grown in Oklahoma, critics of wind power have become increasingly vocal. Concerns have been expressed about questions of regulatory oversight, the impact of wind farms on local residents and property owners, and conservation issues. But the strongest efforts have been aimed at curbing property and income tax incentives enacted in the 1990s and 2000s to assist the nascent wind power industry. Using estimates calculated from Tax Commission data, Frank Robson, a Claremore businessmen and leading opponent of tax incentives for wind, asserted that “the cost of state wind power subsidies over the next five years exceed $330 million.” In advocacy mailers, Robson’s WindWaste organization claimed that subsidies could cost the state $193 million a year.

This session, legislators introduced over a dozen bills targeting tax incentives for wind. By session’s end, two bills had gained final approval and were signed by the Governor. The most significant measure, SB 498, ends eligibility for the five-year ad valorem manufacturing exemption for new wind power facilities effective January 2017. The exemption cost $28 million in FY 2014 and is projected by the Tax Commission to rise to $50 million by 2018.

In addition, SB 502 prohibits wind power facilities from claiming a tax credit under the Investment/New Jobs program effective in 2017. Several bills to eliminate or reduce the state’s zero-emission tax credit, which currently provides a refundable tax credit of $0.0050 for each kilowatt-hour of electricity generated by a zero-emission facility, were introduced but died along the legislative process.

The bills targeting wind power were the only tax credit reform measures to pass this session. The Legislature did, however, enact HB 2182, which establishes an independent Incentives Evaluations Commission to regularly review each tax incentive and issue recommendations on whether they should be “retained, reconfigured, or repealed.” 

When the bill to end the ad valorem exemption for new wind farms passed the Senate, its author, Sen. Mike Mazzei declared:

This incentive was first enacted when Oklahoma was trying to encourage the development of wind farms and the jobs that would be created as a result.  But now that tax incentive is costing our state $44 million a year, and without adjustments it could easily double. Given our current fiscal reality, the need for reform was clear.

Sen. Mazzei’s justification of the need to curb tax breaks for wind power is compelling, but an equally compelling argument could be made about the subsidies for oil and gas production and various other tax breaks that the Legislature has shied away from ending. It’s hard not to conclude that the wind industry, like me on that schoolyard, got beat up not because it’s the worst offender, but because it was an easier target.