Cap­i­tal gains tax de­duc­tion en­er­gizes par­ti­san di­vide

The Oklahoman (Sunday) - - FRONT PAGE - BY RANDY EL­LIS AND CHRIS CASTEEL Staff Writ­ers rel­lis@oklahoman.com

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.”

Agri­cul­ture con­cerns

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.

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