Honor system for tax credit scrutinized

Redemption of tax credits costs Missouri $300 million a year.
Monday, February 23, 2004 | 12:00 a.m. CST; updated 11:40 a.m. CDT, Sunday, July 6, 2008

JEFFERSON CITY — It seemed like a perfect, albeit somewhat complicated, scheme. Fake the purchase of business equipment, send the state the phony invoices and checks, then receive a $75,000 tax credit under a program meant to reward high-tech companies in low-income areas.

During the past two years, James Holtrop and his wife, Jill Meyerhardt, used the scheme to collect $300,000 in Rebuilding Communities tax credits. The St. Louis couple pleaded guilty last week to two counts each of stealing by deceit and agreed to cooperate in an ongoing investigation into others accused of doing the same thing.

Yet the biggest indictment, symbolically speaking, may come against Missouri’s massive tax credit structure, which in a decade quintupled its options for specialized tax breaks with little-to-no accountability.

The state provides no funding for tax credit auditors or inspectors. Nor does it require recipients in many of its tax credit programs to provide follow-up information showing whether the money has produced the intended business results and public benefits.

The Department of Economic Development learned of the scheme in the Rebuilding Communities program only because of a tipster who had second thoughts about taking part in the plot.

Missouri’s tax credit programs “very well could be called an honor system,” said Sen. Michael Gibbons, R-Kirkwood, who is sponsoring legislation attempting to inject a little more accountability into tax credits.

“As far as we know, most of the time the honor system works out. But the trouble with the honor system is that it can lead to fraud like is being alleged in this case,” Gibbons said. “It also eliminates our ability to do a rational, fact-based analysis of whether the people are really getting a public benefit.”

Tax credits work a bit like government grants. Approved applicants are issued a voucher good for a dollar-for-dollar reduction in their state income taxes. In many cases, the original recipients get quick cash by selling the tax-credit vouchers to wealthy people or businesses for 80 percent to 90 percent of their value. The buyers redeem the tax credits later, typically in a year when they have a big state tax bill.

Before 1990, Missouri had about 10 tax credits. Now it has about 50.

There are tax credits for job training, business expansion, environmental cleanups, low-income housing, the refurbishment of historic buildings, grape growers, charcoal producers and adoptions, to name a few.

Many of those tax credits originated in the mid-to-late 1990s, when the state was flush with money and lawmakers were looking for ways to cut taxes.

“It was a way to provide some tax relief in the name of economic development or social justice,” Gibbons said. Now, he said, “it’s a runaway train, and we’re just trying to get it under control.”

The state will have issued almost $1.3 billion of tax credits during the four-year span from fiscal 2001 through this year, and it likely will issue an additional $400 million during the fiscal year that starts July 1, according to an analysis by Senate Appropriations Committee staff.

Because many tax credits can be redeemed five to 10 years after they are issued, it’s difficult to project the annual impact on the state budget. But this year, Missouri expects to lose almost $300 million because of the redemption of tax credits.

The uncertainty frustrates Senate Appropriations Committee Chairman John Russell, R-Lebanon, who wants to eliminate some tax credits, restrict others and cap the total amount of credits that can be issued each year.

Russell, like other lawmakers, voted to create many of those tax credits a few years ago.

“I don’t know that it was the biggest or worst mistake we’ve ever made, but it’s helped cause a bit of pain with the budget,” he said.

Gibbons’ bill would require all tax credit recipients to report follow-up information for three years to the state.

Gibbons hopes the annual reports will help bureaucrats spot fraud and help lawmakers evaluate which tax credits should be eliminated or revised.

But it won’t provide a quick fix. The annual reports wouldn’t begin until June 30, 2005, meaning any legislative response to information is unlikely until 2006.

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