Under the Microscope: Task Force begins work scrutinizing tax credits

The Oklahoma tax code is riddled with some 450 ‘tax expenditures’ that reduce state funds by exempting or giving back tax payments for favored groups and activities. Despite widespread rhetoric about the need for serious reform of  tax expenditures, eliminating tax breaks was “the dog that didn’t bark” this past legislative session. The Legislature did, however, pass HB 1285 to create a Task Force for the Study of State Tax Credits and Economic Incentives. The Task Force is charged with examining the justification and economic impact of all state tax credits and incentives.

On a sweltering Friday in mid-July, an overflow crowd of policymakers, lobbyists, reporters, and policy analysts packed the fourth floor committee rooms at the State Capitol for the Task Force’s first meeting. The meeting began with opening statements from the ten Task Force members, which includes legislative leaders from both parties, statewide officeholders, and Cabinet secretaries. Their remarks emphasized that in a time of severe fiscal constraint, expenditures through the tax code must be held to the same scrutiny and accountability as direct budgetary expenditures. In particular, Task Force co-chair David Dank stressed that decisions about tax credit programs must be guided by a recent Attorney General’s opinion on the subject. As we discussed in this blog post, then-AG Drew Edmondson laid out a three-part test to determine the constitutionality of a tax credit.  The AG’s opinion cast doubt on several existing tax credits, particularly transferable tax credits where entities purchasing a tax credit are not held to the same standards and conditions as those who initially qualify for and receive the credit.

The Task Force began its work by reviewing one of the tax credits singled out for concern in the Attorney General’s ruling: the credit for qualified rehabilitation structures, informally known as the historic preservation credit. This credit is allowed for rehabilitation of certified historic hotels, newspaper buildings, or other historic structures, in an amount equal to the federal credit, which is 20 percent of allowable costs. The Oklahoma credit is transferable and can be used to offset tax liability over ten years. According to the state’s OpenBooks website, the credit was claimed in FY ’08 on 28 income tax returns for a total of $671,000; that same year, however, $8.1 million in historic rehabilitation credits were claimed against the insurance premium tax. An Oklahoma Watch article identified Tulsa-based Community Care HMO as the most aggressive purchaser of building rehabilitation tax credits, using them to reduce its state tax payments by $10.3 million over three years.

In his opinion, the AG voiced concern about the statutory language on the transferability of the historic rehabilitation credit:

¶26 This transfer statute that does not permit enforcement of the three elements required to support a constitutional state economic tax credit against a transferor is infirm, for it would permit the granting of an economic development income tax credit to the transferee taxpayer without recourse, in instances when the transferor failed to provide the promised consideration, and in instances in which the tax credit either did not serve a “public purpose,” or did not have adequate protections and safeguards attached to it.

In other words, while the law contains provisions for holding a company engaged in historic preservation projects to certain standards, that accountability is lost once the credit is transferred, making the statute unconstitutional in the opinion of the Attorney General.

Beyond the transferability issue, Chairman Dank  expressed strong skepticism that providing public subsidies to private developers for commercial development represents the proper role of government, especially in situations where qualifying commercial hotels are competing against non-subsidized developments. The credits were defended by Bob Blackburn, director of the Oklahoma Historical Society, and developers and business leaders associated with the Skirvin Hotel in Oklahoma City, the Mayo Hotel in Tulsa, and other projects. Proponents spoke to the importance of the tax credit for the financing of historical renovation project and to the impact that successful projects have had in transforming abandoned and blighted properties into commercially-feasible, revenue-generating enterprises that help lift up entire city centers and Main Streets. In total, 24 projects have been certified as eligible for state rehabilitation credits since FY 2005.

The first Task Force meeting also devoted several hours to an insurance industry tax credit. Insurance companies are allowed to claim tax credits equal to one hundred percent of the mandatory fees they are assessed to two insurance guaranty funds that pay claims to policyholders in cases where insurance companies fail. The Insurance Department paid out an average of $11.6 million in credits between 2007 and 2010. Industry spokesmen argued that without the credit, they would be forced to raise insurance premiums and some might issue fewer policies or leave the Oklahoma market entirely. Rep. Dank and Rep. Scott Inman questioned, however, why the cost for the assessment should be fully borne by Oklahoma taxpayers rather than by companies and their policyholders.

The meeting made clear that this will be a long, often tedious, sometimes contentious process as the Task Force works to meet its year-end deadline for submitting a final report. But for those looking for serious scrutiny and purposeful action to stop the runaway train of tax expenditures, the initial signs indicate clearly that this Task Force is serious about meeting the challenge.