Giving credit where credit is due

• February 15, 2011
  
  

  Lawmaker pushes for review of state’s tax incentive program
  By M. Scott Carter
  The Journal Record
  2/15/2011

  OKLAHOMA CITY – It was supposed to fly people from Tulsa and Oklahoma City to major cities throughout the country.

  It was supposed to bring nonstop jet service to Oklahoma’s two largest cities.

  It was supposed to help the economy.

  But by the time the dust settled, Great Plains Airlines had blown through $27 million in state-supplied tax credits and, in the end, went bankrupt. In July of 2008, the city of Tulsa ended up paying $7.1 million to settle a lawsuit with Great Plains’ creditor, Bank of Oklahoma.

  Great Plains wasn’t the only one, but if state Rep. David Dank has his way, it will be the last.

  Fly me into space
  Sometime during July of 2001, a company that promised to take Oklahomans on suborbital flights was founded. Three years later, Oklahoma City-based Rocketplane was designated as a Qualified Space Transportation Provider by the state of Oklahoma and awarded millions of dollars in transferable state tax credits to initiate operations, develop facilities and recruit the required engineering staff.

  In July of 2007, state records show that Rocketplane’s fortunes had turned sour and most of its employees, including its chief technical officer, had been laid off. The company also failed to meet a funding deadline as part of the requirement for a National Aeronautics and Space Administration (NASA) contract and struggled when allegations arose that millions of dollars from an $18 million state tax incentive had been diverted for other projects.

  Late in 2007, NASA pulled out of its contract with Rocketplane and by 2009, Rocketplane had vacated its Guthrie, Oklahoma City and Burns Flat facilities.

  Lack of transparency
  For several years now, several state lawmakers have complained about the growth of Oklahoma’s tax incentive program. In 2006, members of the House Revenue and Taxation Committee voted to put a temporary moratorium on one tax credit program that grew from $2 million to $66 million in one year.

  Other lawmakers and lobbyists praised the programs. Many pointed to the state’s Quality Jobs Act, touting it as the vehicle that allowed Oklahoma to compete with other states and to attract new jobs and businesses.

  And while state documents show the QJA has been successful in generating jobs here, other tax credits – including many of those that are transferable – haven’t proven as successful.

  Part of the problem, some lawmakers say, is the lack of transparency.

  Asked if the state had a system to monitor how many jobs were created by each individual credit, House of Representatives Media Division Director Ray Carter said oversight “varies depending on each tax credit.”

  “Not all of the tax credits require job creation,” Carter wrote in an e-mail to The Journal Record. “Some are based on expenditure of funds in pursuit of a business enterprise, but (do) not require a specific number of jobs to be created.”

  In addition, those credits can continue for years.

  Although most are designed to be temporary, Carter said it’s not uncommon for the Legislature to amend the statutes to extend the number of years a tax credit can be claimed.

  “Sometimes the years are extended and sometimes not,” he said. “Tax credits can usually be carried over from one tax year to another – to the extent the credit cannot be used against a liability, each tax credit will have some type of “carry-over” period. Five-year carry-over periods are common.”

  Legislative oversight
  By 2009, more stories that detailed the abuse of the state’s system of transferable tax credits were bubbling to the surface. On July 31, 2009, the Federal Deposit Insurance Corp. (FDIC) seized the First State Bank of Altus and there, investigators uncovered $643 million in counterfeit loans that were used to generate $192 million in state transferable tax credits for the company Quartz Mountain Aerospace.

  But former QMA President John Daniel, in a statement published by the Altus Times, said claims that $221 million was invested in his company were not true.

  “We never received that kind of money and we never had control of and could not use those funds, which means they were never really invested,” he said.

  It was about that time that Dank began to get worried.

  With multimillion-dollar holes in the state’s budget looming, Dank and others began ratcheting up their calls for a review of the state’s tax credit system.

  Pointing to the 2008 budget, Dank said lawmakers “gave away more than $200 million in tax credits to a wide range of special interests with little or no return, minimal accountability or scrutiny and results that included only a handful of new jobs.”

