Four months ago, a legislative task force chaired by Rep. David Dank and Sen. Mike Mazzei laid out an ambitious agenda for reforming Oklahoma’s tax expenditures. The group’s recommendations included ending tax credit transferability, enacting caps, sunsets, and regular audits for all tax incentives, and placing a one year moratorium on credits while the legislature decides which ones should be eliminated.
Describing the task force’s findings, Rep. Dank said, “The simple truth is that a few of these tax credits are like the huckster who took a bucket of manure, covered the top with an inch of honey and sold the whole thing as a full bucket of honey. It wasn’t until the sucker got home with it that he found out what he had actually bought.”
The reception was rocky. The State, Oklahoma City, and Tulsa Chambers of Commerce immediately came out against several task force recommendations. The Tulsa City Council strongly defended the historic rehabilitation tax credit, and filmmakers lobbied to protect the film incentives program. Rep. Dank introduced four bills meant to implement the task force recommendations, but today three of the bills are dead and the fourth has been watered down.
HB 2976 would have extended a moratorium on 26 tax credits that was put into place to help cope with budget shortfalls over the past three years. The moratorium, which is scheduled to expire at the end of June, would have been extended indefinitely. It would also have added 4 credits to the moratorium: the credit for investments in clean-burning or electric motor vehicles, for film or music production facilities, for donations to biomedical research, and for the computer industry. The bill failed in the House Appropriations Committee.
HB 2977 would have reestablished the task force on tax credits and economic incentives through the end of this year so they could prepare a supplementary report. It was approved by the House Revenue and Tax subcommittee that Rep. Dank chairs but never taken up by the full House.
HB 2978 is still alive but has been watered down. Versions of HB 2978 passed both the House and Senate, and the bill will go to conference committee. The bill would require all businesses receiving a tax credit to show that the credit would directly benefit the state and create or retain at least one job. It would require the State Auditor to examine each tax credit and assess the costs and benefits to the state. The original version of the bill banned transferable tax credits, but this was removed. HB 2979, a stand-alone effort to end transferability of six tax credits, failed in Rep. Dank’s subcommittee.
Meanwhile, a parallel debate on tax expenditures has been wrapped up in the push to reduce or eliminate Oklahoma’s income tax. Early versions of the various tax cut bills all sought to eliminate a long list tax credits, deductions, and exemptions in order to partially cover the cost of reducing the top income tax rate. After an outcry from seniors, members of the military, and other affected groups, many of these cuts were scaled back. HB 3038, the income tax bill with the most recent changes, was amended by the Senate to make no changes to any tax expenditures. In its initial version, HB 3038 would have eliminated all of them.
The other income tax measure still alive, HB 3061, does still eliminate a number of credits. However, some of the largest credits targeted by HB 3061 do not go to special interests. The bill would eliminate several broad-based credits that are important to hundreds of thousands of Oklahoma families.
Looking beyond the income tax, a bill to eliminate the sales tax exemption for newspapers and periodicals failed in the Senate Finance committee. Another bill to end sales tax exemptions for newspapers, professional sports tickets, and various other purchases was authored by Sen. Mazzei but never given a hearing in his committee.
The exploding cost of tax credits for oil and natural gas production has forced lawmakers to take another look at these. When payment of these credits was deferred for two years to cope with budget shortfalls, it was estimated that they would cost the state $150 million. But when oil and gas companies submitted their claims in late 2011, the price tag turned out to be about twice as much. Under SB 1234, the state would still pay all of the credit, but the annual payout would be limited to $50 million (on top of the credits being claimed for this year). Unless the state puts a cap on credits for horizontal drilling, the cost will most likely continue to grow.
With little willingness to change tax expenditures, the legislature has to choose between dramatically scaling back their tax cut plans or busting an even larger hole in the budget. It appears they will choose the former, with many now discussing a 0.3 percentage point cut that reduces the top rate to 4.95 percent. Even this much would cost more than $140 million in the first full year. It remains to be seen whether lawmakers will reduce any tax expenditures to make up the difference.
The final income tax plan may include some changes to tax credits, but it appears that much like last year, ambitious talk of reining in tax expenditures has amounted to very little.