This blog post was authored by Michelle Cantrell, a tax specialist residing in Tulsa

One of the six ballot measures facing voters this November is State Question 766, which asks Oklahomans whether the state should have the authority to tax intangible personal property.   While seemingly a simple question, SQ 766 has widespread implications that could drain tens of millions of dollars from schools, fire and police protection, and other vital services, while potentially boosting homeowners’ property taxes.

The state question was placed on the ballot in response to the Oklahoma Supreme Court decision in a case, Southwestern Bell Tel. Co. v. Okla. State Bd. of Equalization, that challenged the state’s method of determining property taxes.  Like most states, Oklahoma determines ad valorem taxation of certain entities, including public service companies, railroads, and airlines, at the state level instead of the local level.  To determine the value of these centrally-assessed companies, the Oklahoma Board of Equalization looks at the value of the entire company as a unit, subtracts certain non-taxable items, then determines Oklahoma’s portion of that value before applying tax rates.

Currently, the Oklahoma Constitution exempts certain intangible properties, such as stocks, bonds, and cash on hand, from taxation. In  its lawsuit, Southwestern Bell asserted that the value of additional items should be subtracted, including the value of customer relationships, trademarks, assembled work force, and employment contracts.  The Oklahoma Supreme Court determined that only those specific items that were listed in the Constitution as exempt had to be subtracted, and that any intangible property that was not listed was taxable.

Because the Supreme Court had ruled that most intangible property was taxable, concern arose that local assessors would have to begin assessing and taxing intangible property, creating a large new tax and placing a tremendous burden on local assessors.  In response, the Legislature created a task force to formulate a solution.[1]  Last spring, responding to pressure from AT&Tthe State Chamber of Commerce and others unhappy with the ruling, state legislators decided to ask voters whether the Oklahoma Constitution should be amended to exempt all intangible property from taxation at the state or local level.

If passed, SQ 766 could cost local governments at least $50 million in property tax revenue, 60 percent of which goes to schools. Yet because the proposed language does not define or limit the definition of intangible personal property, the cost to schools, public safety and other local services could be far greater than estimated and grow over time.  As our economy has become more service- and technology-oriented, the value of a company is increasingly based upon intangible assets. In 1975, intangible assets comprised around 2 percent of the net asset book value of S&P 500 companies; by 2005, it was over 40 percent, and the trend is likely to continue. If SQ 766 passes, Oklahoma will find itself increasingly limited in its ability to tax properties.

The amendment would also likely mean a property tax increase for homeowners. Tulsa County for example receives around 8 percent of its property tax revenue from centrally assessed property.  Any significant reduction in that amount would have to be offset by cuts in spending on public schools and other programs; for items that cannot be cut, such as bond issues and legal judgments, local assessors will have to increase property tax rates to offset lost revenue. In other words, while passage of SQ 766 would hand a large tax cut to big corporations, most homeowners and small businesses could see their property taxes go up.

Because SQ 766 does not define or limit the definition of intangible property, it will likely result in further litigation if passed. Most states that have exempted intangible property have later sought to more clearly define and narrow the definition either legislatively or through extensive court cases as companies pushed to expand deductions.  Other states, foreseeing the potential problems with exempting intangible property, have tried to strike a balance. For example, Oregon specifically allows taxation of intangible property of  property assessed at the state level. Washington exempts certain intangible property from taxation, but permits the use of  appraisal methods that might incorporate intangible value when appraising tangible property.

Unfortunately, Oklahoma’s legislature chose the worst approach, one that – if SQ 766 passes – will create a giant tax loophole for corporations and deprive schools, public safety and local services of badly needed resources. By rejecting SQ 766, Oklahoma voters could force the legislature to come back with a narrower and less costly solution to the uncertainty created by the Southwestern Bell decision.

[1] Initially, as a temporary solution, the Business Activity Tax (BAT) was created as a “tax in lieu of” intangible personal property tax.  The $25 tax will continue if SQ 766 fails.