Do Oregon’s energy tax credits help or hurt the economy?

By Dr. Eric Fruits,

Tomorrow morning, Oregon’s House Revenue Committee will be taking public input on a bill to limit the state’s business energy tax credits.  Oregon’s Business Energy Tax Credit program (BETC) gives a tax credit to businesses, nonprofits, and other organizations to spend money on projects intended to reduce energy consumption. If a business has no tax obligation, it can sell its credits to another business to help reduce the buyer’s tax obligation. As a result, businesses, governments, and nonprofits have an incentive to label standard business practices as energy conservation projects. For example, an employer that puts in bike racks or subsidizes its employees’ bus passes can qualify for the credit.

A recent study by ECONorthwest (PDF) released by the Oregon Department of Energy concluded that BETC’s tax credits produced more economic output and employment than spending on other state funded programs, such as K-12 education. While the BETC program may be associated with increased employment, the jobs associated with 2007-08 tax credit projects have wages that are approximately 11 percent lower than if the money were spent on other state funded programs.

Everyone lines up for a trough full of money

As reported earlier, the State of Oregon projects that the BETC program will cost the state $144 million in tax revenues in 2009-11 fiscal years (approximately $72 million a year), and climb to more than $80 million a year after that.

The ECONorthwest study, however, shows that these projections may be too low. In the first 10 months of 2008, more than $156 million in tax credits were given away, or more than twice the state’s projections for the upcoming two years.

It’s not all good news: Some tax credits hurt employment

The final draft of the ECONorthwest study would give the impression that all BETC projects boost economic activity.  However, an earlier draft of the report obtained by a public records request found that some categories of projects reduced economic output and employment. The earlier draft showed:

* Commercial renewables projects — such as wind and solar projects were associated with 29 fewer jobs and $420,000 less in wage income than if the tax credit money were spent on other state funded programs.

* Industrial conservation projects —ranging from bus passes to energy efficiency equipment—produced 6 fewer jobs and $1.8 million less in wages than if the tax credit money were spent on other state funded programs.  The annual incomes of jobs associated with industrial conservation projects were approximately 6 percent less than if the tax credit money were spent on other state funded programs.

How to make the bad news go away

To help support the Oregon Department of Energy’s contention that the BETC program produces economic benefits to the state, the author of the ECONorthwest study offered to bury his more bothersome findings by combining them with programs that had net benefits.  In an email obtained by a public records request, the study’s author writes to the Department of Energy:

“Here is the draft economic impact report for the 2007-08 BETC/RETC programs. Note that in the commercial and industrial sections, sometimes the impacts are slightly negative. Let us know if you want us to combine categories and not show this additional detail separating commercial and industrial (when commercial and industrial are combined, the net impacts are positive).”

In the end, the final draft did combine the categories, and no negative economic impacts are reported. Instead, the final draft only hints at the possibility:

” In some cases, certain sectors in the economy might show a negative net impact as employment or economic output decreases relative to the Base Case.”

Some trivia

Note that the firm that wrote the study also employs the Revenue Committee vice-chairman as a policy analyst and the author of the report is, in effect, one of the committee vice-chairman’s bosses.

A solution: Broad based tax breaks

As noted earlier, targeted tax breaks such as BETC are ineffective as a tool of economic growth. Spending and investing will occur only if households and firms face low, but stable, tax rates.  Rather than a targeted tax break in which approval is based on the whims of the Oregon Department of Energy, the BETC should be replaced with broad based permanent reductions in state personal and business income tax rates.

Read more: “BETC: Do Oregon’s energy tax credits help or hurt the economy? | Econ International Blog” –

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