AG's office vows tax credit fraud investigation

JEFFERSON CITY, Mo. -- The state economic development director acknowledged employee errors, and the attorney general's office said Wednesday that a "significant, broad investigation" is under way into allegations of fraud in a state tax credit program intended to encourage high-tech businesses to locate in poor areas.

The investigation, which is in its early stages, focuses on the Rebuilding Communities program run by the Department of Economic Development.

Under the program, the state offers tax credits equal to 40 percent of a company's costs for equipment such as computers or medical laboratory devices. The program applies to businesses with fewer than 100 employees that locate in "distressed communities" -- a fairly broad distinction that includes the entire city of St. Louis, 179 other Missouri towns and certain neighborhoods in scores of other cities.

The St. Louis Post-Dispatch reported Sunday that a total of $2 million in program tax credits for the purchase of computer equipment had gone to a dozen St. Louis businesses that had no offices and no employees.

Joe Driskill, director of the Department of Economic Development, said Wednesday that the agency failed to gather enough information from some applicants, such as whether their purported expenditures actually were made. He also said employees failed to follow all procedures when approving the tax credits.

"That's our fault, and we have taken strong corrective action," Driskill told the Legislature's Joint Committee on Tax Policy, which conducted a hearing Wednesday on the state's 54 tax credit programs.

Driskill said he became aware this summer of alleged problems in some Rebuilding Communities tax credits and that information from an internal review was turned over to Attorney General Jay Nixon's office more recently.

Without revealing many details, Nixon's chief counsel for his public safety division said the investigation would focus on tax incentives relating to specialized equipment but could expand beyond that.

"We will investigate this matter without fear or favor, get to the truth and seek justice in the court system if and when it's necessary," attorney general's counsel Edward Ardini told the legislative panel.

Gov. Bob Holden said he has ordered a review of all oversight procedures for tax credit programs run by the Department of Economic Development. He also urged legislators to repeal the Rebuilding Communities program.

A similar proposal was included in legislation that failed earlier this year. Under that bill, several existing programs would have been replaced by a new tax credit for small businesses that had more requirements on job creation.

The Rebuilding Communities program returned 19 cents for each $1 in tax credits last fiscal year, according to an analysis by the department. Driskill said that's one of the lower benefit-cost ratios among tax credit programs.

Driskill urged legislators to overhaul the state's tax credit structure, approve more administrative staff to oversee tax credits and add an internal auditing section to look for fraud and abuse.

He said fraud allegations are not common, but neither are they unprecedented in tax credit programs.

"There's not rampant abuse, there's not rampant dishonesty among those who use our programs, but it does happen, and it's just part of doing business," Driskill said in an interview.

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On the Net:

Economic Development Department: http://www.ded.state.mo.us