Report suggests tax credits end for inventors, homebuilders
About 10 years ago, Ardmore homebuilder Lance Windel was told of an opportunity: If he would build his single-family houses in a more energy efficient manner, he could receive $4,000 per house in tax breaks from the state.
Windel was skeptical but he made the switch and it paid off. He lowered his tax burden and homebuyers appreciated the energy efficiency. After the tax credit expired in 2016, he continued to build houses in an energy efficient manner.
“Today, I’m still building a much better house than I ever did because of that credit, even though I’m no longer receiving that credit,” he said. “That’s exactly what that credit was supposed to do. It got me over the hump. I would have never done that otherwise.”
As part of its thirdannual report to lawmakers, the state’s Incentive Evaluation Commission has recommended the Legislature repeal the tax break. Though energy efficient homes save Oklahoma residents a combined $55,000 on utility bills annually and cut carbon dioxide emissions by 300 metric tons, the $27.6 million in revenue state coffers have sacrificed since 2006 makes it a net negative, a state-paid analyst found.
Of the 11 tax breaks it evaluated this year, the commission voted to repeal three, reconfigure three more and retain five. The commission’s report contains only recommendations; authority to modify or end tax incentives rests solely with legislators.
Tax breaks proposed for elimination
On the chopping block is a tax break for inventors and manufacturers of new products made in Oklahoma. It has existed for 30 years, cost the state $1.2 million in revenue and predominantly benefited two international companies based here: Charles Machine Works and ThruTubing Solutions, according to the commission’s report.
“Repealing this tax exemption will have a negative effect on our company and result in less money being available for future product development in Oklahoma,” said Angie Drake, chief financial officer at Charles Machine Works. “This in turn could result in less patents being developed and fewer new products being available for sale, resulting in less taxable revenue and income tax for the state.”
Also recommended for repeal is the Quality Jobs Investment Program, which was created in 1994 to invest in businesses relocating or expanding in the state. The program hasn’t made an investment in 11 years, has received poor returns on its investment, is $3.4 million in debt and loses hundreds of thousands of dollars annually in debt payments.
One of the state’s most commonly used tax breaks, the Investment and New Jobs Tax Credit, should be drastically modified, according to the commission. It gives manufacturers a tax credit for purchasing property or hiring new employees. About $39 million in those tax credits were awarded in 2016, the latest year data is available.
One problem is its socalled carry forward provision. Because companies can save the tax breaks for use in future years, there is more than $557 million in unused credits, a large liability for the state that is only expected to grow. The program also gives companies tax breaks for creating jobs that pay as little as $7,000 per year, an analysis found.
The commission recommends the Legislature make nine changes to the incentive that would limit the carry forward provision, reduce the credit amount, restrict it to property bought for new or expanding facilities and require higher salaries to qualify.
Affordable housing credit
An affordable housing tax credit was also recommended for reconfiguration. Similar to a federal tax credit with the same purpose, it has awarded homebuilders tax breaks for adding affordable housing in counties with a population of less than 150,000. It is estimated to cost state coffers $115 million by 2024 but has increased statewide economic activity.
“Can it help with economic development? Absolutely,” said Windel, the Ardmore developer. “If you’re trying to bring jobs to Madill, Oklahoma, but you can’t get manufacturing to come because there’s not enough housing, you’ve got a problem from an economic development perspective.”
Currently, homebuilders can receive tax breaks for a decade and, because they’re transferable, can sell those tax breaks. For example, a homebuilder receiving $100,000 in affordable housing incentives every year for 10 years can sell those for $900,000 up front. The broker who purchases them makes a profit of $100,000 over time and the homebuilder gets $900,000 in immediate money for building houses.
Public Financial Management, the Pennsylvania company hired by the Incentive Evaluation Commission to analyze tax breaks, recommended ending this practice but commissioners unanimously voted to keep it in place.
They instead recommended the Legislature shorten the credit period from 10 years to five and expand the tax break to include homebuilders in counties with more than 150,000 residents, such as Oklahoma County.
“I can point to, literally, hundreds of single-family homes that I’ve built in places like Hugo and Atoka and Davis and Ardmore — Chickasha, Marietta and Duncan — because of this credit,” Windel said.
“Because of this credit, I have built hundreds of homes in those rural Oklahoma towns and their economic development folks needed them. Their population needed them.”