Credits, exemptions, S.Q. 744: Walking through the weeds

In early stages of the campaign for State Question 744, the controversial union-sponsored ballot initiative on next Tuesday’s ballot in Oklahoma, advocates estimated the cost of implementation at $850 million.

When the initiative petition drive to qualify the issue was in early stages two years ago, at a kickoff press conference in a school cafeteria in the MidDel system, this reporter asked the head of the Oklahoma Education Association what percentage of the total state budget would belong to K-12 education if the measure passed, and what the cost would be after full implementation.

Roy Bishop, the OEA leader, said he would secure that information and provide it. Several weeks later the question was posed again in a phone message left with Bishop’s assistant. The answer was never forthcoming from the state’s largest labor union. The question was not repeated a third time.

The core question about State Question 744 remains how much it would cost. The $850 million figure is rarely used by advocates these days, while opponents of the proposition say the cost would be $1.7 billion in the third year of phased-in implementation.

While advocates say 744’s costs could be covered with growth revenue, even a robust economy would leave the state government short of the required income, in the estimate of state Treasurer Scott Meacham. No less an advocate of public school funding than David Blatt of Oklahoma Policy Institute has said the pro-744 estimates are far too optimistic.

Leaving aside the cost issue, on which there is wide diversity but at least a range of specific figures, in the view of many journalists and policy analysts, nearly as significant is a second question: How the state could finance – beyond growth revenue -- the initiative’s core requirement. That is the requirement is that Oklahoma’s per pupil spending be brought within three years to the regional average, and then maintained there.

In recent weeks, advocates for S.Q. 744 have asserted the measure could be paid for with elimination of, or restrictions on, the use of various tax credits and exemptions. In recent days, CapitolBeatOK has examined state reports and data in an attempt to outline the extent of potential “cost recovery” to be found in credits and exemptions that some deem “tax expenditures.”

With no pretence at an exhaustive or final analysis, essential findings are summarized below.

The assumption of advocates for S.Q. 744 is that "special interest" tax credits can be repealed to bring in more money for K-12 schools. To be sure, on this news website, stories have documented examples of particular credits or exemptions that were, in practice, of marginal economic value.

Members of both parties have at various times advanced particular credits or exemptions that raise concerns of equity, justice or fairness.

Conversely, members of both parties have defended the efficacy of particular tax credit programs or exemptions as beneficial to heritage industries, including natural gas or quality of life.

A walk through the Oklahoma Tax Commission’s Tax Expenditure Report, released on October 1, finds many credits or exemptions, line items that totaled over $10 million each. Because the total needed to finance is by most estimates large -- $850 million, at least $1.7 billion, or some say closer to $2 billion -- the bigger tax credits and exemptions are the ones worth studying.

In all, 39 of the credits/exemptions, taken together, total over $4.2 billion. However, three of those either can't be repealed or would have no effect.

Specifically, the tribal cigarette tax exemption is part of a legal compact, so that $34 million exemption has to stay unless the compact is renegotiated. Second, the sales tax exemption for the State of Oklahoma ($92 million) and it's political subdivisions ($114 million) would net nothing if repealed – in cash terms it is  taxes paying a state tax. Taking away these two “big ticket items” still leaves some $4 billion.

Complicating the picture is the fact that poor people, generally not considered a special interest, benefit from some of the relatively significant credits. These include the Earned Income Tax Credit ($32 million, Child Care/Child Tax credit ($29 million) and Food Stamp sales tax exemption ($39 million).

It is not clear that advocates of State Question 744 want to tax government retirement benefits ($36 million), Social Security benefits ($89 million), private retirement benefits ($30 million) and military retirement benefits ($15 million).  Disabled veterans can access a sales tax exemption worth $15 million, and that is an exemption with wide support.

This exercise eliminates as unlikely to face repeal tax credits/exemptions that total $525 million.

For income earners, the standard deduction and personal exemption on Oklahoma's income taxes total $870 million. On the assumption (perhaps  misplaced) that advocates of S.Q. 744 would not consider the standard deduction and personal exemption fair game to finance the initiative’s provisions, the original $4.2 billion in potential revenue has declined by $1.3 billion.

There are tax credits and exemptions that could be criticized but which do not immediately seem unreasonable, including not taxing a parent who gives a car to his or her child ($18 million). There are credits that prevent double taxation, including an income credit for taxes paid to another state ($34 million) and the motor vehicle tax exemption for used cars sold by a dealer ($61 million). Another credits a person who moves to Oklahoma with a car bought in another state ($14 million).

The Estate Tax has been fully repealed, meaning that reenactment would require a super-majority of the Legislature or a vote of the people to put back in place the $51 million exemption for that purpose.

By this point, a total of 18 tax credits and exemptions have been  sketched, worth $1.5 billion in the list of potential cuts.

Some big ticket items are still “out there,” but can scarcely be described as slam dunks for repeal. These include possible taxes on utilities. The exemption for residential natural gas ($118 million) and water/trash/sewer service ($13 million) might be described as a special interest benefit by some, but others would consider it reasonable.

The same could be said for the sales tax exemption on drugs ($132 million) and medical devices ($11 million), especially for those who earn income and provide their own health care coverage. State Question 744 undeniably aims to help education, so the $19 million sales tax exemption allowed for tuitions might not be the first candidate for repeal.

The following 16 tax credits and exemptions round out the rest of the picture: Oklahoma Investment/New Jobs - $28 million; Clean-Burning/Electric Cars - $16 million; Venture Capital - $12 million; Qualified Small Business Capital/Ventures - $11 million; Rural Venture Capital/Small Business - $37 million; Oil & Gas Depletion Allowance - $16 million; Oklahoma Source Capital Gain - $77 million; Newspaper sales tax exemption - $17 million; Advertising sales tax exemption - $42 million; Agricultural Sales tax exemption - $65 million; Sales to Manufacturers - $1,745 million; Commercial Airlines or Railroads - $52 million; Livestock Purchased Outside State - $60 million; Horizontal well drilling - $83 million; Ultra Deep Well Drilling - $25 million; and Gas Marketing Deduction - $31 million.

Of course, the exemption for sales to manufacturers is a big ticket. More on that below.

Like them or not, several of this final list are part of the “tool box” of economic incentives the state government draws upon in efforts through the state Commerce Department and other economic development arms to entice business start-ups, relocations or expansions.

State officials reflect that one big-looking item ("Sales to Manufacturers") -- making up nearly $2-billion in tax credits --  is a sales tax exemption to manufacturers for raw materials. If a business makes “widgets” from steel, it does not pay sales tax on the steel because, in the end, the widgets themselves will be taxed.

That particular exemption is on the books in nearly every state that has a sales tax. Eliminating it would put Oklahoma manufacturing at quite a disadvantage.

The rest of the picture adds up to a little over $500 million. To touch on a couple of particulars, it seems unlikely that agriculture, natural gas and oil would be candidates, in Oklahoma at least, for punitive new taxation in the form of zeroed out exemptions.

Within each of the line items, there are particular examples of exemptions and credits awarded that were unwise, yet those examples are not immediately obvious as reasons to undo the entire structure of tax exemptions and tax credits.

The debate over State Question 744 aside, proposals have been made for a methodical stem-to-stern study of Oklahoma’s tax credits and exemptions. It seems more likely in the past that will actually happen, but as this essay outlines, the choices and tradeoffs presented -- in  government revenue versus economic activity flowing from tinkering with most proposed changes -- will be challenging.