Can we stop the runaway train of tax expenditures?

In an earlier post, we discussed tax breaks that had been extended or newly created in the most recent legislative session. The governor promised to eliminate tax credits that “do not create jobs,” but there were no successful bills to end credits or any other tax expenditure this year.

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.