Ken Miller: Rhetoric versus reality on tax incentives

Ken Miller is State Treasurer and a member of the the Task Force for the Study of Tax Credits and Economic Incentives.  This originally appeared as an article in the November Oklahoma Economic Report and is reprinted with permission. For an earlier blog post on tax credit reform by Task Force co-chair David Dank, click here, and see this piece laying out OK Policy’s position.

Critics contend that if politicians are good at anything, it is studying something to death. While this legislative interim has been full of task forces and studies, many promise to be more than just simple academic exercises. True, some are meant to garner attention for a favored issue. Others are meant to bolster an opinion. And some are honest undertakings in search of good policy.

And there are some with elements of each of the above. Facing a December 31 report deadline, the Task Force for the Study of Tax Credits and Economic Incentives is preparing final recommendations.

It is this task force member’s hope that rhetoric and ideology will play a subordinate role to sound policy and economic reality. The task force recommendations can impact our business climate for years to come and must take into account the competitiveness of states in attracting industry and economic growth.

There is unanimity among task force members that all incentives should meet the three-way test of public purpose, consideration and controls.  The panel has concluded the state grants too many tax incentives, many of which need to expire, and that all incentives need stricter controls, accountability and sunset dates.

There is no such unanimity on the issue of transferable tax credits, which can be sold to a third party when the original recipient does not earn enough taxable income. Only one other state, Iowa, has recently considered eliminating tax credit transferability.  The recommendation, made by a similar task force, was not adopted by its Legislature.

As with all incentives, the criteria should boil down to a cost-versus-benefit analysis.  If our Legislature determines that an economic benefit, like infrastructure improvement or job creation, is worth a predetermined cost in tax revenue, it is difficult to understand in concept why it matters which company claims the tax credit after the three-way test has been met and the induced benefit received by the state.

It has been argued that it matters because among the largest purchasers of tax credits is the insurance industry, whose remittances are earmarked for pension funding. However, such logic is just as flawed as saying that the state income tax rate cannot be lowered because its remittances are earmarked for education. Also perplexing is why the secondary market for credits has been met with demagoguery by those who usually favor mutually beneficial voluntary exchange.

Although no new transferable tax credits have been granted in the last seven years, certainly there were poorly structured ones allowed in the past. But there have been beneficial ones as well. Facts fail to confirm the claim that all transferable tax credits, regardless of structure, are inherently bad. Everyone is entitled to their own opinion, but not their own facts and it is the latter that is currently missing from an informed decision.

Another area of divergent thought relates to accountability.  Some task force members want the State Auditor’s powers expanded to judge an incentive’s worthiness.

Others are not yet convinced the case to grow government and spending has been made, or if it is even an appropriate use of the Auditor’s office. The Tax Commission seems the more appropriate agency for such determination and is already auditing most incentives.

Further, if three-year sunset provisions are implemented, it seems wasteful for taxpayers to fund additional annual or biannual audits on expiring incentives. Facing sunset, the beneficiary will have to make the case for extension to legislators who stake their reputation with each push of a button.

Should it be determined existing audits are not enough, the panel should consider having tax credit beneficiaries pay the cost of outside independent audits. It bears remembering the courts provide the ultimate remedy for violations of the constitution and public trust.

Like those that have gone before it, this interim has seen its share of studies with varying degrees of worth. With well thought-out recommendations and proper legislative follow-through, the incentive task force will help breathe new life into job-creating tax reform, better budget prioritization and a stronger Oklahoma economy.