Oklahoma Incentive Evaluation Commission

1. 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 April 25,2019

2. Today’s Agenda • Update: project activities to date. • Presentation of preliminary benchmarking results. • Discussion of sales tax exemptions subject to evaluation. • Next steps.

3. Update: Project Activities to Date • Project team is ahead of schedule. The Year 4 incentive overviews provided at the January 2019 meeting are the similar to the Year 3 overviews shared at the April 2018 meeting. • In February, PFM issued an information request to each of the administrating agencies and is in the process of using the data supplied to evaluate program effectiveness. • In March, the project team members met on-site with key personnel from several administrating agencies: the Department of Commerce, Tax Commission and i2E. We have also conducted phone interviews with the Water Resources Board and Department of Career and Technical Education. • Based on discussions with the Tax Commission, the project team has learned that none of the sales and use tax exemptions subject to evaluation are currently in use; this issue will be discussed later in this presentation. • In addition, the project team has completed preliminary Year 4 benchmarking and will continue to refine as needed throughout the remainder of the process.

4. Benchmarking: Oklahoma Seed Capital Fund • The Oklahoma Seed Capital Fund provides concept, seed and start-up equity investments to Oklahoma’s innovative seed-stage businesses. The Fund, administered by i2e, makes investments ranging from $100,000 to $1,000,000. • The retention of early/seed stage companies is a concern for many states. States take different approaches to increasing the supply of capital in order to retain these companies: • Arkansas, Tennessee, Missouri, and Vermont have comparable programs funded by state appropriations. • Arkansas and Missouri’s funds are administered directly by state economic development agencies, while Tennessee and Vermont take similar approaches to Oklahoma by partnering with a third-party fund manager. • Many other states, including Connecticut, Georgia, Louisiana, Minnesota, North Dakota, Wisconsin, offer tax credits to stimulate similar investment. - Another common approach is to offer tax credits to private investors. Instead of the state directly funding venture capital investment, a tax credit equal to a percentage of the qualifying investment is offered to investors. This encourages investment and reduces the investor’s risk.

5. Benchmarking: Community Economic Development Pooled Finance Act • The Community Economic Development Pooled Finance Act authorizes the creation of two $100 million financing pools for local government infrastructure projects and projects associated with for-profit entities. • Under the program, debt is issued by the ODFA to fund company expansions or relocations in the State and companies are able to use captured withholding taxes generated by new employees to pay debt service • The local government infrastructure project pool has never been used. • Research to date has found no truly comparable program in other states. Many states offer pooled finance and support for municipal infrastructure projects, but none appear to offer a comparable program for private industry. • Since the central benefit of this program to companies is the value of withholding taxes, the most comparable programs have been those that offer a withholding tax credit or retention of withholding taxes based on new job creation. • Many states, including Indiana, Iowa, Kansas, Michigan, Missouri offer withholding tax credits or recapture based on new job creation.

6. Benchmarking: Railroad Modernization Income Tax Credit • Provides an income tax credit equal to 50 percent of qualified railroad reconstruction or replacement expenditures of Class II or III railroads. Credit is limited to $2,000 per railroad track mile.* • The federal Railroad Track Maintenance (45G) tax credit is equal to 50 percent of the cost of track and bridge improvements, capped at $3,500 per mile.** • Oklahoma and Kentucky programs are already in place, while other states have recently proposed similar programs (Georgia, Idaho, Indiana, Iowa, Louisiana, Oregon, Texas, Washington). Generally, these tax credits are transferrable but not refundable. • Oklahoma’s $2,000 cap is lower than peer state proposals and the federal government – though its 50 percent reimbursement rate is higher. • Other tax-related incentives for railroad infrastructure include property tax exemptions (Massachusetts, New Jersey) and other types of property tax relief programs (New York, Virginia). • Other states offer annual revolving loan and grant programs capitalized with annual appropriations (Idaho, Kansas, New Jersey, New York, Ohio, Oregon, Pennsylvania, Virginia, Wisconsin). * Beginning in tax year 2016, the amount of the credit calculated is reduced by 25 percent. ** After being extended several times, the program expired in December 2017 – though two bills introduced in January 2019 (H.R. 510 and the nearly identical S. 203) call for the credit’s permanence.

7. Benchmarking: Local Development and Enterprise Zone Incentive Leverage Act • Provides funding for local units of government to match local tax revenue dedicated to support a project located in an enterprise zone, in support of a major tourism destination or in support of a military growth impact. • While enterprise zones are very common among states, the direct community financing aspect of Oklahoma’s program is unique, with just two states offering similar incentives: • The Texas Leverage Fund Program (not currently accepting applications) allows communities to leverage future sales tax revenues to support economic development projects that promote business expansion, recruitment and exporting. Loans ranging from $25,000 to $5 million are geared toward small, rural communities which may be unable to access traditional sources of infrastructure financing, such as municipal bonds. • West Virginia’s Local Economic Development Grant provides up to $14,400 in matching grant funds to economic development organizations and community authorities to enhance their capacity to provide economic development activities.

8. Benchmarking: Training for Industry Program • Provides employee training to new or expanding business and industry. Training is provided to targeted business and industry in selected manufacturing, processing and national or regional offices of business and industry that are creating new employment opportunities or others that have significant economic impact on Oklahoma’s economy. • While approaches vary, many states make an effort to support workforce training, including Arkansas, Colorado, Texas, Kansas, Kentucky, Missouri, Nebraska, New Mexico, and West Virginia. • One important distinction among programs is method of payment. Oklahoma’s program reimburses CareerTech training centers throughout the state that perform the training. Some states provide payment directly to companies who provide training to current or prospective employees. • Arkansas, Colorado, and Kansas each have programs that target job retention in addition to expansion. Oklahoma’s program is only available to expanding or new businesses.

9. Benchmarking: Rural Economic Action Plan (REAP) • Assists small communities, towns counties and unincorporated areas with populations under 7,000 by providing grant funds for projects primarily focusing on water quality, solid waste, sanitary sewer, rural roads, fire/public safety and projects meant to increase employment. • Colorado, Georgia, North Carolina, South Carolina and Texas also support rural communities by issuing grants directly to the communities for infrastructure projects. • Other states support rural infrastructure improvement by providing funds directly to businesses for projects in rural areas (Idaho, North Carolina, Texas). • Other unique approaches exist. For example, Florida’s Rural Infrastructure Fund provides increased incentive awards and lower wage qualification thresholds in its rural communities. • Many state programs have more restrictive uses than Oklahoma. For example, North Carolina’s rural program focuses on building demolition and building reuse.

10. Preliminary Benchmarking: Key Takeaways • No states are ‘perfect peers’ there are multiple differences in economic, demographic and political factors that must be considered. • It is exceedingly rare that any two state incentive programs will be exactly the same. • Generally, Oklahoma’s incentive programs are comparable to those offered in states with similar programs, and the Oklahoma programs were not found to be outliers.

11. Unused Sales Tax Exemptions Subject to Evaluation • At the January 2019 meeting, the Commission considered exempting the spaceport sales tax exemption from evaluation due to inactivity. • Upon further research and discussion with Tax Commission leadership, it was determined that the following sales and use tax exemptions have also not been used for at least five years (in some cases due to businesses opting to instead participate in the Quality Jobs Program): - Aircraft facilities sales tax exemptions - Computer services/data processing facility sales tax exemptions - Construction materials tax exemption for manufacturers • These conversations have also led to the project team’s understanding that the following sales tax exemptions do not meet the definition of an incentive and instead exist as a result of the Oklahoma tax code: - Ethanol sales tax exemption (because it is subject to motor fuel tax) - Telecommunications services sales tax exemption (because it is subject to ...telecommunications excise tax)

12. Benchmarking Oklahoma and Other Pew “Leading States” • The Pew Charitable Trusts identifies Oklahoma as one of the ‘leading states’ for incentive evaluation. • This is based on the State incentive evaluation statute and its implementation – including this process. • The number of evaluations conducted each year by leading states varies, but Oklahoma (at an average of around 10 a year) is on the high side: - Colorado 10 (scheduled for 2019) • Indiana 7 (scheduled for 2019) • Iowa 5 (conducted in 2018) • Maine 3 (conducted in 2017, 1 in 2018, 1 scheduled for 2019) • Maryland 3 (conducted in 2018) • Minnesota 2 (conducted in 2018) • Nebraska 2 (conducted in 2018) • Virginia 5 (conducted in 2018) • Washington 9 (conducted in 2018)

13. Next Steps • The project team will be on-site in June for interviews with key external stakeholders and the Chamber of Commerce. • The project team is also scheduling additional sessions with leadership at the Water Resources Board and Department of Career and Technical Education. • The team intends to conduct a survey of the state’s 11 Councils of Government in relation to the Rural Economic Action Plan. • Program analysis is underway and will continue over the course of the next several months. • Initial benchmarking will continue to be refined and program evaluations of comparable state programs will be reviewed. • Rough drafts will be provided to the Commission in mid-August, with completed reports submitted by October 1.

14. Questions and Discussion