Once in Place, Sales Tax Breaks Nearly Impossible to Touch (Oklahoma Watch)

Buried deep in the Oklahoma tax code is a sales tax exemption for railroad spikes. Once it got hammered into place, it never budged.

The tax break was created in 1993 for the benefit of one spike manufacturer, Wellington Industries, so it would relocate from Texas to Sand Springs. Tax code reformers later targeted it for review, but it survived. Oklahoma Tax Commission officials said they weren’t able to calculate how much it costs the state today.

It’s got plenty of company, though. According to Tax Commission data, the state’s 4.5-cent sales tax has 150 specific statutory exemptions. They range from the obscure, such as an exemption for commercial spaceports, to the colossal, such as two exemptions for raw materials and wholesale goods.

The state sales tax and its companion “use tax” on goods purchased out of state brought in $2.6 billion last year.

They left far more than that on the table. The 30 largest exemptions alone reduced 2014 fiscal year tax collections by an estimated $8.1 billion, the tax commission said. An estimated $7.1 billion of that amount was attributable to the exemptions for goods purchased by manufacturers or by “resellers” who operate at the wholesale level. Tax analysts generally agree those exemptions make good sense.

That still leaves 148 exemptions adding up to at least $1 billion. Yet when state officials recently drafted a list of 75 business tax breaks to be evaluated by a newly created Incentive Evaluation Commission, they included only a handful of sales tax exemptions.

That’s partly because sales tax breaks have tended to be a “third rail” of Oklahoma state finance. Once in place, they’re almost impossible to touch without getting hurt.

“I got beat up pretty good,” said former state Sen. Jim Wilson, D-Tahlequah, who tried unsuccessfully three years ago to raise money for education by removing the sales tax exemption for newspapers and magazines. “Even the Tahlequah paper beat me up on that. I was surprised at the backlash.”

Business tax breaks will be under scrutiny again in 2016 because the state is facing a record budget gap of as much as $1 billion next year. State agencies already are being advised to expect a significant decline in legislative appropriations for core services such as health and education.

Earlier this year the Legislature voted to set up a new Incentive Evaluation Commission to help identify business tax breaks that might not be living up to expectations. It will begin operations in January.

The initial list of possible reform targets is noticeably light on sales tax exemptions. Several state officials insisted that nothing was officially off the table for now. But they acknowledged that sales tax breaks were particularly difficult to tackle, particularly for elected lawmakers.

“The perspective that most legislators have is that eliminating a sales tax exemption is equivalent to charging consumers with a new tax,” said Senate Finance Committee Chairman Mike Mazzei, R-Tulsa. “I don’t know that they’re impervious, but they’re very difficult.”

The Oklahoma Legislature created the state sales tax in 1933. It started out at a penny on the dollar and grew to 4.5 cents by 1990. Cities and counties charge additional levies, and the combined total tops 10 cents in some locations. The sales tax has gotten more scrutiny in recent months because of a proposed statewide penny sales tax for education.

The $8.1 billion estimated cost of the 150 existing exemptions is inflated by two huge exemptions: sales of tangible goods to manufacturers and to resellers, which reduced tax revenue by an estimated $2.0 billion and $5.2 billion, respectively.

Tax analysts said that doesn’t mean they should be eliminated. If the sales tax were applied to sales of raw materials and wholesale goods, it would create a phenomenon called tax “pyramiding.” Consumers would pay far more for finished products at the retail level. For that reason, the two big tax breaks are widely accepted and generally not considered when policymakers discuss tax code reform.

“In principle, those are appropriate and justified exemptions, the idea being that you only tax sales to the end user,” said David Blatt, executive director of the nonprofit Oklahoma Policy Institute in Tulsa. “Most states exempt sales for resale and sales to manufacturers.”

Many of the other big-ticket exemptions also enjoy widespread support. For example: sales of prescription drugs and residential utilities, which reduced last year’s revenue collections by about $124 million and $133 million respectively.

When it comes to single-industry sales tax breaks that have a significant revenue impact, a relatively small number of recipients stand out. For example:

–Sales tax exemptions for agricultural goods, including livestock, cost the state an estimated $185 million in 2014.

–Sales tax breaks for railroads, airlines and aircraft maintenance operations reduced state tax collections by $61 million.

–An exemption for essentially all forms of advertising in Oklahoma cost the state $47 million last year.

–The exemption for sales of newspapers and periodicals, the first sales tax break mentioned in state law, lowered state revenue by $11 million.

–The waiver of sales taxes on tickets to professional sporting events, including the Oklahoma City Thunder, cost the state $3 million last year.

The fact that some tax breaks are politically popular doesn’t mean they should get a free pass, Blatt said.

“I think Oklahomans can rightly ask why we exempt ticket sales to professional sporting events while we continue to tax groceries,” Blatt said. “If you look at who’s buying season tickets to the Thunder compared to who’s buying groceries, it’s hard to justify.”

Blatt, Mazzei, Wilson and other officials interviewed for this story said they were convinced that it was nearly impossible to take on tax credits on a piecemeal basis. If the state wanted to eliminate them or scale them back, it would need to do it in the form of comprehensive tax code reform, they said.

“It’s probably impossible,” said Wilson, who served the maximum 12 years in the House and Senate and now chairs the Northeast Oklahoma Regional Alliance. “They’ll give it a lot of lip service and talk about it. But they’re not going to successfully remove any [major] tax breaks.“

Oklahoma Press Association Executive Secretary Mark Thomas, who attended the 2012 committee session when Wilson’s bill was scuttled, said newspapers might be willing to give up their tax break, but not if they’re standing on the firing line by themselves.

“Our fundamental policy here is that if the state were to eliminate every single tax exemption on the books, we’d feel like we had to go along,” Thomas said.

“But if they’re going to give one to somebody for Thunder tickets or to somebody else for some other good cause, we’re just as good a cause as anybody.”

In Sand Springs, the Wellington Industries railroad spike plant is still getting its sales tax break 22 years after it was put on the books.

Gerdau S.A., a big Brazil-based steel company, acquired the plant years ago. A plant manager in Sand Springs said he wasn’t allowed to discuss operations there. He referred questions to Gerdau’s U.S. headquarters in Tampa, Fla. Officials there did not return a reporter’s phone call.

Sand Springs Mayor Mike Burdge said the plant was still a valued community employer. He did not criticize the tax exemption it received nearly a quarter century ago, but said he thought the state should do a better job of reviewing tax breaks.

“Those sales tax exemptions are really tough on cities,” Burdge said. “They ought to be looked at from time to time to see if they’re still serving their purpose.”

Once in Place, Sales Tax Breaks Nearly Impossible to Touch

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