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Nov 08, 2009 (Tulsa World - McClatchy-Tribune Information Services via COMTEX) -- As senior citizens rally at the state Capitol for hot meals, schools contemplate layoffs and the Oklahoma Highway Patrol reduces the number of troopers on the road, more than $100 million a year is diverted from the state treasury before it is even collected.

State tax credit programs, most of them instituted over the past two decades in the name of economic development, have cascaded into a potential liability to the state likely in excess of $500 million, a review by the Tulsa World shows.

The largest tax credit program, intended to spark economic investment in rural Oklahoma, in many cases appears to have benefited businesses with Tulsa and Oklahoma City addresses -- businesses that in some cases may exist only on paper.

"My primary interest is what kind of jobs, and what kind of benefits to the taxpayer, are accruing from these programs," state Sen. Mike Mazzei, R-Tulsa, said last week. "Put simply, are the taxpayers getting their money's worth?"

It's a question Mazzei and others have been asking for years. Critics say the programs have little or no oversight and have been frequently abused. A legislative task force is digging into them, and at least one legislator thinks some have been used to perpetrate outright fraud.

But economic development specialists say the programs are critical to enticing investment in the state and, when properly used, save and create thousands of jobs ranging from coal mining to caddying.

Tax credits are created by the Legislature to

encourage investment or participation in certain activities. Typically, the credits are for 20 percent to 50 percent of original investment. Most can be redeemed over as many as 10 years.

Most of the programs are relatively small. Volunteer firefighters get a $200-a-year credit. There's a tax credit for raising "specially trained canines" and one for installing dry fire hydrants.

Three of the largest programs, however, have generated almost $418 million in potential tax credits in just the past three years. The amount actually claimed is more difficult to determine, but Rep. Mike Reynolds, R-Oklahoma City, a legislative gadfly frequently targeted by business interests, recently put the figure at $466 million for just two of the three.

Credits redeemed can exceed credits generated over a period of several years because they can be carried forward. That's one reason credits from individual investments are difficult to track.

The most controversial tax credit programs were created to encourage venture capital -- investment in high-risk, high-reward enterprises. The oldest, called the venture capital credit, is being phased out, but the rural small business venture capital and small business capital programs are bigger than ever.

The three attracted almost $1.6 billion in investments from 2006 to 2008, with two-thirds of that going into the rural program. The rural program's popularity can be simply explained -- it returns a 30 percent credit, compared to 20 percent for the other two.

Reynolds, though, says most of the target companies have never taken out workers' compensation insurance or filed with the employment security commission, an indication they've never had any employees. Although the companies are supposed to file annual reports with the Oklahoma Tax Commission, the financial sections of the report are considered confidential.

To receive the tax credits, investors must deposit money with an approved venture capital fund, which then invests in a "target" entity. When the target entity meets certain financial measures, it triggers the tax credits. The tax credits are distributed to the investors, which can be individuals or, most often, legal entities such as corporations, trusts or limited liability companies, commonly called LLCs.

LLCs have attracted the attention of legislators and regulators because of reports that potential investors have been told they can receive $3 in tax credits for every $1 they invest.

According to Mark Harter, assistant general counsel of the Oklahoma House of Representatives, LLCs are unique in that the allocation of tax credits among the company's investors does not have to be proportional to the amount each invests. Under this scenario, an investor could put $100,000 in a company theoretically capitalized at $1 million but receive all its tax credits -- as much as $300,000 through the rural venture capital program.

This has led tax-credit critics such as blogger Nick Baker, known as "The Prowling Owl," to conclude some LLCs are operating fraudulently.

"The tax credits started out small," Baker said, "but they tinkered with it here, and tinkered with it there, until it morphed into a monster."

Randy Krehbiel 581-8365 randy.krehbiel@tulsaworld.com

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Randy Krehbiel

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