Tuesday, June 8, 2010

Oregon's BETC Reform

In energy circles Oregon has been well known in the last ten years for it's generous Business Energy Tax Credit (BETC) which offers up to 50% off the capital cost of a project back as an income tax deduction.  Better yet if you are a low cash flow start up you can "Pass-Through" this BETC for 35% of face value cash up front.  So if you build a $1,000,000 project in theory Oregon will give you a $500,000 income tax break over five years and you can sell this tax break to an investor for $350,000 cash.

Its no doubt one of the greatest deals for project development out there.  Throw into that mix a huge clean energy consumer base and utility connection to wheel power to the California market and you've got a strong comparative advantage in Oregon.  I know I've done several project that would not have happened without the BETC which have directly created jobs at my family's business.  I've also used the BETC as a down payment with a bank as part of financing.  Its a great economic development tool but the lack of boundaries on the program has blown up its use.  Solar panel manufacturers, wind farm developers, and a few large projects have exploded the dollar figure this tax credit brings.

So in Oregon the Department of Energy (ODOE) has been under fire for the Business Energy Tax Credit  taking a large cash draw in the economic downturn.  The fact that the alternative energy tax break is primarily being taken by the Wal-Mart, large banks, and other huge corporations hasn't polished its image any either.  Corporate welfare is never a great selling point.  This causing Oregon's Legislature to push a "reform" to bring down the total dollar figure of the BETC.

First a law capping total dollars came down.  Then rules were written to figure out how to stay within the budget.  So the rules are set and now is the time to pay attention as any potential new project I may come across will be playing in this new league.  Through the recession I haven't had much in the way of project opportunity.  Just trying to keep momentum moving forward for what we built pre-2008.  Taking a look there are things I agree with and those I don't.

First I don't see any reference to property tax impact of a capital project (and I didn't in the debate during the reform). The local positive impact of these projects isn't considered at all.  If the state is losing on the income tax side but funneling more in a much more permanent base of property tax revenues I would call that great policy.  Unfortunately the only focus isn't on long term revenues but instead on a single ticket price

I've always thought the controversy of corporations taking BETC's to avoid income tax is over stated.  In fact its safe to say if it wasn't for the BETC many of these companies wouldn't have realized the same amount of income tax (then avoided by a BETC) by creative and legal accounting gimmicks to minimize profits in Oregon.  I am very confident that the BETC funnels what otherwise would have been money leaving Oregon into capital investments that raise local property taxes far in excess of their real cost to Oregon's general fund.

Now back to the actual reform.  One good thing is they moved the one year BETC opportunity up to a $20,000 one year project (meaning I can take a tax credit in one year instead of taking it over five years). Short payback of tax credits is very good for small businesses seeing great years and investing in improving their operation.  In the small business community you never know what the next year holds so five year paybacks are a tough sell for a BETC.   Better yet, one year is very positive for the type of projects I do with refueling infrastructure which can be kept under $20,000 if we work at it.  It's also very good for retrofit projects as well so local smaller scale contractors will benefit from this.

As of right now there is a cap of $300 million  in BETC money established through 2011's state budget.  Of this $300 million $218 million potential projects has already been pre-certified.  So in theory its already spent.  But of course it probably won't be close to spent.  It begs the question, how does this work that projects take years and are unpredictable and therefore when the BETC vests to being taken might effect other budget years?

There is a Q&A page but it hasn't posted any questions and answers.  I definitely have small talk to make next time I run into an ODOE staffer.  Just that much more reason to get to local conferences I guess.

To help they have created a "tiered" approach.  ODOE shows an under $500,000 project costs, $500,000 to $6,000,000 project cost, and of course an upward of $6,000,000 project.  This will be interesting.  It does not mention how they will break out the remaining sum of cash between these projects.  I also am curious what happens if you apply pre-project, don't get a pre-certification, then start building and finish in a specific time frame.  If other's in that tier didn't finish can you take their budget allotment?

Oh well. As with all changes questions and ideas pop up.

No comments: