OKLAHOMA CITY (AP) — A lawsuit by an out-of-state company that challenges a tax break on capital gains for Oklahoma-based businesses is causing some consternation at the state Capitol after an analysis on the potential costs of a payback show Oklahoma could be on the hook for as much as $480 million.
“My biggest concern from a financial risk standpoint is the severe damage that could be created to budget expectations over the next couple of years, given the uncertainty of the monetary implications,” said Sen. Mike Mazzei, R-Tulsa, a financial planner and chairman of the Senate Finance Committee.
Endorsed by former Gov. Brad Henry and approved by the Legislature in 2005, the exemptions on certain capital gains apply to property owned for at least three years by Oklahoma-based companies and five years for out-of-state companies. A similar exemption also is in place for individuals.
The law was designed to encourage companies to invest in Oklahoma, but it was challenged by CDR Systems Corporation, a now-defunct Florida-based company that owned and sold a manufacturing facility in Waynoka, which claimed it unfairly discriminated against non-Oklahoma companies.
After the Oklahoma Tax Commission rejected its attempt to claim the exemption, CDR appealed to the Oklahoma Court of Civil Appeals, which ruled in January the exemption violated the Commerce Clause of the U.S. Constitution because it discriminated against non-Oklahoma companies. The Tax Commission has asked for a rehearing and wants the court to clarify whether the ruling applies to previous tax returns by individuals and companies.
That clarification is critical, Mazzei said, because it could decide whether the state must reimburse out-of-state companies that would have otherwise qualified for the exemption.
A cost analysis Mazzei compiled with the help of Senate staff suggests there is a wide range of financial implications, depending on how the court rules. If individual and corporate gains are no longer tax deductible, the state could actually see a benefit of more than $140 million. But, if the court decides all capital gains qualify, regardless of the location of the company headquarters, and orders the state to pay back both individuals and corporations, the state could be on the hook for as much as $480 million if all of those who qualify filed amended returns.
“There’s not as much buzz about this as there should be,” said Senate Democratic Leader Sen. Sean Burrage, D-Claremore. “When you talk about a potential ruling that could impact not only the revenue picture going forward, but cause refunds to be due to the taxpayers, that causes me great concern.”
When combined with an estimated $237 million price tag for a tax cut approved by the Legislature and expected to be signed into law, Burrage said the cost to the state could amount to 10 percent of the total state appropriated budget.
A spokesman for Fallin declined to comment on the pending litigation, other than to say the governor believes the state will prevail.
“However, our office has been preparing for all possible legal outcomes for the past several months,” said spokesman Alex Weintz.
Republican legislative leaders who helped craft the $7.1 billion budget for the upcoming fiscal year said the possible outcome of the court case was not something that was considered in the budget for next year.
“We’re not basing this budget off of something that could result in either a $120 million increase in available funds for the state or a possible deficit of $500 million. Either of those is a possibility,” said Sen. Clark Jolley, R-Edmond, chairman of the Senate Appropriations Committee. “We think the capital gains issue is something that can be worked out separate from this budget and needs to be separate from this budget.”