MORE ON HOW TAX INCENTIVES GO WRONG…
Tax incentives are back in the news, this time in Oregon where Walmart has managed to buy a multi-million dollar tax break because its accountants are smarter than the politicians in Oregon. Once again, Al Norman has jumped in.
[T]his Oregon energy tax break involving Wal-Mart has left city and state officials looking foolish. According to the Beaverton Valley Times, Wal-Mart received a fat subsidy at taxpayer’s expense by buying a tax credit from Solar World, a German company that makes photovoltaic solar panels.
The city of Hillsborough, Oregon was able to attract this large solar production plant, and its 1,000 jobs, by offering a candy store of tax-subsidized incentives to the manufacturer. But some of the profits ended up in Wal-Mart’s pocket instead, because of a bizarre arrangement that allows manufacturers to sell their tax credits to companies who are doing nothing valuable for the environment, like Wal-Mart.
According to the Valley Times, Solar World was given an $11 million renewable energy tax credit. Solar World was then allowed to turn around and sell that credit to Wal-Mart for only $7.3 million, two-thirds of its real value. The full $11 million value of the credit was 51% more than what Wal-Mart paid for it.
Wal-Mart can now use the full credit to reduce its corporate income taxes on profits owed to the state, earned at Wal-Mart’s 32 stores across Oregon. Wal-Mart can spread this $11 million tax credit over the next five years. Oregon taxpayers lose out on $11 million in income taxes that the corporation would have paid, and Wal-Mart makes $3.7 million for merely buying up the credit.
The smartest politician is not as smart as a corporation’s lawyers and accountants because they get to focus on the holes in the legislation. It’s the same reason why hackers can exploit the best computer code, they’re not trying to build something, they’re trying to tear something down and the latter is always easier than the former.
Norman thinks it’s time to rethink the system.
When a super-wealthy corporation like Wal-Mart, controlled by five of the richest people in the world, is able to use the BETC renewable energy credit to make several million off of Oregon taxpayers, its time to rethink the Betsy program, and its usefulness. Instead of allowing companies to sell these tax credits, the company investing in renewables should be given a direct cash payment that is non-transferable.
Wal-Mart did nothing to deserve this form of welfare, and in fact has wasted hundreds of acres on energy-inefficient single-story buildings that encourage automobile-dependent shopping, and undermine the smart growth principles of compact, downtown development.
I disagree. I think it is time to out-right scrap the concept of tax incentives. They’re too easy to game and the unintended consequences do more damage than the incentives do good.
Tax incentives are probably too important to managing the economy to scrap entirely without a radical revision in the way taxation is carried out. However, while I won’t fault Wal-Mart for using a legal means (albeit unintended) to save money, I agree that it is evidence that something is broken. It certainly isn’t something that should have been allowed.
Shalom Someone,
I’m all for the radical revision. The carrot and the stick don’t work the way we think they do.
B’shalom,
Jeff
This reminds me of times when some article comes out about an individual or groups of individuals who abuse welfare or some similar form of government handout. One side will then be all “The system is broken, it doesn’t work!” and the other side is all “No, no… the system is fine, this is just an extreme example.”…
Shalom Bob,
Walmart is no Reaganesque welfare queen driving her new Cadillac.
If we’ve learned anything since last September it is that corporations are, by nature, bad economic actors.
And even if this were a case of Walmart as isolated bad actor, I hardly find the mythical welfare queen taking $50,000 from the government in the same league as Walmart waltzing away with, in this single case, $3.7 million.
B’shalom,
Jeff
Now, as you can guess, I’m no fan of the government using “tax incentives” to drive one type of business over another.
But I’m not really sure how Walmart walked away with $3.7 million of government money or how the tax payers lose out on $11 million that they “would have paid” – It seems to me that the state of Oregon “gave” this $11 Million to Solar World. So, tax payers were already out of the $11 Million in taxes before Walmart ever came into the picture. Then, Solar World sold the tax credit to Walmart. If my limited understanding is correct, this means that Solar World will now be paying this $11 Million in (since they have no credit to fall back on) while Walmart is not paying in. The Government is still getting the same amount of taxes – just from a different source.
As for the difference, it sounds like Solar World is out the $3.7 Million. If they’re okay with that (and I assume they are, or else they wouldn’t have sold), why should we care?
But, again, not a fan of tax incentives to promote types of business.
Shalom Bob,
The deal reminds me of how the black market worked in Korea.
American service personnel were allowed to purchase two quarts of booze a week from the commissary store. Johnny Walker Red was very popular with the mamasans and the other underworld types.
An enterprising sailor would line up a few buddies who could care less about buying a quart of booze, pay them a percentage of the purchase price (and give them the money to buy the booze, of course) and quickly assemble a case or two of the coveted hooch.
