The promising life and untimely death of tax credit reform in Oklahoma

Not too long ago, Oklahoma seemed on the verge of enacting a far-reaching reform of the state’s special-interest tax breaks. Now, after a series of setbacks, the prospect of meaningful reform seems to have vanished.

Oklahoma offers hundreds of tax breaks, known collectively as tax expenditures, to businesses and individuals for a wide range of purposes. While some of these are relatively uncontroversial, , such as tax preferences for disabled veterans, tax credits that subsidize certain kinds of businesses and economic activity have come under increasing scrutiny in recent years. Tax credits are frequently faulted for picking economic winners and losers, being economically inefficient, providing insufficient transparency and oversight, and having unknown fiscal costs. The goal of subjecting tax credits to closer scrutiny, and to doing away with credits that are not serving a strong public purpose, has united lawmakers and advocates from across the political spectrum.

In the fall of 2011, a task force chaired by Rep. David Dank and Sen. Mike Mazzei produced a unanimous report that would have fundamentally altered the way that tax credits are enacted, operated, and evaluated in Oklahoma. Its recommendations included  fiscal caps and end date (or “sunset” provision) for all tax credits, the end of tax credit transferability, and a moratorium on the approval of new credits. Several bills aimed at implementing the task force recommendations were introduced by Rep. Dank and Sen. Mazzei in the 2012 session. Meanwhile, tax reform proposals that coupled cuts to the top income tax rates with the elimination of a broad array of tax credits, deductions, and exemptions were speeding through the legislative process.

Then the tide turned, as businesses and chambers of commerce mobilized to defend their favored tax breaks. A  bill by Rep. Dank to extend a temporary moratorium on over two dozen tax credits was defeated in the House Revenue and Taxation committee, as was a bill to end the transferability of tax credits. Other tax credit measures, including one to reestablish the task force on tax credits, made it out of committee but eventually faltered. The final tax cut agreement between the Governor and legislative leaders proposed eliminating a substantial number of tax credits, but but the targeted credits were claimed by only a few businesses and individuals and had a limited fiscal impact. The agreement failed to gain passage after House Republicans objected to the efforts to curtail tax preferences, especially a provision that would have limited eligibility for the personal exemption.

This year’s tax credit debate has followed a similar course. Rep. Dank and Sen. Mazzei reintroduced several tax credit reform bills. When HB 1371, a bill to sunset 32 tax credits, subject to legislative review and reapproval, failed on a 3-10 vote in the House Revenue and Taxation sub committee, Rep. Dank denounced the outcome as “absolutely disgusting”, and chose to withdraw from consideration a measure that would have done away with transferable tax credits. The same committee later killed the Senate version of the moratorium proposal. A final bill, HB 1369, that would subject any future tax credit enacted by the Legislature to a number of requirements and restrictions, made it through the House but was killed in the Senate Finance Committee.

After the failure of  last year’s effort to couple income tax cuts with elimination of various tax credits and exemptions, the Governor and House leadership are promoting an unpaid-for cut to the top income tax rate without touching any tax breaks (HB 2032). Senate Republican initially insisted that tax cuts must be coupled with efforts to reform the tax code by curbing tax breaks. Their major tax bill, SB 585, closely modeled on last year’s leadership agreement, would eliminate or curtail over 30 tax credits and deductions. However, these tax reform efforts generated opposition from the State Chamber of Commerce and the Oklahoman editorial board.   The Oklahoma Council of Public Affairs, after last year calling for the elimination of every income tax credit, deduction, and exemption, is now insisting that the top income tax rate be cut without making any reforms to other parts of the tax system. On April 1st, the House Revenue and Taxation committee voted down the Senate’s tax reform bill on a 2-11 vote. The Senate then passed a watered-down version of its tax proposal as a committee substitute for HB 2032. It would limit and eventually sunset five transferable tax credits, while leaving the rest of the tax code untouched.

If this pattern continues, we can expect that legislators will keep paying lip service to the need to clean up the tax code and scrutinize tax breaks.  We just shouldn’t expect them to actually do anything about it.