Better info doesn’t equal easier choices

WHEN Oklahoma lawmakers created the Incentive Evaluation Commission, they argued the group could provide credible numbers that would inform tax policy decisions. The implied message was that those decisions would also be made easier as a result. So far, the commission is providing the data lawmakers wanted, but that doesn’t always translate into easy choices.

Consider a report prepared for the commission by the Pennsylvania-based PFM Group Consulting regarding a capital gains tax break. Under Oklahoma law, the profits made from the sale of Oklahoma capital that has been held by the owner for at least five years is fully deductible from state taxable income.

From 2010 to 2014, consultants found, the tax break reduced state tax payments by $474 million cumulatively, but they estimated only $9 million in additional tax revenue was created.

“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 report said.

Spokesmen for The State Chamber and the freemarket Oklahoma Council of Public Affairs quickly pushed back, arguing the incentive still makes sense. And their argument has intuitive appeal. How will it help Oklahoma to raise taxes on those who invest in Oklahoma businesses? A higher effective tax rate could, at the margins, discourage some investment.

In several instances, the report concedes that insufficient data is available, such as when the report says “little hard data can be gathered and analyzed to determine the value of the deduction in terms of economic activity in the State.” That leaves room for doubt regarding the call to repeal the break.

Furthermore, lawmakers cannot look to repeal of the tax break as a way to quickly address ongoing shortfalls. The impact of the tax break has swung wildly. It’s credited with reducing tax revenue by anywhere from as little as $45 million in 2009 to as much as $166 million in 2007. Who knows what the impact will be next year?

Evaluators identified other tax breaks for potential elimination. They found “no evidence of increased capital investment” associated with two tax credits for Oklahoma-produced coal (one for businesses buying Oklahoma coal and another for companies that mine coal in Oklahoma). The number of coal mines in Oklahoma — seven — remains unchanged from a decade ago, but the number of people working at them has fallen from 237 to 161.

Similarly, the state provides a tax credit for insurance company “home offices,” or headquarters. In four of the past six years, the number of businesses claiming the tax credit has increased but employment at those companies has declined.

From 2011 to 2015, the state has lost $6.2 million on its Ethanol Fuel Retailer Tax Credit, which was passed in 2006 to boost the sale of ethanol-blended gasoline by artificially lowering the cost of ethanol fuel. This one’s a head-scratcher since Oklahoma isn't a major corn-producing state, so increased demand for ethanol-blended fuel does little to stimulate our economy.

Even when available information is incomplete, the Incentive Evaluation Commission has done good work in compiling data that allows lawmakers to evaluate the worth of many longstanding tax breaks. Whether lawmakers make good use of that information remains to be seen.