There’s lots of talk at the Capitol this year about the need for greater scrutiny and control of tax incentives. As we’ve discussed, bills authored by the House Speaker and Senate Pro Tem would evaluate all incentives on a regular basis and collect data on their fiscal and economic impact. Yet at least one measure that would create a new tax incentive of unknown cost and effectiveness is rushing through the Legislature.
HB 1747, authored by Rep. Tom Newell, has been labelled the Rural Opportunity Zone bill. As a way to lure new residents to struggling rural areas, it creates a five-year exemption from all state income tax for anyone moving from out-of-state to a county that is projected to lose population between 2016 and 2075. The bill references a 2012 report by the Oklahoma Department of Commerce that identifies 25 counties, mostly in the Western half of the state, that are expected to see their population decline in the coming decades (see map).
Unlike most tax bills, HB 1747 was referred not to the Revenue and Taxation Committee but to the House Agriculture and Rural Development committee (That may have been a tactic to go around Revenue and Taxation Chair Rep. David Dank, who has pledged that no bills creating new tax breaks will be heard in his committee while the state faces a huge budget hole). The bill, which has picked up several co-authors, including Speaker Jeff Hickman, passed unanimously out of House committee and then passed the full House 64-11. It currently awaits action in the Senate Finance committee.
Newell’s bill is modeled closely on Kansas legislation passed in 2011 creating Rural Opportunity Zones. In Kansas, the income tax exemption for individuals moving to designated rural counties is coupled with student loan repayments up to $15,000. As of last year, 240 taxpayers are claiming the tax exemption, while about 1,000 people are receiving student loan reimbursements, according to recent reports. The two incentives are estimated to cost Kansas state and local governments (which pick up part of the tab for the loan reimbursements) close to $2 million.
For HB 1747, the Oklahoma Tax Commission was unable to calculate an estimated fiscal impact. The fiscal statement from House staff states:
Data is not available as to the number of people that migrate based on point of origin or country… It is believed this measure will have an unknown negative fiscal impact for tax year 2016.
There are other uncertainties about HB 1747 in addition to its completely unknown cost. The bill hinges on establishing residency in a county, but unlike ‘state resident’, which is a well-established term in state and federal statutes, existing income tax law does not recognize county residency. How and by whom will county residency be determined? The bill is silent on the matter.
In its current form, HB 1747 provides a tax break for a limited time period in a limited geographic area, but it’s not hard to imagine steady pressure to broaden its provisions. In Kansas, the program, which was initially applied to 50 counties, was expanded to an additional 23 counties in 2013 and another four in 2014. Gov. Brownback now wants to expand the law to include those who take up residency in impoverished urban areas.
[pullquote]For too long, Oklahoma has passed more and more tax incentives without any real estimate of what they will cost or any way of determining if they are working.”[/pullquote]In Oklahoma, 27 counties border the 25 counties that would be designated as Rural Opportunity Zones in HB 1747. Officials in those border areas, which include some of the poorest parts of the state, are unlikely to want the appearance of a competitive disadvantage in trying to attract new residents from out-of-state and will undoubtedly seek to be included. Extending the exemption beyond the initial five years will no doubt become an urgent priority for counties fearful that new residents will pack up and leave once they lose their tax break. These counties may also look to expand the program to include migrants from other parts of the state, and to include long-time residents who may be unhappy when their new neighbors are exempt from taxes and they are not. Before too long, we might not be left with much of an income tax at all – an outcome that would surely not disappoint at least some of this bill’s principal supporters.
Most problematically, supporters of Rural Opportunity Zones, in Kansas or in Oklahoma, can’t point to any research that establishes the effectiveness of the incentive in meeting its goal, which is to attract people to an area who wouldn’t have migrated there otherwise. As a result, HB 1747 could become just another giveaway for behavior that would have happened anyway.
For too long, Oklahoma has passed more and more tax incentives without any real estimate of what they will cost or any way of determining if they are working. If lawmakers are truly serious about this being a new day in subjecting tax incentives to proper scrutiny, they should avoid unproven schemes like the one in HB 1747.