Budget & Tax, Education

OK House: Yes on half-billion in tax credits; no school choice

March 11, 2021

Ray Carter

House lawmakers have voted to issue more than a half-billion dollars in new tax credits and deductions with 66 percent going to the state’s largest corporations.

That action was taken even as House lawmakers sidelined a far smaller tax-credit measure that would have benefited low-income children by increasing their school-choice opportunities, even though a fiscal analysis showed that bill would actually generate a net increase of millions in education funding.

House Bill 2083 would provide corporate income-tax deductions that begin at 20 percent of total taxable income in 2022 and rise to 100 percent by 2026. The bill is expected to provide up to $377 million in annual tax breaks when fully implemented.

House Bill 2041 would provide individual tax credits that supporters said would be the equivalent of a quarter-point reduction in the state income-tax rate for filers. The bill would also make the state’s Earned Income Tax Credit “refundable,” meaning that qualifying individuals who owe no income tax instead receive cash payments from state government.

When fully implemented, HB 2041 is projected to cost $188.9 million in annual tax credits. The EITC is expected to account for just under $25 million of that total.

The two measures combined involve more than $565 million in annual tax credits and deductions once fully implemented.

Supporters said the tax breaks provided in the two bills would attract new businesses to Oklahoma, but simultaneously said the tax breaks were designed to be easily and swiftly repealed.

“These bills get Oklahoma off the short end of the short list. They help us close the deals we are losing to other states like Texas, Tennessee, and Florida,” said House Speaker Charles McCall, R-Atoka. “Businesses are exiting the coastal states because of high taxation. They are flocking to other parts of the country. We have an optics problem in the state of Oklahoma. We have a 6-percent corporate income tax rate. These other states do not. That’s the big reason they are winning and we are not closing the deal.”

“Every time we put more money into the taxpayers’ hands, we end up in turn creating more jobs and more stimulus of the economy,” said House Appropriations Chairman Kevin Wallace, R-Wellston. “There will be an offset of return of money.”

But supporters also stressed that the legislation was designed to evade the restrictions of State Question 640, which amended the Oklahoma Constitution to require a three-fourths supermajority in both chambers of the Legislature to raise taxes. Under the restriction, it takes 76 votes in the Oklahoma House of Representatives to raise taxes.

“We’re not going to cut the rate because that is something we can’t restore without 76 votes,” Wallace said.

Because the two bills provide tax credits and deductions, he said the bills are designed so they “will never” require a supermajority vote to roll back.

“Should we face a future market calamity, this reduction can also be paused or reversed with a simple majority vote,” McCall said. “I do not want any Legislature to inherit what we inherited in the 56th Legislature (2017-2018). This bill ensures that that will not happen.”

As a result, the tax breaks provided by the two bills would not provide certainty to business entities considering relocation to Oklahoma.

Opponents objected that the two bills, particularly the corporate tax breaks, would reduce funding for a variety of state entities, such as public education.

“There’s no trick or treat,” said Rep. Regina Goodwin, D-Tulsa. “This is just a trick.”

She noted that supporters cited the extreme volatility of the corporate income tax as a reason to effectively eliminate it through deductions. Goodwin said the volatility is the product of existing tax breaks earmarked for those entities.

“Yes, we appreciate our big corporations, but oftentimes corporate tax law allows loopholes where they have not been paying their fair share of taxes,” Goodwin said. “That’s the real deal.”

Rep. Monroe Nichols, R-Tulsa, said “most of the relief is going to folks who, frankly, need no relief at all.”

Supporters stressed that the tax reductions could be easily reversed.

“If it doesn’t work out, 51 votes can stop it,” Wallace said.

Because the two measures are not subject to SQ 640, a bill to repeal the tax breaks could pass with only the support of Democrats and a small faction of Republicans in the Oklahoma House of Representatives.

Even as lawmakers passed the half-billion in new tax credits and deductions, they declined to take up a bill that analysis showed would have no significant fiscal impact on the state, a program supporters say has proven a life-changer for low-income children with limited educational opportunities.

House Bill 2701, by Rep. Toni Hasenbeck, would increase tax credits for an existing state program that supports public schools and private-school scholarships. Under the bill, donors to both public schools and scholarship-granting organizations receive tax credits.

However, since schools and scholarship organizations would receive up to $2 in new funding from private sources for every $1 in tax credits issued under the bill, the program generates a net increase in education funding in Oklahoma.

While the bill would allow an additional $18.5 million for tax credits to those who donate to public schools, it would generate an overall net funding increase of up to $27.5 million for schools, according to a fiscal analysis.

The bill allows issuance of another $6.5 million in tax credits for scholarship-granting organizations. But that program also generates net savings because the cost of tax credits is less than the amount the state would otherwise spend educating scholarship recipients. Under the law, most students served by the program are eligible for the free-and-reduced lunch program.

An analysis conducted by Jacob Dearmon and Russell R. Evans at Oklahoma City University found the tax-credit scholarship program generated savings of $2.91 for every $1 in tax credits issued, and predicted that figure would rise to $3.16 in savings for every $1 in tax credits issued.

Even as lawmakers touted the tax breaks in House Bills 2041 and 2083 as necessary to compete with income-tax-free states like Florida, the scholarship tax-credit program in HB 2701 is based on a similar Florida program in place since 2001. For the 2020-2021 fiscal year, the state of Florida has allotted up to $873 million in tax credits for that program, many multiples more than Oklahoma.

The sidelining of the tax-credit scholarship measure comes as families across Oklahoma are struggling with subpar and virtually nonexistent schooling in several major districts and other serious problems across the state.

In Tulsa, school officials recently acknowledged that nearly half of students were flunking at least one class following the district’s refusal to provide full-time, in-person instruction for almost a full year, while the Lone Grove Public Schools district recently argued in a court filing that passing grades and a high-school diploma are unrelated to academic achievement, saying that “successful mastery of state-mandated core courses is not currently, and never has been, the graduation standard for students in Oklahoma public schools.”

HB 2083 passed on a 74-20 vote. HB 2041 passed on a 91-5 vote. Nearly all Republicans present voted for both bills.

HB 2701 was not given a hearing before the deadline for floor activity. There are 82 Republicans in the 101-member Oklahoma House of Representatives. It takes only 51 to pass legislation.