As states across the nation face a worsening fiscal crisis and the prospect of deep spending cuts, some policymakers and advocates are attempting to shine additional light on the traditionally dark corner in which reside the large and ever-growing array of credits, deductions, and exemptions written into state tax codes. Our friends at the Center on Budget and Policy Priorities have released an important and timely new report on tax expenditures, making the case for states to do a better job at providing information on the provisions written into the tax code that reduce state revenue.
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.