Red-Hot Tax Credits

[July 30th, 2008]

When the book is written on how America woke up to the threat of global warming, it will need a big chapter about the tax lawyers and CPAs who profited from the awakening.

The impetus to invest in renewable energy is being driven by generous state and federal tax credits as much as it is by the prospect of global warming. And the biggest of those projects require complex financial structures that basically function as tax shelters for often-affluent taxpayers.

Jodi Wiser, a member of the grassroots group Tax Fairness Oregon, is sympathetic to the goal of renewable energy. But Wiser questions whether tax credits are the best path to that objective.

“Tax credits have become the way to fund all sorts of things,” says Wiser, a retired teacher. “I don’t think it’s a very efficient budgetary process.”

Multnomah County’s plan to put solar panels on county buildings (see Murmurs, WW, June 18, 2008) is a case in point. Here’s how the deal it signed last month works:

The county agreement with SunEdison LLCrequires the Maryland company to buy photovoltaic panels and install them atop three county buildings. The county benefits because it will buy all the electricity the panels generate for the next 20 years—at rates lower than what it would otherwise pay PGE.

As for SunEdison, a company spokesman declined to say how much it plans to invest. But one estimate puts the cost of buying and installing the solar panels at $7.5 million to $8.5 million.

Those panels will generate about 1 million kilowatt hours per year—about 14 percent of the three buildings’ combined electricity needs.

The county expects to pay SunEdison about $65,000 a year for the solar power. Thus, after 20 years, SunEdison will have grossed about $1.3 million from selling electricity to the county—about one-sixth of its likely investment.

And that’s where tax lawyers come in.

So, too, do the drains on federal and state budgets, because this type of deal can only work with a massive indirect tax subsidy from federal and state tax credits that reduce investors’ tax liabilities.

(Tax credits work by canceling out tax liability. For example, a company with a total tax liability of $100 and a tax credit of $50 would have a total tax liability of $50.)

With this county project, the feds’ Business Energy Tax Credit gives back 30 percent of the project’s cost in the first year to those who use them as tax shelters. And federal depreciation rules allow the entire value of the investment to be deducted from business income over a five-year period.

Oregon’s Business Energy Tax Credit also gives back 50 percent over a five-year period (See “Windfarm Windfall,” WW, Jan. 16, 2008).

But in this case, the tax liability on selling electricity to the county isn’t enough to take advantage of the millions of dollars in tax credits the project makes available.

So to take advantage of the credits, SunEdison must match the project with investors that would otherwise pay millions in taxes to Oregon and the IRS.

According to its website, SunEdison is backed by Goldman Sachs and a pack of smaller investors. SunEdison won’t say which of its private investors will gain the deal’s tax benefits. Because SunEdison is private, it’s unclear who will be taking the tax credits for panels on the Multnomah County buildings. And Wiser says it’s not right that “nobody knows how many businesses will get public tax credits.”

Even with these back-door subsidies, the economics of solar energy remain precarious.

Though the sun is free, the technology to turn photons into electrons is still far from being competitive with other ways to generate electricity—at least in the Northwest, with its relatively cheap hydropower.

Although critics question these deals, they have become commonplace in larger renewable-energy projects.

“There’s no question when you look at a solar-energy deal that a big piece of what makes it work is tax incentives,” says County Commissioner Jeff Cogen, who led the way on the county solar project.

“But that’s true of any energy project. The amount of subsidies that go into renewables is a pittance compared to the subsidies that go into fossil fuels. Government’s role is to build the market and set an example,” Cogen says. “And our current way of generating energy is unsustainable.”