Governments often attempt to impose their social and
political doctrines by using public funds to influence investment behavior. One
method of choice is issuing tax credits that encourage and induce speculation
in ventures that free market investors would normally avoid due to high risk
and low probability of profit.
Many of those who do choose to invest understand the
importance of maintaining close and favored relationships with the politicians
and bureaucrats who create and manage the distribution of the tax credits. They
recognize how favored status can result in immense profits being reaped.
The state of Oregon has issued more than $1 billion in
tax credits designed to promote free market investments in high-risk renewable
energy enterprises. Even if the public agrees that government-driven market
distortion is an appropriate objective, tax credits are a very inefficient and
costly way to achieve that goal.
Most Oregon Business Energy Tax Credits (BETC) have
been issued to municipalities, special districts, school districts and non-profit
organizations that are tax exempt, or to businesses that have little hope of
earning taxable profits. The tax credits are of little of no value to an entity
with no tax liability, unless they can be sold. For that reason, the
Legislative Assembly created a market for the sale of tax credits to business
ventures that do have Oregon tax liabilities.
Businesses purchase tax credits to offset their own
taxable income dollar-for-dollar. The tax credits are sold at discounted rates,
allowing the purchaser to earn capital gains profits on the difference between
the face value of the tax credit and the discounted purchase price of the tax
credit.
For example, TriMet is a tax-exempt entity that was
issued $1.8 million in Oregon BETCs. It sold the tax credits through a
brokerage for $1.35 million, a 25 percent discount. This transaction provided the
purchasers $450,000 in potential capital gain profits.
Further, tax credit sellers often pay as much as a
five percent fee to a third party to broker the sale. After selling a tax
credit at a 25 percent discount and paying a five percent brokerage fee, only
70 cents of each tax credit dollar may actually be applied to the intended
purpose of creating renewable energy or greenhouse gas reduction.
It is our understanding that some Oregon tax credits,
issued to promote affordable housing, have recently sold for less than 55 cents
on the dollar. After applying a brokerage fee, only about half of the tax
credit can be applied to the intended purpose of building affordable housing.
Nevertheless, state tax revenue is reduced one dollar
for every dollar of tax credit that is issued and used to offset taxes owed.
The program allows selected purchasers of tax credits and their brokers to make
enormous profits off the public dime.
Oregon news media has done an impressive job exposing
the scheme, including reports that the sale of state tax credits may
have been made contrary to Oregon statutes and administrative rules. Further,
favoritism may have occurred in the selection of tax credit purchasers and the brokers
who participated in the sales. Finally, the potential exists that capital gains
taxes may not have been properly reported or paid.
The Legislative Assembly intended for the Department
of Energy (DOE) staff to broker the sale of BETCs at minimal discount rates
established by DOE formula. However, a significant number of sales occurred as
early as 2012 with substantially higher discount rates. These sales were brokered
by private firms, providing the potential for much larger profits for the
buyers.
DOE officials claim they began allowing these
apparently extra-legal sales based on advice of their Department of Justice (DOJ)
attorney. Allegedly based on that advice, the agency then implemented temporary
administrative rules in March of 2015 that served to retroactively authorize
privately brokered BETC sales, with negotiated discount rates greater than the
DOE formula allowed, dating back to July 2010. DOE has declined to share the
legal advice with its own staff, or other interested parties, claiming
attorney-client privilege.
Moreover, DOE’s management acknowledged to the Secretary
of State's audit team “it
did not fully communicate, externally or internally, its 2012 decision to
accept privately negotiated discounts. As a result, few financial firms were
aware that discount restrictions had been lifted, and department staff gave
conflicting advice when asked about transfer discounting.”
It also appears DOE provided significant preference
for third-party brokerage to one or more Portland-based finance firms. It
appears that one firm consistently negotiated discount rates significantly
greater than the limit established by DOE’s formula.
Those “preferred” firms may have brokered the
preponderance of the third-party negotiated BETCs. It appears that DOE did not
keep records on the brokerage fees charged by these financial firms. It also
appears that DOE may not have filed the appropriate tax forms to document
taxable capital gains resulting from the discounted sale of BETCs.
At least one Department of Revenue (DOR) auditor has
told both Legislators and media reporters that the agency’s auditors were
specifically instructed by management not to select transactions with potential
BETC capital gains for audit procedures.
It is alleged that DOR management was working with
then-Governor Kitzhaber to introduce legislation during the 2013 session
designed to retroactively cancel potential capital gains on BETC sales. That
alleged effort did not result in a law being enacted.
Still, the audit moratorium was in affect for about 15
months. It served to permanently prohibit audits of hundreds of millions of
dollars of BETC sales, due to the statute of limitation on Oregon tax audits.
According to the DOR auditor, the instruction may have
caused the loss of as much as $20 million in state capital gain tax revenue. Once
again, it is unclear whether the federal taxable capital gains were
appropriately reported to the Internal Revenue Service.
The credit for bringing this scandal to light is owed to
Oregonian reporters Ted Sickinger
and Jeff
Manning, Willamette
Week’s Pulitzer Prize-winning Nigel
Jaquiss and the Portland
Tribune’s Hillary Borrud.
Their excellent investigations and series of separate in-depth news reports uncovered
the extent of this ongoing multi-department debacle.
The Secretary of State’s Audit Division initiated its fiscal
investigation of the DOE after receiving a “hotline tip” from a concerned
citizen regarding ongoing practices within the agency.
The DOE's
Chief Financial Officer resigned soon after the reporters
began publishing their investigative findings.
A former DOE fiscal officer and a current DOR auditor
contacted five Legislators this fall, including all four Republican members of
the House Revenue Committee. After spending several hours on the phone with
these “whistleblowers,” and conferring with Legislative Counsel, the five Legislators
agreed on a course of action.
The Legislators wrote
a letter expressing our concerns to several state and federal
law enforcement agencies. Several seemingly related actions have occurred since
that letter was sent and made public on December 7.
On December 9, the Legislative Assembly’s Presiding Officers
made public their
agreement to appoint a bicameral committee to investigate
the DOE. The Committee will begin hearings in February 2016 and will be
directed to report its recommendations to the 2017 Legislative Assembly.
Also on December 9, Governor Kate
Brown announced she would assemble a task force comprised
of mainly agency directors to look into the DOE’s actions.
The first, and to date the only, response from the law
enforcement agencies is a letter
from Fred Boss, deputy director of the Oregon DOJ. His
letter requests more specific information about allegations regarding DOE, but
does not specifically address allegations regarding the DOR.
Earlier this month, the Department of Revenue director
announced
to his staff that he plans to retire as of February 1.
In my opinion, misuse of public funds most likely did occur.
I am greatly concerned that some of the malfeasance described may constitute
criminal activity.
It is my hope that our letter will result in parallel
state and federal criminal probes that will definitively determine whether
criminal acts occurred, the extent of those acts, if any, and seek appropriate
punishment in the event that laws were broken.
Please remember--if we do not stand up for rural Oregon, no one will.
Best Regards, Doug
Senate District 28
Email: Sen.DougWhitsett@state.or.us I Phone: 503-986-1728 Address: 900 Court St NE, S-311, Salem, OR 97301 Website: http://www.oregonlegislature.gov/whitsett
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