The arrangement was illegal of course, but went on all the time. Armed with 24 quarts of liquor, the enterprising sailor could quickly parley that into illicit purchases at a discount price.
What Walmart and Solar World did was not illegal, it merely exploited the loophole left by the silly politicians in Oregon, but it clearly was not what the incompetent legislatures intended.
If I were even more cynical than I am, I might suspect that the loophole was deliberately place in the legislation as a favor to the large corporations that would benefit; kind of like the despicable agriculture laws we have that allow gentleman farmers to collect millions for crops they grow.
B’shalom,
Jeff
As I understood it, Bob, the tax credit had no value to Solar World because they do not generate the income to take advantage of it. So, by selling it to Wal-Mart below its value, they actually make money and Wal-Mart, which does bring in enough to benefit from the credit, also comes out ahead.
Shalom Someone,
That aligns with my understanding as well. Solar sells $11 million in tax credits for $7.3 million to Walmart who realizes a profit (at taxpayer expense) of $3.7 million on the deal.
B’shalom,
Jeff
Ah – so, in theory – tax payers did lose out on some money because even though the state government had written off the $11 Million they gave away in incentives, there was no way Solar World would have actually ever paid in that much without incentives.
So, then the question is – would Solar World have came to Oregon for less in incentives than what they received – since they wouldn’t have been able to take advantage of the entire $11 Million anyway? Or did they come to Oregon *knowing* they would be able to sell the $11 Million immediately and “cash in” on the tax credit and turn the money in capital for their business ventures in the state of Oregon?
Shalom Bob,
My cycnical self would guess that the latter is true.
But I’m not aware of the precise timing of the deal.
B’shalom,
Jeff
Now, again, I’m against using tax incentives like this, but…
If the state government was prepared to write off the $11 Million in taxes to get Solar World to locate there and, hypothetically, Solar World located there for the reason that they could resell the $11 Million credit to the highest bidder – is it really *that* horrible?
Shalom Bob,
Yes, horrible is always relative.
If I give a panhandler $10 to buy a meal and they buy several bottles of Mad Dog instead, is that so horrible?
No, not really. The panhandler is an adult and responsible for their own well being. I, on the other hand, might be less generous in the future, thus possibly endangering a person truly in need.
Like you, I think tax incentives are bad policy, but if a local government is going to use them, then Walmart’s gaming of the system makes that tool less likely to be used in the future?
And that may actually be generally good but specifically bad.
B’shalom,
Better: You give a panhandler several cans of food valued at $11. He then trades those cans to someone better off for a nice, hot meal worth $7.30. The someone-better-off gets to keep the difference, the panhandler still gets a meal (a nice, hot one instead of canned food) and you’re still out the $11 you planned to be out in the first place.
Shalom Bob,
The problem still exists whether the trade is for muscatel or roast beef and trimmings.
The intent of the gift was subverted for the personal profit of another.
While the panhandler and the someone-better-off are most likely satisfied with the exchange the original source is most likely not and less likely to be generous in the future.
B’shalom,
Jeff
[...] MORE ON HOW TAX INCENTIVES GO WRONG… Tax incentives are back in the news, this time in Oregon where Walmart has managed to buy a multi-million dollar tax break because its accountants are smarter than the politicians in Oregon. Once again, Al Norman has jumped in. Keep reading… [...]
>”While the panhandler and the someone-better-off are most likely satisfied with the exchange the original source is most likely not and less likely to be generous in the future.”
Good. Maybe our government will learn to stop giving tax incentives to private businesses then.
Shalom Bob,
Agreed.
B’shalom,
Jeff
Ugh. A quick read through this is missing another point. Wal-Mart realizes a savings of $4 million. They can pocket $2 million as per profit then use $2 million to lower their prices at the cost of tax payers who are now subsidizing prices in Wal-Mart which are competing against the smaller local more connected to the community businesses who not only are not getting the tax breaks Wal-Mart is because of its size but are actually helping pay the taxes Wal-Mart is taking advantage of… and who has all the money to lobby like crazy and to buy politicians both local and national?
Let’s say you own a hardware store close to Wal-Mart. What do you think a $2 million advantage for Wal-Mart would mean to you?
This is not homeless cold canned meals versus one hot meal. Try you own a restaurant and are forced to send in money that is given to the restaurant next to you to sell inferior product for much less than you can no matter what you do. Because your customers are taxed so heavily to make up for other tax incentives your business neighbor was given they think they can’t afford to eat at your place so also go next door even though it’s their money also subsidizing the cheap meals that are competing against yours.
Further, the tax credit may save Wal-Mart only $4 million but they will take the full $11 million credit.
Shalom Glauckenstück,
I like your illustration of how existing businesses find themselves subsidizing their competitors.
But I think the model may be finessed a bit.
B’shalom,
Jeff