Audit reveals flaw in two major tax credit programs
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Audit reveals flaw in two major tax credit programs

Date: September 8, 2010
By: Joe Yerardi
State Capitol Bureau

JEFFERSON CITY - On the same day Missouri's governor convened his panel to cut back on special interest tax credits, the state auditor released a report that the claims of economic benefits from two such programs were exaggerated.

The audit of the Enterprise Zone Tax Credit and the Enhanced Enterprise Zone Tax Credit, released Wednesday, found the Department of Economic Development provided lax oversight of the programs.

Missouri gives out more than $500 million in tax credits for various activities including economic development efforts.

The audit reported the department had failed to adequately monitor businesses receiving credits and routinely overstated the programs' benefits in reports to the legislature.

The programs were created to encourage business growth in economically disadvantaged areas of the state. Under the programs, businesses can receive tax credits for hiring and capital investment and local property tax abatements for building improvements.

The audit found that the department failed to perform a single visit to any of the 158 businesses issued economic zone tax credits since 2000 and visited only 15 of the 51 businesses issued enhanced zone tax credits since 2006. Such visits are essential in determining whether businesses are meeting hiring and other obligations to receive the tax credits.

The department told the report's authors that they did not intend to visit any of the economic zone business sites since the program is set to expire in the 2014 tax year. That's a problem, says Montee.

"Even though they're requiring documentation, they're not following up to see if it's a real accurate representation of what's going on at the job sites," the auditor said.

A spokesman for the department said he had not read the report and as such could not comment on its findings nor could he say what policies the department had in place to ensure its tax credit programs were effectively monitored.

The audit also found the department, instead of using actual economic activity data, simply passed on estimates of such activity provided by businesses in its reports to the legislature.

"The General Assembly is just not getting adequate information as to what's going on," Montee said.

In one analysis of 19 businesses authorized for tax credits in 2007, the audit determined that actual jobs created were 6.1 percent less than proposed and actual investment was 29.5 percent less than proposed.

In another review of 40 businesses that submitted data to receive tax credits in 2008, the audit found errors 43 percent of the time. In one instance, a department employee's data-entry error resulted in a business's initial investment proposal amount of $8,760,000 being keyed in as $87,600,000. Because of such errors, the legislature was receiving overstated benefit forecasts and results for the programs. The legislature uses such reports to determine whether a tax credit was an effective promoter of economic activity.

Three blocks away from the state auditor's office, Nixon presided over the inauguration of the Tax Credit Review Commission.

"This is about making sure the taxpayers are getting the best return on their investment," explained Nixon.

The commission begins its work at a time when state finances are in a difficult position. Net general revenues are down 1.4 percent for the first two months the 2011 fiscal year, which began July 1.

The governor alluded to the state's budget woes, saying, "Clearly, we're here because of the budget crisis."

Nixon has called on legislators to scale back the tax breaks but his effort was blocked by the GOP leadership in Missouri's House during the last legislative session. He appointed the Tax Credit Review Commission after the legislative session.

The governor said he looked forward to seeing the commission's report by Thanksgiving, allowing the administration time to include recommendations when crafting a budget proposal for the legislative session that will begin in January and he stressed that he would work with the legislature to implement them.

Representative Don Calloway (D-St. Louis), a supporter of maintaining tax credits targeted for elimination by the governor, sounded a note of cautious optimism.

"The legislature...has been such that they are in favor of the programs so I don't think any bill that completely guts, for example, low-income and historic renovation programs would have any legs but perhaps we would be amenable to some changes to shore up the budget for the coming years," he said.

For her part, Montee is concerned that the same incorrect information given to the legislature could now be used by the Review Commission to reach inaccurate conclusions.

"When they have these task forces that are going to look at all the tax credits in general, they have to have accurate information otherwise they can't make any kind of informed decision," Montee said. "They're just making them in the dark."