Dan Wieden recently did something few Oregonians can do: He bought a dollar for 75 cents.
Wieden, co-founder of Portland's Wieden+Kennedy advertising agency, purchased a $1.8 million state income tax credit from TriMet in April. To get the credit, he paid only $1.35 million—saving $450,000 on his taxes.
The tax credits were created to encourage energy efficiency in transportation projects in Oregon. At the same time, however, they have allowed wealthy Oregonians to reduce their own taxes at the expense of state budgets for schools, health care and public safety.
In 2011, state legislators saw that Oregon's massive energy tax credit program was costing the state too much and too many people were doing what Wieden did: obtaining tax breaks at bargain prices.
But the practice has continued, despite legislative reforms. Records obtained by WW show a private broker TriMet hired last year claimed to have found a loophole that allowed public agencies, including TriMet, to continue selling tax credits for a deep discount.
Earlier this year, however, documents show a leading Portland accounting firm warned the Oregon Department of Energy that such discounts appeared to violate state law. Energy officials responded by rewriting the rules after the fact, according to records.
Wieden and other investors who bought the discounted tax credits did not do anything wrong. But critics, such as Chuck Sheketoff of the Oregon Center for Public Policy, say public agencies in the state were supposed to have stopped serving up big tax breaks on a silver platter.
"This is a subsidy program for energy investments," Sheketoff says. "It's not supposed to be a program to further enrich the founder of one of the world's largest ad agencies."
Oregon has a long and tangled history with tax credits. Like many states, Oregon has doled out tax credits to encourage investments that might not otherwise occur. The state provides credits, for instance, to stimulate development of alternative energy projects and low-income housing, and to preserve historic properties.
Tax credits work like grocery coupons. The Legislature approves the credits and grants them to project developers, who sell them to investors like Wieden. The proceeds help pay for new projects, and the investor gets to reduce his tax bill by the value of the credit.
The Oregon Department of Energy issued more than $1 billion in tax credits between 2007 and 2014, according to the Legislative Revenue Office, much of it to support wind farms. After the agency's main program, the Business Energy Tax Credit, proved too expensive, lawmakers in 2011 ended the program.
One major flaw lawmakers wanted to address was the low price investors were paying for tax credits. New laws required that the purchase price of credits better reflect their value. If an investor is getting a tax credit worth $1, then the price of the credit should be as close to $1 as possible.
To replace the old, unlimited energy tax credit program, lawmakers created new programs, including the Energy Investment Program, capping tax credits it would offer at $51 million per biennium. The program included incentives for transit agencies to save energy, and the Oregon Department of Energy awarded TriMet $3.6 million in tax credits beginning in 2015.
Last year, TriMet hired a Portland broker named Blue Tree Strategies to help it find buyers for the tax credits. Blue Tree president Aaron Berg told TriMet he'd helped 25 public clients sell more than $10 million in tax credits. In a June 2014 letter to TriMet, Berg noted that legislative reforms had made tax credits less attractive.
"These new discount rates are significantly reduced when compared to the old BETC program, resulting in a much lower rate of return for buyers," Berg wrote June 3, 2014. "In our opinion, in order to induce buyers to purchase TriMet's credits, the credits (and most other EIP credits in the marketplace) will need to be 'marked to market' against old-BETC discount rates."
Translation: To make the tax credits more appealing to investors, TriMet and Blue Tree would need to find a way to cut the price below what state law appeared to allow.
Documents show Blue Tree came up with an elaborate transaction allowing TriMet to show it had been selling the credits at a higher price, even while offering investors a big discount.
In an interview, Berg told WW the mechanism he proposed to TriMet was perfectly legal and no different from the rebate programs that manufacturers and retailers offer their customers. He says he proposed it because new rules raising tax-credit prices made them unattractive to investors.
"The feedback we were getting was, the price was too high," Berg says.
But while TriMet and Berg were preparing to sell the tax credits, a private accounting firm questioned how brokers could offer tax credits at prices lower than state guidelines.
Irina Antonache, a senior manager in the tax group at the Portland accounting firm Moss Adams, wrote to state Energy Department officials earlier this year suggesting the practice didn't comply with the new law.
"I understand that one or more intermediaries have been transferring EIP credits at a pass-through rate that is lower than the mandated rate," Antonache, who is also a lawyer, wrote in an email to Energy Department officials Jan. 16. "It has been our understanding that the EIP credits must be transferred at the pass-through rate as established by the DOE." (Antonache did not respond to a request for comment.)
On March 23, the Energy Department acted to resolve the confusion. The agency issued a temporary rule allowing the transactions at whatever price buyers and sellers agreed upon and then made the determination retroactive.
With the new, temporary rules, the mechanism Berg suggested to TriMet was no longer necessary. The agency completed the sale of the $3.2 million in tax credits in April, selling them at 75 cents on the dollar. (TriMet sold to six buyers in all. The next largest after Wieden was Pacific Office Automation, which bought $772,500 worth of credits.)
The Energy Department's new rules yielded less money than sellers such as TriMet might have collected.
On Wieden's transaction, for example, TriMet netted only 70 cents on the dollar, after fees paid to Blue Tree.
TriMet spokeswoman Mary Fetsch says that's the best her agency could do.
"Demand for the tax credits is the determining factor based on the rate willing buyers will pay for them," Fetsch wrote in an email.
Fetsch says her agency will use the proceeds to overhaul aging MAX cars and other vehicles. TriMet would have done the work that proceeds from the sale helped subsidize anyway, Fetsch says—just more slowly.
Wieden did not respond to requests for comment.
Sen. Mark Hass (D-Beaverton), co-chairman of the Joint Committee on Tax Credits, says he's unfamiliar with the specifics of the TriMet deal, but he's opposed to discounting tax credits.
"We're trying to meet policy goals," Hass says. "We're not interested in lowering taxes for well-heeled taxpayers."
Sheketoff says big discounts are unnecessary. He notes that the Oregon Film Office auctions the $10 million in tax credits it receives each year and gets more than 99 cents on the dollar.
Department of Energy chief financial officer Anthony Buckley says the agency always believed it was legal for tax-credit holders such as TriMet to sell credits below the state's formula price. He says the March rule change merely clarified that point.
"Once a credit is issued," Buckley said in statement, "ODOE no longer has authority over how the credit is used."
Sheketoff says Buckley is missing the point.
"Both ODOE and TriMet have a responsibility to taxpayers," he says. "They are enriching people contrary to what the Legislature intended."