Capital gains tax deduction energizes partisan divide
What started life as a vague sentence buried in a complex ballot question has grown into a huge tax break for some Oklahomans and a target for teachers seeking more money for education.
Worth $465 million in a recent five-year period, with most of the money going to people who made more than $200,000, the capital gains tax deduction has staunch defenders in some industries, including agriculture.
But some of the people responsible for its existence — including some progressive Democrats — want to take it behind the barn and kill it.
“It generates no money and should be repealed,” said Democrat Cal Hobson, a former state Senate leader who helped author the bill that got
the deduction put on the 2004 ballot. “Folks with a lot of money are already well taken care of.”
“It needs to be repealed,’’ agreed Democratic gubernatorial candidate Drew Edmondson, who was attorney general back in 2004 and approved the ballot title for the state question.
Not so fast, says Republican Gov. Mary Fallin.
“The capital gains tax deduction, which was a tax reform measure approved in a statewide vote in 2004, is an exemption from capital gains taxes for property and business located in the state of Oklahoma,” she said. “The idea was to increase the incentive for people to invest in Oklahoma, and to put Oklahoma properties and businesses on an equal footing with other states.”
Edmondson acknowledged that the ballot language authorizing the deduction was obscure.
It was just one short, vaguely worded line tucked away in the fifth paragraph of the complicated state question which was mostly devoted to asking voters whether they wanted to restructure and increase the state’s cigarette tax by a net of 55 cents per pack to fund health programs and trauma centers.
The ballot question said only this about the deduction: “It allows certain capital gains of an individual to not be subject to income tax.”
No clue to voters
The brief mention of the deduction provided no clue to voters about who would benefit from the deduction or the significant impact that it would have on the state treasury.
Edmondson said Wednesday that he didn’t even remember the capital gains tax deduction was part of State Question 713 when he approved the ballot title. Edmondson said he also would bet that people didn’t give it much consideration.
“We gave great deference to the Legislature on ballot titles,’’ he said. “I would bet money that we just OK’d the ballot title that came out of the Legislature because that’s what we typically did . ... I would also bet that people were looking at the cigarette tax part when they voted.”
Hobson said Wednesday that Democratic lawmakers were pushing for the cigarette tax. The capital gains tax deduction was included to attract Republican House votes.
Scott Meacham, who was then-Gov. Brad Henry’s finance director, “had to give that in order to get a handful of Republican votes” for the tobacco tax hike, Hobson said.
“For me, it was an afterthought compared to what we were focusing on,” said Hobson, who described the deduction “an abject failure.”
Meacham confirmed Hobson’s account of how the tax break ended up on the ballot and said many lawmakers believed it would help the state compete for investment capital with Texas, which has no income tax.
Oklahoma’s income tax is lower now than it was then, so the deduction doesn’t provide as much investment incentive as it used to, he said. Rather than a full repeal, Meacham said he would favor making the incentive more targeted, like requiring the capital gains to be reinvested in Oklahoma to be tax free.
The capital gains tax deduction has now been a part of Oklahoma’s tax law for more than a dozen years, but many Oklahomans may not even know what it is since fewer than 19,000 Oklahomans have claimed it on their state tax returns in any given year since its inception. About 1.7 million Oklahomans have filed tax returns in recent years.
Sale of property
Capital gains are profits that a person or corporation has made from the sale of property. People often realize capital gains when they sell their homes, land, stocks, rental properties or businesses.
For Oklahoma taxpayers, profits made from the sale of land, homes, equipment and other physical possessions aren’t subject to state capital gains tax if the property has been owned for at least five uninterrupted years before its sale.
The sale of stock or ownership interest in an Oklahoma company, limited liability company or partnership also is not taxed if the stock or ownership interest has been owned for at least two uninterrupted years before the sale.
The capital gains tax deduction suddenly became a hot-button issue in Oklahoma in November 2017 when a consultant hired by the Oklahoma Incentive Evaluation Commission produced a controversial report recommending its repeal.
Over the life of the program, more than 83 percent of the benefit from the deduction has gone to individuals with income of more than $200,000, the consultant said.
State revenue reduced
The deduction reduced state tax revenues by an estimated $474 million from 2010 through 2014, while generating about $9 million in tax revenue. That resulted in an estimated net cost to the state of about $465 million, or an average of $93 million a year, the consultant said.
“The incentive overall cannot, with the data available, be credibly shown to have significant economic impact or a positive return on investment for the state,” the consultant’s report stated.
The consultant recommended its elimination.
The commission rejected that advice and voted in November to recommend that the Legislature retain the deduction.
“The whole goal of the deduction is to encourage capital investment into Oklahoma,” Lyle Roggow, commission chairman, told The Oklahoman. “That’s how we have to grow our state budget is through business growth and business opportunities.”
Repeal of the capital gains tax deduction has since become a rallying cry for striking Oklahoma teachers, who see the deduction as draining away state revenues that could support education.
OEA wants repeal
The head of the Oklahoma Education Association has called for its repeal and tried to make that one of the conditions for ending the teachers strike.
Teachers rallied around the cause, chanting for repeal of the tax break in the halls of the state Capitol while lawmakers were meeting to consider other bills.
But teacher activism on the issue has created a backlash among Oklahoma business owners, farmers, ranchers, real estate professionals and mineral owners.
“Eliminating the capital gains exemption is not a reliable way to fund core services of government, and it will make Oklahoma less competitive economically for capital investment,” said Fred Morgan, president and CEO of the State Chamber of Oklahoma.
“We have also heard numerous concerns from our members about how this would impact familyowned farms, small businesses and regular Oklahomans.”
Rodd Moesel, president of Oklahoma Farm Bureau, said his organization opposes repeal to the tax break.
“Oklahoma Farm Bureau has always and continues to support education, but placing the burden of funding our state’s schools on the backs of family farmers and ranchers is concerning, especially with farm income at a 12-year low,” Moesel said.
“Farming and ranching is a capital-intensive business, as growing food and fiber requires a large amount of capital including land and equipment.”
Travis Schnaithman, who runs a cow-calf operation near the western Oklahoma town of Garber, said agriculture would be particularly hard hit if the deduction were repealed.
“It would hit ranchers square in the teeth,” he said.
A 5 percent tax on the $800 sale of a cow is “a pretty substantial cost” for a business already operating on low margins, Schnaithman said.
The tax would also be onerous for farmers selling land and even to those selling equipment that was upgraded and worth more than the purchase price, he said.
Kathy Fowler, president of the Oklahoma Association of Realtors, said she strongly opposes repeal of the tax break.
“Investing in real estate is the best way for families to create wealth,” Fowler said. “Reinstating the capital gains tax will hurt opportunities for Oklahomans to invest in their future.”
The governor and Republican lawmakers remained resolute in their refusal to consider repeal of the capital gains tax deduction throughout the teachers strike, and the Oklahoma Education Association announced Thursday that teachers would be returning to the classroom.
The issue could resurface, however. OEA President Alicia Priest vowed Thursday that teachers would continue to press for more fundingand will support political candidates who think like they do.