Eliminating tax breaks: The dog that didn't bark

In her first State of the State speech, Gov. Fallin said, ”Our course of action will be simple: only tax credits that create jobs will stay. For instance, my budget begins the process of restoring the Aerospace Engineer Tax Credit, which brings good, high tech jobs to Oklahoma. But those tax credits that do not create jobs must be eliminated.”

Reinstating the aerospace credit was among the Governor’s top goals this year, and she made good on that promise early in the session. Unfortunately, eliminating tax credits that aren’t worth the cost did not seem to be as much of a priority.

While some positive steps were made over the legislative session to increase transparency of tax credits, we have seen no credits permanently taken off the books. On the contrary, several tax credits and exemptions were added or extended.

• HB 1008, a bill to restore the Aerospace Engineer Tax Credit, was signed by Fallin in early April. The credit pays newly hired engineers $5,000 a year for up to five years, and companies hiring the engineers receive a credit equal to 10 percent of the new hire’s salary if the engineer graduated from an Oklahoma college or 5 percent if the engineer graduated from an out-of-state college. It also reimburses 50 percent of the tuition to a new engineer graduate for the first four years of his or her employment. The credit was suspended in 2010 to help deal with the budget shortfall. The credit had been in effect for one year before it was suspended, and in that year it cost the state about $3.5 million. It was already set to return in 2013, but HB 1008 brings it back a year early.
• Another new tax credit program added this year by HB 1953 is the “Oklahoma Quick Action Closing Fund.” This fund is meant to provide money for the Governor to provide tax credits, infrastructure investments, and other incentives while negotiating to bring companies to Oklahoma. The fund is modeled after the Oklahoma Opportunity Fund, which had been ruled unconstitutional, and the Texas Enterprise Fund. OK Policy previously discussed the troubling histories of those precedents here. No money was put into the closing fund this session, and where the money will eventually come from remains unclear. Senator John Sparks successfully amended the bill to require that companies winning awards from the fund not make independent political expenditures for a specified period before and after their award. This amendment may help prevent some of the ethical problems in Texas, where Gov. Rick Perry has come under fire for giving millions to his major political contributors for projects that did not create the promised jobs.
• On the other hand, SB 935 created an exception for manufacturing facilities that had been promised a tax exemption but then failed to meet job creation requirements that the exemption required. Despite this promised tax break, many companies are failing to meet these goals during the recession. The bill extends the time they have to meet them to the full five years of their eligibility. While the state still won’t pay unless the jobs are eventually created, the companies’ current inability to create jobs despite the existence of the tax break should make us question the premise of these incentives. If companies can only create jobs under these programs during good economic times, we should ask whether it makes sense to be paying them at all, much less showing more leniency on when they can receive the funds.
• Finally, HB 1488 extended several gross production tax incentives for oil and gas wells another two years (they were previously set to expire in 2012). Oil and gas producers were given more than $100M in gross production tax rebates in 2010, despite evidence that state tax breaks have very little effect on where producers decide to drill. HB 1488 also eliminated taxes on the mining of gold and silver.

In a coming post, we will go over the progress that was made this sessions toward providing more transparency into where the money is going.