Key industry tax breaks in Oklahoma have more than doubled over the past four years and are now costing the state well over half a billion dollars a year, state records show.
The two dozen business tax breaks combined grew from $356 million in 2010 to $760 million in 2014. The 2014 figure is equivalent to just over 10 percent of the state’s $7.2 billion budget, and more than the state spends every year on prisons and public safety.
An Oklahoma Watch analysis shows that the growth has been fueled by incentives provided to oil, gas and wind-power producers. Together, the energy industry tax breaks reduced state revenue collections by $486 million in 2014. The other tax breaks related to areas such as job creation, the film industry and historic building rehabilitation.
Some lawmakers and advocacy groups say the lost revenue is harmful to the state, restricting its ability to invest in core services such as education and health care or to offer broad-based cuts in income or sales taxes.
“It’s the largest corporate welfare giveaway in the history of Oklahoma,” said Senate Finance Committee Chairman Mike Mazzei, R-Tulsa. “It’s going to crowd out our ability to do other levels of tax reform, other levels of lower taxes for people, small businesses and other industries that aren’t in oil and gas.”
Supporters of the subsidies insist that they help pay for themselves by generating economic growth and creating jobs. Energy industry leaders say without oil and gas production tax breaks, they would make new drilling methods less cost-effective and stifle exploration.
“My neighbors, my families, my friends are employed by those people,” said Rep. David Dank, R-Oklahoma City. “We’re doing the geology and the engineering for wells that are being drilled in Ohio and West Virginia and Pennsylvania. I want that to continue.”
Leaders in both parties have voiced concern about the growth in tax breaks and have taken steps to pare them back. Since 2010, the legislature has repealed, capped or attached “sunset” dates to several dozen business tax breaks.
According to a newly released report by the Oklahoma Tax Commission, the number of all exclusions, exemptions, deductions, credits and other tax breaks that it tracks declined from 480 in 2010 to 455 in fiscal year 2014.
But the legislature has rejected efforts to rein in others, even as the total amount of business tax breaks has soared, tightening the squeeze on state revenue collections.
“We’ve done some positive things that have never been done before … in terms of cleaning up some special-interest tax breaks,” Mazzei said. “But we’ve started some new ones that have greatly increased taxpayer-subsidized support for some special interests.”
The Tax Commission’s latest tally of “tax expenditures” adds up to billions of dollars of lost revenue every year if every kind of tax preference is considered.
Many of the biggest breaks benefit very broad constituencies and enjoy widespread popular support. An example is the sales tax exemption for prescription drugs, which reduced state revenue by $136 million in 2014.
Mazzei estimated that tax reforms already enacted by the legislature were boosting annual revenue collections by at least $100 million. They include the phasing-out of three controversial tax credit programs for venture capital investments.
At the top of Mazzei’s setback list, however, is this year’s expansion of gross production tax preferences for oil and gas production, he said. In response to intense energy industry lobbying, the legislature replaced a temporary tax break for horizontally drilled wells with a permanent tax break for all wells during their first three years of production.
Even before the change, the horizontal well tax break had soared in cost from $83 million in 2010 to $363 million in fiscal year 2014. (The 2014 figure includes $94 million in rebates paid out during 2014 for production during two earlier years when the tax break was suspended.)
It appears unlikely that the legislature would consider scaling back the gross production tax at this point. The oil and gas industry has strong support from lawmakers who say it has become the backbone of the Oklahoma economy, generating jobs and revenue that might be endangered if the tax breaks were curtailed.
Rep. Dank has been a key figure in the crusade to get rid of certain tax breaks. But he said he is a firm supporter of the gross production tax incentives because of the oil industry’s contributions to the state.
“What’s more important to me than the gross production tax is the high-paying jobs that are created in the Devon Tower, by Continental, by Sandridge, by Sampson, by Chesapeake,” Dank said.
Wind Power Credit
If the gross production tax breaks appear secure for now, another energy industry tax subsidy, the wind power credit, is in the crosshairs of reformers who say its rapid growth is imperiling state revenue collections without a big economic payoff.
In 2003, the state began providing an income tax credit to companies that built wind-powered electricity generating plants. A year later, it added wind-power facilities to the list of manufacturers eligible to receive five-year property tax exemptions. Although property tax collections go to county governments and schools, the state reimburses them for the manufacturing exemptions.
The combined cost of the wind-power income tax credits and property tax exemptions ballooned from $7 million in 2010 to $50 million in 2014, according to the Senate Finance Committee.
Supporters sold the legislature on the idea that the tax breaks were needed to help jump-start an environmentally friendly energy source that offered potential long-term payoffs to the state. Critics contend the industry generates few long-term jobs once the wind farms are up and running.
The Senate Finance Committee conducted an interim legislative study of the wind power tax breaks this fall. Mazzei said he intended to propose changes during the 2015 legislative session.
Incentives for Jobs
Another big-ticket incentive that might receive scrutiny is the Quality Jobs Program. Created in 1983, it provides direct payments to manufacturers who create new jobs by building new facilities in Oklahoma or expanding existing ones.
It, too, has grown rapidly in recent years. Direct payouts to manufacturers were $82 million in 2014 compared to $54 million in 2010.
Oklahoma’s Quality Jobs program has been touted by Dank and others as one of the best programs of its kind nationwide. But even some supporters contend it might have become too generous.
Under a 2008 amendment, for example, the partnership that owns Oklahoma City’s Thunder basketball team now qualifies for the Quality Jobs Program. Professional Basketball Club LLC received $4 million in payouts during the 2014 fiscal year.
(The Thunder’s owners include oilman George Kaiser of Tulsa. The George Kaiser Family Foundation is one of Oklahoma Watch’s principal funders.)
Even if Quality Jobs is considered a national model, companies sometimes eliminate jobs for which they have been receiving subsidies. Under the program’s terms, the state pays the companies for up to ten years. If the firms eliminate the jobs in a downsizing, the payments stop. In most cases, no payback is required.
Larkin Warner, a retired Oklahoma State University economics professor who served for years on the state’s Incentive Review Committee, said he thinks the legislature should make sure the program is kept within reasonable limits.
Yet he cautioned that Oklahoma must remain competitive with other states in providing economic growth incentives.
“We have to meet or beat the competition,” Warner said. “We could thumb our nose and say, ‘Well, we’re not going to stoop that low.’ And then along comes another state and just takes business away from us.”
No State Comparisons
Although some national organizations track state tax breaks, Oklahoma Watch could find no comprehensive data to assess how Oklahoma’s complete package of business incentives compares with that of other states.
“The trouble is, there are no standardized rules,” said Greg LeRoy, executive director of Good Jobs First, a nonprofit research group in Washington, D.C., that has been publishing state tax-break data for four years.
LeRoy said the Governmental Accounting Standards Board (GASB) recently drafted its first proposed rules for defining business incentives. But until standardized rules are adopted, no comprehensive comparative data is available, he said.
“We can’t (provide it). The data doesn’t exist in a uniform way because of GASB’s negligence. The states have resisted, too,” LeRoy said. “You get into a lot of gnarly, definitional gray areas.”
Despite the limited success of past tax reform initiatives, Mazzei said he intends to continue pushing for lower tax rates across the board and few or no special-interest tax breaks.
“The lesson we need to learn is that when we stay in the habit of picking winners and losers and helping one special-interest group over another, we fail to make progress toward what is best for everyone,” Mazzei said.
Dank said he, too, would keep pushing for more reforms.
“I think we’re winning converts,” Dank said. “I think we’re making progress.”