New issue brief examines one of the largest business subsidies in Oklahoma

Mark Lash is a retired federal employee who follows Oklahoma policymaking. He has previously written about the Quality Jobs Program for the OK Policy Blog.

Download the full report here.

According to a New York Times report, state and local governments provide over $80 billion each year to a variety of businesses through tax exemptions, tax credits, incentives, and other programs. That same report showed Oklahoma provides over $2 billion each year to businesses for economic development.

Perhaps the most popular and well-known subsidy in Oklahoma is the Quality Jobs Program. A new OK Policy issue brief examines the background of this program, describes its key elements, and makes recommendations on how to best achieve its stated purpose of job growth while also maximizing the use of limited state revenues. Read on for a summary or click here to download the full issue brief.

Summary

The Quality Jobs program was created in 1993, with the first companies enrolling in the fall of that year. Through the end of fiscal year 2014, the Quality Jobs Program has paid out over $955 million to private businesses for job creation in the state. Quality Jobs payments have increased for the past four years, going from $56 million in fiscal year 2010 to to $82.3 million in fiscal year 2014.

Who can receive Quality Jobs payments has expanded significantly since the program was created. It was originally focused on manufacturing jobs, but many other business sectors have been added over the years. Oil and gas companies were made eligible to receive Quality Jobs payments in 2005, and in fiscal year 2013 they received over 53 percent of incentive payments compared to 28 percent for manufacturing companies.

The size of companies approved for the program range from relatively small to those with thousands of employees and hundreds of millions of dollars in annual revenues. One provision even arranged for the state to contribute towards the salaries of Oklahoma City Thunder basketball players.

Spending by the program has no cap, and it is not subject to the normal state budget process. The program’s authorization also does not include a sunset provision to require reauthorization by the state legislature. Funding needed for incentive payments is simply “taken off the top” of estimated revenues for the budget year.

The program is required to be revenue neutral. However, the Department of Commerce’s methodology for determining revenue neutrality has been questioned by at least two Oklahoma economists and includes some obvious flaws. If the Quality Jobs program continues without changes, we can expect that costs will continue to rise as they have over the past 20 years.

Recommendations

The strength of the Quality Jobs program is that it provides incentives for job creation. Properly targeted, this can be very helpful to certain companies while also making the best use of limited state revenues.

• Review/Revise EligibilityCriteria — The evaluation of applicant companies should consider factors such as whether the company is a local startup, moving from out of state, or well established in the state. Industry sector, as well as the size and current profitability of the company, should also be considered as measures of whether incentive payments are a meaningful consideration in the company’s bottom line;
• Review/Revise Factors for Incentive Payment Percentage — Surveys early in the program showed that around half of new jobs would have been created without incentivesbeing provided. This needs to be taken into account, along with other factors, when determining the payroll percentage paid for each qualified new job;
• Review/Revise Economic Analysis — Given the statutory requirement that this program be revenue neutral, a public review of the methodology used by the Commerce Department to determine costs and benefits to the state is needed;
• Cap Program Expenditures — Annual expenditures should be capped within a reasonable limit, whether as a dollar amount or a percentage of income tax revenues. With core state agencies already facing budget shortfalls, expenditures on the Quality Jobs Program should not be allowed to increase without limit;
• Improve Program Management and Oversight — The state needs additional staff to effectively manage a program of this size. By assessing a fee percentage against each contract, it could ensure that the Commerce Department and Oklahoma Tax Commission would have the necessary resources to effectively oversee, evaluate and manage this program;
• Review Special Provisions — Preferred treatment for sports teams, companies claiming they’ve received offers to relocate out of state, etc. need to be reevaluated to determine if they are appropriate for this program;
• Revise Open Records Act — The release of most information relating to this program is currently not required under the Open Records Act. Revisions are needed that would allow the release of more information which would provide a better understanding of the program and greater transparency.

The rapid growth of Quality Jobs payments during a time when most Oklahoma public services have seen flat funding or budget cuts should be cause for concern. At the least, lawmakers should create better oversight for the program, to ensure that the millions in taxpayer dollars going to private businesses are creating a benefit for the whole state.