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This update provides an overview of the project activities to date and the draft evaluations for 2019 incentives. Key findings and recommendations for each incentive are included.
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Oklahoma Incentive Evaluation Commission Year 4 Incentive Evaluation Update PFM Group Consulting LLC. 1735 Market St. 43rd Floor Philadelphia, PA 19103 (267) 713-0700 pfm.com October 3, 2019
Today’s Agenda • Update: project activities to date. • Overview of 2019 draft evaluations. • Next steps.
Update: Project Activities to Date • The project team is on schedule for all project deliverables. • At the January meeting, PFM shared overviews of each of the incentives to be evaluated. • At the April meeting, PFM shared detailed benchmarking data with the Commission. • On August 16, PFM provided working drafts for eight of the ten incentives to be evaluated in 2019. • On August 19, PFM provided a full set of the working drafts for the ten incentives to be evaluated in 2019. • While not required by statute, the working drafts were requested by the Commission last year, and the project team has complied with that request in both 2018 and 2019. • Final draft evaluations were provided on September 27th (four) and September 30th (the remaining six).
Aircraft Maintenance Facility Tax Exemptions • Key Findings • The State’s aircraft maintenance-related sales tax exemptions are not currently in use, and the program has had no fiscal or economic impact. • Oklahoma plays an important role in the national aviation maintenance industry and ranks 12th among states for associated economic activity. • Oklahoma offers a robust package of incentives to aerospace companies. • The State’s aerospace manufacturing industry attractiveness ranked 30th among states in 2019 (declining from 20th in 2018). • Recommendation: Reconfigure • Consider the policy goals of the exemptions and modify them accordingly. • Explore the adoption of targeted tax preferences employed in other states, including Georgia, Indiana, Michigan, Missouri and North Carolina.
Spaceport Tax Exemptions • Key Findings • The State’s spaceport tax exemptions have never been used, and the program has had no economic or fiscal impact. • Oklahoma has one of the 11 non-federal facility spaceports in the U.S. • It has been a decade since it was used for spaceflight testing. • Oklahoma’s space industry employment is 33 percent more concentrated as a share of total employment than for the nation as a whole. • The space economy is expected to grow exponentially over the next several decades. • Recommendation: Reconfigure • Support space-related startups with incubator/accelerator services, and develop and expand supplier relationships. • Extend liability protections to those involved in spaceflight activities.
Railroad Modernization Tax Credit • Key Findings - There is a need for additional private investment in Class III railroad tracks within the State. - Credit use to reduce tax liability fluctuates from year to year. - In the years following the implementation of the credit, short line derailments have decreased. - The program results in increased statewide economic activity, but the net impact is negative. - Credits are frequently transferred by railroad companies to other taxpayers. - A few beneficiaries make up a large majority of total claimants. - Evaluations of similar programs are generally positive but have yielded mixed results. • Recommendation: Retain - Consider making the credits refundable instead of transferrable. - Standardize reporting to improve data collection and analysis. - To evaluate program success, require eligible recipients to provide additional information about eligible projects.
Rural Economic Action Plan (REAP) • Key Findings • The State’s two REAP funds are competitively awarded and appear to be in demand. • REAP funds do not appear to impact quality of life measures, but data related to certain evaluation criteria is not collected by program participants or administrators. • REAP grants increase statewide economic activity, but the net impact on state tax revenue (versus the grant expenditures) is negative. • A traditional economic impact analysis does not capture the full benefits of improving infrastructure. • Other state approaches include focusing on directly incenting businesses in rural areas. • Recommendation: Retain • Increase REAP funding and/or pair REAP funds with other rural economic development strategies. • Eliminate split sharing provisions. • To measure program success, require communities to provide additional information regarding impact of REAP-funded projects.
