Keeping tabs on tax breaks

This post originally appeared on Oklahoma Watch as part of their Oklahoma Voices series. The legislative task force that has been studying tax breaks will vote on final recommendations at its November 30 meeting. Also appearing today on our blog is a statement by tax force co-chair Rep. David Dank.

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.