‘Green’ credits prove spendy

Private firms profit, state loses revenue on special tax credits

By christian gaston

The Portland Tribune, Apr 9, 2009, Updated Oct 30, 2009 (5 Reader comments)

JONATHAN HOUSE / TRIBUNE PHOTO

A special state tax credit program encourages renewable energy and conservation work — and helps state agencies buy hybrid gas-electric vehicles like the Toyota Prius. Some say the program is too costly to the state, however.

Each time a state agency buys a Prius through a vaunted Oregon tax break program, the state loses $259.

Toyota is not gouging the state. The culprit is a quirk in Oregon’s tax law.

The state offers businesses, nonprofits and government agencies that “go green” a tax credit for 35 percent to 50 percent of the costs of weatherizing a building, buying a hybrid vehicle, or completing some other renewable energy and conservation project.

The Oregon Business Energy Tax Credit program is aimed at providing an incentive to spend money now on items that will save energy for years to come.It has subsidized thousands of projects, including Columbia Gorge wind turbine complexes and energy-efficiency improvements at Portland State University and Oregon Health & Science University.

In many ways, it’s working just as planned.

But the credit comes with a hefty price tag for Oregon taxpayers. State projections expect the program to double in cost in the next biennium, providing $143.8 million in tax breaks during the next two years.

What’s more, an investigation of the program’s inner workings by the Pamplin Media Group shows that when state agencies use the tax credit to fund sustainability projects, those projects often wind up costing the state more than what it would have cost to just pay for them outright.

As with anything relating to taxes, the math gets complicated, even in a simple scenario like the state buying a hybrid car. But every time the state buys a Prius using a BETC, for example, it loses at least $259.

Here’s how it works:

A Prius costs $5,745 more than a comparable gasoline-only vehicle, so the state Department of Administrative Services applies for a BETC from the Oregon Department of Energy. A $2,011 tax credit is issued to the Department of Administrative Services – which, of course, as a state agency pays no taxes so can’t use the credit.

But the department – like other government agencies, nonprofits or private businesses that might have low tax liability even without the credit – is allowed to sell the tax break at a discount to a third party, which then gets to use the full tax credit.

So the Department of Administrative Services sells its $2,011 Prius tax credit at a state-determined discount rate of $1,752, to a business that pays taxes, like U.S. Bank or Sears.

The buyer then claims the full credit – $2,011 – on its state tax return. That reduces state tax revenue by $259 more than the state generated by selling the credit.

“Why’d they even do the tax credit? I don’t get it,” said Chuck Sheketoff, executive director of the Oregon Center for Public Policy, a Silverton nonprofit that advocates for low-income people and progressive tax policies. “Doing the deal with (private entities) is just nuts. (The state) should just buy the cars.”

Because companies that buy the credits are charged an even lower rate for larger tax credits, the math gets worse for taxpayers on larger projects.

From January 2004 through February 2008 – the most recent period for which data were available – state agencies were awarded $4.4 million in BETCs for a range of projects that cost more than $20,000 each.

Those credits were all sold to private entities, costing the state $1.2 million in lost tax receipts.

“The state shouldn’t be doing these,” Sheketoff said.

Trimming tax obligations

Lou Torres, a spokesman for the Department of Energy, said that state agencies are using the BETC program to make up the extra cost of going green.

“Government and school districts aren’t budgeting for hybrid cars,” Torres said. “So this is another option to fund it.”

But the state’s not just selling BETCs for the purchase of hybrid cars. State agencies sold BETCs for much larger projects that traditionally would have been funded directly with tax dollars, like upgrades to buildings at Portland State University.

Filing for a BETC and then selling the credit to a private entity is more expensive than simply paying for the project outright, Sheketoff said.

But Torres said the BETC allows the state to get money up front for projects that otherwise would be difficult to fund.

The sale of BETCs happens through the Department of Energy’s “pass-through” program and is strictly controlled by the state. “Pass-through partners” pay a set amount for the tax credits that state agencies, school districts and tax-exempt non-profits can’t use.

Since the buyer of a large BETC credit has to spread the credit out across five to eight years, the discount is supposed to offset the private company’s loss of liquid capital. In essence, the tax credits are a bit like interest on a company’s initial investment in the BETC program.

But Torres also said the pass-through rate is supposed to provide a profit incentive for buying BETC credits.

“We’re basically out there competing for cash for these projects,” Torres said. “Why would they participate in a program if they weren’t going to be making something off of that?”

Since the pass-through program was established in October 2001, more BETCs are being sold. Last year, 49 percent of the 2,219 BETCs issued were “passed through,” instead of being claimed directly on tax returns.

Kris Alman, a Raleigh Hills activist who volunteers with the grassroots group Tax Fairness Oregon, said buying and selling of tax credits brings lawyers and accountants into the deals, along with an added “layer of profiteering.”

U.S. Bank, the largest purchaser of the tax credits from 2004 to February 2008, paid $14.6 million to buy $20 million worth of state tax credits.

“They’re not doing this as a contributor to the world,” Alman said of the companies buying the tax credits. “It all gets built into the cost of renewable energy.”

PacifiCorp, the Portland parent of Pacific Power, ranked as the seventh-largest buyer of the tax credits from 2004 through February 2008, acquiring $4.8 million in tax credits for $3.5 million.

In most cases, Pacific Power was helping its customers pay for renewable energy and conservation projects, said spokesman Tom Gauntt. The biggest project was when PacifiCorp bought the tax credits that a former subsidiary earned from developing the Leaning Juniper wind turbine complex near Arlington, Ore.

It’s probable that the former subsidiary didn’t pay state corporate taxes and couldn’t benefit directly from the state tax credit, Gauntt said. By selling the credit at a discount to PacifiCorp, it was able to use most of the state’s incentive to build wind turbines in Oregon.

If PacifiCorp profited in the deal by trimming its own taxes, Gauntt said, it’s obliged under a 2005 law to reduce what it charges its utility customers.

Banks and other companies buying the credit do not have that obligation.

Surviving Salem’s politics

The Legislature, in an effort to find new revenue to balance the budget during a disastrous economic downturn, is already looking at ways to trim the tax credit program.

State Sen. Ginny Burdick, a Southwest Portland Democrat, said BETC was a good tax credit that has produced results for the state.

But, she said, the math on state pass-throughs illustrates that tax credits need more scrutiny. If tax credits had to come up for a vote, Burdick said, like school funding and public safety appropriations, she’s not sure they would survive Salem’s brutal politics.

“If they had to compete for that money as a budget item, you really wonder what the decision would be,” Burdick said.

“We’re going to try to tighten up some of the requirements and make sure that the credit is going to projects in a way that is in the best interest of the taxpayers because the taxpayers are paying for it.”

– Tribune reporter Steve Law contributed to this story

BETC BENEFITS PORTLAND WORK

Here are a few examples of Portland projects subsidized by Oregon’s Business Energy Tax Credit program, and how the credits were sold.

• Oregon Health & Science University spent $3.1 million to add energy-efficiency features to a building, earning a $1.1 million tax credit. Umpqua Bank paid OHSU $800,000 for the credit.

• Portland State University spent $25,185 for bicycle improvements, earning  a $7,052 tax credit. Developer Mark Edlen paid PSU $5,138 for the credit.

• Lewis & Clark College spent $313,214 for heating and cooling improvements to its social science building, earning $109,625 in tax credits. U.S. Bank paid Lewis & Clark $79,870 for the credits.

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