Tax credits are like taking candy from a baby
I’ve never met a tax credit I liked, not even the one that allowed me to live in Oklahoma for four years and not pay a dime of state income tax.
The aerospace engineer tax credit was mentioned to my husband when he was recruited. As a recent graduate, he could get a $5,000 tax credit per year for five years if he came to Oklahoma. It was a sweet deal for us. But not such a sweet deal for the state, I think.
We didn’t change our spending habits, or buy a bigger house, and we left the state before it expired. Like taking candy from a baby. Sure I felt bad, but the baby asked me to take it (and even provided a one-page form). Which brings me to Colorado. The Office of the State Auditor analyzed Colorado’s conservation easement tax credit, and in a revealing report released last week found that in 16 years, the tax credit has cost the state almost $1 billion.
Yes, it has put more than 1.7 million acres in permanent conservation status, meaning there are tight restrictions on how the land is used and developed in the future. It is intended to protect critical habitats for wild animals, endangered species and open spaces used for recreation or education. But there is a problem here. “No one in the state has bothered to evaluate whether what is being conserved is worth the lost tax revenue,” the audit says.
The typical story for tax credits reads: Lofty goal, little tangible evidence.
It’s easier to sell a $45 million-ayear tax credit to your fellow lawmakers than it is to ask them to set aside $45 million for land conservation in the annual budget alongside competing interests like K-12 education and Medicaid.
It’s close to being the same thing (except in Colorado the Taxpayer’s Bill of Rights provides a perverse incentive with caps on revenue and required refunds for the state to spend tax dollars before they come in).
Things can quickly spiral out of control, especially when tax credits are transferable, like the conservation easement. Transferable credits can be sold to someone else. Secondary markets spring up to buy and sell tax credits. These markets aren’t readily available to the common man, meaning it’s Colorado’s wealthiest getting tax breaks for no apparent reason other than that they are rich enough and savvy enough.
In 2008, in response to reported abuses of the conservation easement tax credit, the state tightened down the appraisal process to ensure that appraisers weren’t over-estimating the value of land put into an easement to boost the value of the tax credit.
In 2010, lawmakers capped the program so that only the first $22 million per year in tax credits claimed would be accepted. In 2013 the cap was raised to $34 million and in 2014 raised to $45 million. There have been critical audits all along the way.
Everyone out there has a tax attorney adept at making the most of the law for their clients.
What was once a self-administered program has become a small bureaucracy funded by fees on those seeking the tax credits. The Division of Real Estate has a nine-member commission that makes the final determination on the tax credits. It takes 5.8 fulltime equivalent staff to administer the program. It is funded by about $205,000 in fees.
Protecting our lands in Colorado is critical, but the state should have a priority system for these lands and a line item within the budget. When it comes to conservation, some lands are more critical than others. We need to be strategic in how we use our limited resources.
Lawmakers are likely to take a look at these tax credits during the 2017 session that starts next month.
But tax credits, once born, are a stubborn thing.
After all, I told anyone who would listen for four years in Oklahoma that there were major flaws in the aerospace engineer tax credit.
Yet it was renewed in 2014 with great fanfare and little public scrutiny to the overall cost of the program, other than big claims that the credits brought Boeing and other employers to town with the lure of affordable living.
I didn’t buy it then, and I don’t buy it now.