Two tax-credit programs now under intense legislative scrutiny could mean some of Oklahoma’s wealthiest taxpayers, both individuals and corporations, will pay no state income taxes for up to 10 years, officials say.
Under the program, insurance companies also qualify for a break on their premium taxes if they make investments in small companies, and beginning July 1, oil companies also will qualify for reducing their gross production tax liability.
Some lawmakers say the program is definitely being abused. They are trying to close a loophole in law to prevent a potential loss of hundreds of millions of dollars in state revenue through investors making exorbitant profits while not necessarily creating any new jobs.
The Tax Commission is estimating the program will cost $66 million for the 2005 calendar year and the revenue loss to the state will likely go much higher in succeeding years if the program is not altered.
Officials, including Gov. Brad Henry, have said some investors have found a way to manipulate the tax credit programs in “a shell game” that nets profits of 100 to 500 percent over a period of time.
Tony Mastin, director of policy at the Oklahoma Tax Commission, said a corporation or individual could make enough money in tax credits to completely offset their tax liability and continue that practice for up to 10 years.
The program was designed for investors to get a 20 percent tax credit on non-rural small business projects and a 30 percent tax credit on rural projects.
Scott Meacham, state treasurer, said the loophole in the law that officials want to close allows “a whole lot of borrowed money” to be combined with a smaller amount originally invested to start up a business.
“That can result in taxpayers receiving a tax credit of two or three times the amount of their investment without really caring about the performance of the company being invested in because they are getting these large tax write-offs anyway,” Meacham said.
Rep. John Nance, R-Bethany, said the fact that the law allows investors to be anonymous causes him concern.
“It is a money-laundering scheme and you can’t tell who these people are,” said Nance, a retired special agent in the Internal Revenue Service’s criminal investigative division. “It may be strictly a shell game all the way.”
Meacham and others say the tax credit program is needed to generate jobs, but must be refined to stop a drain on the treasury that would hurt education and other vital state services.
In one example, the treasurer said, investors could put in $10 million for a rural project and a company associated with the investors could borrow $115 million. A 30 percent tax credit could be taken on the $125 million total, resulting in tax credits of $37.5 million, over three times the original investment.
Henry has issued an executive order to put an administrative roadblock in the path of what he terms as inflated tax credits.
A bill on the House calendar would place a moratorium on tax credits, but Sen. Ted Fisher, D-Sapulpa, said what is needed is new language correcting the ability of investors to take advantage of the program without making a good-faith effort to create jobs.
Fisher, the original sponsor of the program, said it worked well its first three years, costing taxpayers only $2 million a year before tax attorneys found a way to exploit the law.
He said other states have had similar problems, including Louisiana, where he said credits rose from $17 million to $340 million in the space of a year before an emergency rule was issued in 1999 stopping transfer of the tax credits.
In Missouri, Fisher said, an audit of a similar program found that $140 million in tax credits were doled out while only generating $23.6 million in projected revenues and creating an average of 293 projected jobs over 15 years.
He said he wanted the program to work and is concerned that no one has come forward and told him about local projects that are working well and creating jobs.
“My door is always open. I want to hear these success stories,” Fisher said. “We need to help small business and we need to help rural Oklahoma. That is what these programs were targeted for.”
Only one project using the state tax credit program has had publicity. It is Quartz Mountain Aerospace Inc. of Altus, which is gearing up to produce planes to be used in flight training.
John Daniel, president of the company, said the company has 37 employees and is still hiring and should have up to 100 by the end of this year and 300 by the end of 2007.
Daniel said his company has had all forms of financing, including private investors who did not get tax credits, funds from the City of Altus and state tax credits.
He said he has read of alleged abuse of the state tax incentive system. “I hope we don’t get tarred with the same brush because we have created jobs and will continue to create jobs,” he said.
Paul Doughty, president of Altus Ventures, LLC, said about $7 million of the $66 million tax liability mentioned by the Tax Commission came as result of tax credits growing out of the Altus project.
Doughty said over three years about $20 million in state tax credits will be used toward the Altus project, including money still in the pipeline. He said a similar amount has come from other investors and the City of Altus.
He said investors using state tax incentives are getting about a 2-1 return on their money. That’s considered a generous return by any measure, but not as good as many think because it raises the investors’ federal tax liability, Doughty said.
“We’re doing good stuff; we’re not doing bad stuff,” he said.
“The Tax Commission tells us there are some funds out there that are doing some crazy stuff. Everything we’ve done is totally within the bounds of the law,” Doughty said.
Neither legislators nor the Tax Commission have alleged that anything is illegal is happening under the tax credit program, just that it is being used by some investors to reap big profits up front without a lot of attention to job creation, the main goal of the program.
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