Local Development and Enterprise Zone Incentive Leverage Act • Key Findings • Oklahoma City is this incentive’s primary (and nearly sole) beneficiary. • To ensure revenue neutrality, the Department of Commerce calculates a net benefit rate for each project as required by law. • Based on standard econometric multipliers, it is reasonable to estimate the State captures an amount equal to or greater than the incentives offered under this program. • Developers typically receive other incentives in conjunction with this program. • The incentive is relatively uncommon among states. • Very limited data is available regarding the program’s use to aid in its evaluation. • Recommendation: Retain • Increase program appeal and usage beyond Oklahoma City. • Improve data collection, including employment, capital investment and other impacts associated with enterprise zones (such as changes in assessed value).
Computer Services, Data Processing and Research andDevelopment Tax Exemption • Key Findings • The exemption has not been used in the last five fiscal years. • It may be difficult for data centers to meet job creation requirements. • Data center investment may generate increased property and sales tax revenue, but it generally does not create a significant number of new jobs. • Research and development firms are likely choosing the Quality Jobs Program or Small Employer Quality Jobs program instead of this incentive. • Recommendation: Repeal • This incentive has become unnecessary due to the availability of more generous and easier to use incentives.
Construction Materials Tax Exemption • Key Findings • The exemption has not been used in the last five fiscal years. • It is likely that eligible firms would choose to participate in the Quality Jobs Program instead of this exemption. • The documentation required to claim the exemption as a refund may be burdensome. • Recommendation: Repeal • The Quality Jobs Program has likely made this program (at least in terms of actual use) unnecessary.
Economic Development Pooled Finance • Key Findings • Projects that have received financing through the program are expected to create 4,269 jobs and make capital investments of $1.5 billion. • Since FY 2011, $86.9 million in withholding tax revenue has been foregone by the State as part of the program. • The average wage of new jobs associated with Economic Development Pooled Finance projects is $33,447. • Over the past five years, the average number of years required to recoup the incentives offered was three years. • No pool funds have been used for local government infrastructure projects. • Recommendation: Retain • Add a clawback provision requiring a company to repay all captured withholding taxes if it ends operations in the State prior to the end of the expected repayment period. • Establish regular reporting of awards and costs associated with the program.
Oklahoma Seed Capital Fund • Key Findings • From 2008 to 2018, $22.9 million has been invested in 37 companies. The most common OSCF investment recipients are companies operating in the biopharmaceutical or computer software industries. • The program invested $22.9 million between 2008 to 2018, received $9.1 million in repayments, and generated an estimated $16.7 million of tax revenue for the State, creating a net fiscal benefit of $3.0 million. • Oklahoma ranks low among nearby states and the nation in terms of venture capital funding disbursed. • The administration of the program is aligned with many best practices for government-supported investment funds. Startup Lifecycle
Oklahoma Seed Capital Fund (continued) • Recommendation: Retain • Improve data collection and reporting. • The current annual survey data collected by i2e can be improved by relating job growth, capital investment, and profitability growth to the timing of initial investment.
Training for Industry Program • Key Findings • A total of 10,166 employees received training through TIP from FY 2014 through FY 2018. • Companies have received $4.8 million in reimbursements for training costs from FY 2014 through FY 2018. • Wages of trainees vary widely. The overall average annual wage associated with jobs that received TIP training was $37,976, but hourly wages of jobs receiving training ranged from $8.50 to $59.95 • From 2014 to 2018, the project team calculated a net benefit to the State from the program of $62.9 million. • Recommendation: Retain • Establish a minimum wage requirement or weighting criteria. • Collect data regarding wage increases and employee retention following training. • Require applicants to demonstrate the need for program funding. • Require applicants to demonstrate the potential for trainee retention and career progression.
Pew State Tax Incentive Evaluation Ratings (August 2019):Oklahoma Still a ‘Leading’ State Pew State Assessment 2017 Source: Pew Charitable Trusts: State Tax Incentive Evaluation Ratings
Next Steps • Under the current schedule, the next Commission meeting will be in two weeks (October 17). • As required by statute, the Commission must hold at least one public hearing between October 1 and November 30. • By December 15, the Commission must provide its written report to the Governor and the Legislature. • By December 31, the Commission must provide its schedule of incentives for review in the next four year period. • PFM’s contract with the State expires with the end of this evaluation cycle.
