Budget & Tax
Curtis Shelton | January 28, 2020
Aerospace tax-credit debacle points up need for reform
“Nearly 1 in 4 aerospace industry engineers have received letters recently demanding they repay Oklahoma thousands of dollars after state auditors determined they’re ineligible for a popular tax credit under the state’s exacting standards,” Janelle Stecklein recently reported.
Some of those engineers, meanwhile, said they feel they were misled by what seems to be a bait-and-switch initiative organized by state leaders to lure them to move to Oklahoma in exchange for a lucrative tax incentive. The problem, they said, isn’t the program itself, but the qualifying conditions are so complicated and convoluted they make eligibility unclear. In some cases, employers don’t even understand who is eligible.
This unfortunate episode highlights the problem with many tax incentive programs, namely, that the government is putting its finger on the scale. Why has the government determined that engineers in the aerospace industry should get to keep more of their money than engineers in other fields? Is that really fair?
Of course, the rationale behind the tax credit is to spur growth in the aerospace industry and the wider economy as a whole. The idea is that taxes matter, whether we’re trying to discourage behavior (e.g. tax hikes on cigarettes) or encourage growth (e.g., the federal tax cuts in 2018). And these sorts of business tax incentives are a popular political strategy; one new study found that government spending on incentives increases during election years.
But instead of picking winners and losers through the tax code, the government should go about the hard work of reforming the tax code so that all taxpayers can prosper together. There is plenty of evidence, highlighted by How Money Walks, that states with no income tax have seen more growth than high-tax states. If the government already admits that lower taxes through incentives can create growth, why not lower the income tax rate for all Oklahomans instead of just a few?
Lower rates would allow Oklahoma to better compete with neighboring states, particularly Texas. Reforming the tax code may take more work than creating a few small incentives, but it would put Oklahoma in a better position nationally for long-term growth.
Policy Research Fellow
Curtis Shelton currently serves as a policy research fellow for OCPA with a focus on fiscal policy. Curtis graduated Oklahoma State University in 2016 with a Bachelors of Arts in Finance. Previously, he served as a summer intern at OCPA and spent time as a staff accountant for Sutherland Global Services.