Oklahoma Lawmakers Eye Business Tax Breaks Amid Budget Shortfall

November 10, 2009

Oklahoma gives away billions of dollars in tax revenue through hundreds of exemptions, credits and deductions that some lawmakers say the state may no longer be able to afford as it slips deeper into a revenue shortfall.

Tax breaks have been granted to manufacturers, farmers and ranchers, oil and gas producers and a variety of other groups over the years as lawmakers work to encourage economic activity.

But officials say some of those tax breaks could be suspended and others eliminated to keep revenue flowing for public education and safety programs and to state agencies that provide health care to the poor and meals to the elderly.

“Passing tax law is like making sausage – there’s no science to it,” said Rep. Richard Morrissette, D-Oklahoma City. “There is no policy foundation for these tax exemptions. It’s pure politics.”

The state imposes sales taxes on basic necessities like food, but tickets to professional sporting events – a luxury for many people – are exempt from sales taxes, Morrissette said.

“There’s something really wrong with that,” Morrissette said. “We’re at a crossroads. We need to protect people over multilateral corporations.”

State financial officials have reduced monthly budget allocations to state agencies by 5 percent due to a revenue shortfall caused by low energy prices and a slowing economy that has pushed tax revenues $388.3 million below estimated collections during the first three months of the fiscal year that began on July 1.

The shortfall is forecast to deepen in the coming months as revenue remains static and new tax cuts approved by state lawmakers kick in, said David Blatt, director of policy for the Oklahoma Policy Institute.

Tax cuts scheduled to take effect next year include the final phase of repealing the state estate tax, which disappears in 2010, as well as another increase in the standard deduction for Oklahomans who do not itemize their income taxes, Blatt said. The standard deduction currently costs $685.5 million a year, according to the Oklahoma Tax Commission.

In addition, seniors will have broader eligibility to deduct their retirement income.

“Tax cuts are still phasing in,” he said. “With some foresight the Legislature could have looked at the tax cuts that are still scheduled to take effect.”

In addition, the Republican-controlled Legislature has reduced the state income tax from a top rate of 6.65 percent to 5.5 percent in recent years. Another cut in the top income tax rate, to 5.25 percent, will take effect once revenue is projected to grow by more than 4 percent over the previous year.

Blatt’s organization estimates the income tax cut will have a revenue impact of more than $100 million and will be triggered in 2011.

Blatt said the budget shortfall could total up to $700 million for the fiscal year that ends June 30, a 14 percent decline in revenue from the previous year. Revenue will be $1.5 billion less than about three years ago – a 25 percent drop in tax collections.

The Tax Commission’s Tax Expenditure Report for 2007-2008 lists more than 300 state tax exemptions, credits and deductions and estimates the amount of state revenue that would have been collected during a fiscal year if the tax breaks did not exist.

A sales and use tax exemption for various forms of manufacturing activity deprives the state of more than $1.6 billion in tax revenue a year, according to the report. An exemption granted to wholesalers who sell items to retailers for resale accounts for another $1.5 billion.

An exemption on the sale of advertising accounts for $46.8 million in lost revenue, and an exemption on agricultural sales, including the sale of livestock, machinery and animal feed, totals $63.9 million in lost collections.

In addition, 535 companies have participated in the state’s Quality Jobs Program, which provides financial incentives for relocating or expanding operations in the state if the company creates new, well-paying jobs and offers their employees health insurance, according to the Department of Commerce.

Since the program was launched in 1993, $603 million has been paid out in benefits creating more than 418,000 jobs, according to agency spokesman Jason McCarty.

Just this year, lawmakers approved new tax credit programs to expand the number of vehicles in the state running on alternative fuels like compressed natural gas and expand the number of publicly available CNG fueling stations.

Last year, lawmakers extended an existing tax break on the payment of state gross production taxes on oil and natural gas for wells deeper than 15,000 feet.

“While we’re cutting programs and laying off state employees and reducing operating hours and seniors are missing meals, we have people claiming unlimited amounts of investment tax credits,” Blatt said. “We’ve got to be looking at expanding our revenue base.”

But some lawmakers defend tax breaks as a good way to encourage businesses and corporations to locate or expand in the state and grow the economy.

“I don’t think the answer is a blanket elimination of every single exemption, deduction and credit that’s written into the tax code,” said Rep. Randy Terrill, R-Moore, former chairman of the House Revenue and Taxation Committee. “There are some very legitimate and worthwhile reasons why you would have certain exemptions, deductions and credits.”

However, Terrill and other lawmakers said they support a proposal to impose sunset provisions on tax break programs that would force lawmakers to review how effective they have been and eliminate those that are ineffective.

“If they aren’t accomplishing their intended purpose, they should be done away with,” Terrill said.

“If they’re just lining some special interest group’s pocket rather than attracting new industry, we need to look at doing away with them,” said Rep. Doug Cox, R-Grove, chairman of an appropriations subcommittee in the House that manages the budgets of public health and social services agencies.

“I think those are on the table,” Cox said. “It’s time to do the best job of prioritization that we have ever had to do.”

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