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

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

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

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.