OKPOLICY.ORG
Ryan Gentzler is an OK Policy Research Fellow and a Research Associate with the Early Childhood Education Institute. He recently completed his Master of Public Administration degree at the University of Oklahoma.
After years of stalled reforms on tax incentives in Oklahoma, the Legislature this year passed a pair of bills that could have a real and positive impact on a growing problem. HB 2182 requires all tax incentives to be evaluated by a newly formed Incentive Evaluation Commission at least once every four years, and SB 806 requires the Legislature to state a measurable goal for any new tax incentive. These reforms could be the first two legs of a three-legged stool that supports strong accountability for tax breaks in Oklahoma. For the third leg, lawmakers should pass sunset provisions for all tax incentives, which will periodically require them to act on the information they receive from the Incentive Evaluation Commission.
A growing problem
Tax incentives are policy tools used by states to encourage economic growth by providing support to private businesses, including cash payments, tax breaks, and in-kind benefits given to companies to offset the costs of opening or expanding a new facility. Often, tax incentives are put in place permanently without any way to measure their impact or assess whether they are accomplishing their goals.
An important principle for understanding tax incentives is that they are government spending by another name. These tax expenditures are a way to redirect tax revenue that otherwise would have gone to supporting public services to promote specific goals.
However, Oklahoma’s tax expenditures have increased dramatically at the same time as most other areas of state spending have been flat or severely cut. In 2010, 24 key business tax credits in Oklahoma totaled $356 million; two years later, they had almost doubled to $760 million. Meanwhile, almost half of appropriated state agencies remain more than 20 percent below pre-recession funding levels, and next year’s appropriations budget will be $719 million below FY 2009 after inflation.
Evaluation is critical
The Pew Charitable Trusts have identified three complementary policy tools to improve incentive programs, which form something resembling a three-legged stool – each is necessary to ensure strong accountability for tax incentives over time. These are:
- Sunset Provisions: By forcing legislators to act in order to keep a tax credit program in place, sunset provisions require periodic review of the benefits of each program. Lawmakers in Oregon, for example, include sunsets after six years for most tax credits. In 2011, a review of 18 expiring tax credits led to four being renewed without changes, five being redesigned, and nine being allowed to expire.
- Economic Impact Analysis: Evaluations of tax credits should take into account the extent of incentives’ effect on businesses’ decisions and compare the effects of those decisions to the cost of the program. A review in Minnesota, for example, found that nearly four in five new jobs at companies receiving the Job Opportunity Building Zones credit would have been generated without the incentive, and that each job cost five times what was estimated.
- Gauging Progress toward Goals: In order to be properly assessed, tax credits should have clearly defined and measurable goals, and many states have begun to require that each new tax credit include them. In 2013, Vermont passed a law requiring every credit already on the books, as well as each new proposed credit, to include a statement of purpose.
Progress in 2015
[pullquote]”The two reforms that passed this year will generate critical knowledge of the effects of current tax incentives, but sunset provisions hold the key to reform.”[/pullquote]The Pew Charitable Trusts consulted with Oklahoma officials on developing a plan for evaluating tax incentives, and the Legislature followed through with two of its recommendations. First the Incentive Evaluation Act (HB 2182) sets up an Incentive Evaluation Commission, a team of financial experts, public officials, and economists that is charged with evaluating each incentive that has more than a “minimal fiscal impact” every four years. The law specifies that the most significant incentives should be evaluated first, and evaluations should assess incentives’ impact on business behavior and the economy as a whole, as well as their progress towards specific goals, before making recommendations for retaining, adjusting, or repealing the incentives. Second, SB 806 requires that all new incentives include a measurable goal.
The two reforms that passed this year will generate critical knowledge of the effects of current tax incentives, but sunset provisions hold the key to reform, because they create regular obligations for lawmakers to confront the results. The work done by the Oregon Legislature, mentioned above, is a great example of evaluation information put to use; they were forced to act when the incentives were due to expire. The Oklahoma Legislature did put in place sunset provisions for a small group of incentives aimed at railroad rehabilitation and wind power generation this year, but they were modest and aimed only at easy targets.
Priorities for 2016
Next year, the Legislature should build the third leg of its stool by placing sunsets that align with the evaluation cycle on all new and existing incentives. If the Oklahoma Legislature follows Oregon’s example on this front, we can expect that the tax incentives that work will be allowed to continue, and those that cost more than they are worth will be changed or eliminated. Without those sunsets in place, tax incentives could continue to use up more taxpayer dollars without any oversight that the dollars are being used wisely.
