Last week, Missouri’s Tax Credit Review Commission said the state could save as much as $220 million by dismantling some tax credit programs and modifying others. Before the Commission had time to take a breath, special interests came to the defense of their tax credits. The Commission responded, Legislators weighed in… and now it’s just a huge mess to sift through.
What are we talking about?
A tax credit is a decrease in tax liability. The decrease is given because you’re going to do something the Powers That Be think isn’t being done enough. Tax credit recipients are typically expected to create a certain number of jobs and/or secure additional investments.
What’s wrong with the way Missouri handles Tax Credits?
A lot, as it happens. Tax credits are a large liability for Missouri. We currently have 61 distinct tax credit programs. Last year alone, tax credit redemptions cost $521.5 million, and over the last 8 years, those redemptions grew from $372 million in 2001 to over $584 million in 2009, an increase of 57%. Between 2005 and 2009, tax credits grew from 5% of the budget to 7.8% of the budget.
So we’ve got two things happening each year: the amount of tax credits we’re giving out is growing at quite a clip, and we’re also seeing more tax credits redeemed each year. A joint legislative committee recently determined that Missouri had issued between $1.5 billion and $2 billion in tax credits that have not been redeemed yet, and I’ve seen quotes as high as $2.3 billion.
That’s quite a discrepancy.
If that’s not convoluted enough, the value of our tax credits is not in line with the liability they represent. In 2005, for example, tax credits were only worth 74% of the liability out on them.
Many credits are transferrable – they can be bought and sold – though the value they have in this “market” could be less than the actually liability to the state. This distorts our ability to determine whether these credits are working and to what extent they have been used.
Say I’m a developer, and I need capital. I don’t have capital, but I am eligible for tax credits – however, my tax liability is relatively low so I won’t see much more money in my pocket at the end of the year. But if I transfer my tax credits to someone with a rather large tax liability, say, a partner in the venture, then the fellow with the big tax bill gets a substantial break and I get the actual cash I need. I may, though, be inclined to sell them for less than a dollar on the dollar, since I need cash now and the tax credits have little value to me in their current form.
Another thing that is keeping everyone in the dark is Missouri’s poor reporting on the results of tax credits.
The Enterprise Zone Tax Credit is one program often lamented for its lack of accountability. According to a 2010 Auditor’s Report on the EZTC, the Department of Economic Development does not require businesses claiming EZTCs to submit proof of new jobs created or new investment put in place.
Of the 51 businesses that received Enhanced EZTCs, only 15 had been visited to verify they were doing what they said they would do. Also, none of the 158 businesses authorized to receive EZTCs since 2000 had been visited – ever.
Actual job creation with this tax credit was lower than estimated, and new investment was almost 30% less than projected. Data used by the DED to make these forecasts and analyses had a 43% error rate.
Yikes. But wait, there’s more! Missouri tax credit recipients have racked up more than a million dollars in penalties for failing to file the required annual reports.
So while some may defend that tax credits create “good” things, like jobs, we are really stunted in our ability to tell how well a tax credit recipient creates jobs. We can’t say what our total tax credit liability is. We’ve failed to even remotely predict the real cost of many tax credits. Still, these programs keep expanding year after year.
It just doesn’t add up – except as a huge subsidy that the state no longer can afford or justify.
Image by Brooks Elliot.