  In 2007, a state Tax Commission survey noted that companies participating in the state’s tax credit program earned more than $88 million and claimed the creation of 727 permanent jobs.

  “One part of that report, which accounts for $88 million in squandered revenue, says three part-time jobs were created in the state,” Dank said. “Those wasted dollars would have done much to plug the state budget hole.”

  While the Oklahoma City Republican acknowledges that some tax credits create jobs and are good for the economy, he had harsh questions for the state’s transferable tax credits, credits that can be sold from one company to another.

  “Many other tax credits border on taxpayer fraud,” Dank said. “They include only minimal conditions for qualifying companies or industries and they call for little or no transparency or accountability.”

  The worst, he said, are simple giveaways.

  “It’s time for a sweeping review of how, where and why we grant tax credits,” he said. “And it’s time for legislation that would restrict those credits to real job creators that are audited each year.”

  A good credit
  Still, some tax credits do work and have helped generate thousands of jobs for the state.

  Take, for example, the Quality Jobs Act.

  Designed to encourage a business to locate in Oklahoma, the state’s QJA provides cash payments for companies that establish long-term, high-wage jobs, said the bill’s author, former state Sen. Ted Fisher.

  Developed during the term of then-Gov. David Walters, Fisher said the QJA fixed several problems with the state’s economic development efforts.

  “Before we had the QJA, we’d go into special session, pass some type of gift to someone. Then maybe they’d come here or not,” he said. “And if they did, fine. We’d parade around the rotunda and talk about economic development. But before the QJA there was nothing that caused them to have to perform to a certain standard.”

  “The truth is with the QJA, you don’t get paid anything until after you perform and the state has a way of monitoring the performance,” he said. “You have to create a payroll and you’d have, say, three years to get there. If you did that and if those jobs were high-wage jobs, you got cash back for up to five percent of your gross payroll for ten years.”

  Because of those checks and balances, Fisher said, the QJA couldn’t be gamed.

  “It’s not complicated when you think about it,” he said. “You’re taking a portion of the state income tax that the employees paid in and paying it back to the company.”

  Unlike many other credits offered by the state, Fisher said the QJA credits weren’t transferable.

  “For the Quality Jobs Act it’s mano-y-mano,” he said. “There’s no transfer.”

  The next step
  Faced with a $600 million budget hole for fiscal year 2012 and the announcement by Republican Gov. Mary Fallin that she would not support any type of tax increase, Oklahoma lawmakers have a limited number of tools available to write a budget.

  In addition to some one-time federal money, a transfer of funds from the Transportation Department and additional budget cuts, sources for additional revenue are slim, at best.

  Enter the tax credit.

  Armed with the chairmanship of the House’s Revenue and Taxation subcommittee, Dank said he will push for a thorough review of the state’s tax credit system.

  “I want to be fair,” he said. “I want all those people who received credits to come and justify them.”

  He said a 2010 opinion by then-Attorney General Drew Edmondson clarified many of the conditions under which a tax credit could be authorized under the state constitution.

  “It’s apparent from that opinion that some of the tax credits on the books are unconstitutional,” he said. “We’re going to go after those first and then we’re going to examine every other tax credit and see if it’s actually doing what it promised.”

  For state Rep. Mike Brown, Dank’s interest in reviewing the tax credit system is welcome news.

  “Now we have to deal with reality,” said Brown, D-Tahlequah. “And sometimes reality slaps you in the face. It’s time we took an in-depth look at the tax credit system and just how equitable it is.”

  Like Dank, Brown – a minority member of the House’s Revenue and Taxation Committee – said he would like to see a rigorous examination of the state’s transferable tax credits.

  “It seems to me if we’re going to get to the bottom of this, you really have to examine those credits,” he said.

  While Brown agrees that some tax credits have helped generate jobs, he said the state’s biggest problem is the abuse of its tax credits.

  “I have no problem with a company that’s bringing jobs here getting a tax incentive,” he said. “But I think many of our tax credits have been abused and it’s cost us hundreds of millions of dollars.”

  The House Revenue and Taxation Subcommittee will hold its second meeting on the state’s tax credit system on Feb. 21.

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