Walking away from our $4.9 million investment

By Jody Wiser of Portland, Oregon. Jody runs the citizen watchdog group, Tax Fairness Oregon.

This week, the Oregonian reported on a green energy success story. Bend’s P.V. Powered, the solar industry start-up making inverters to change solar electricity into household electricity is being acquired by a Colorado firm that also makes inverters -- for $90 million.

But it’s great news only for some of the investors in P.V. Powered. Oregon taxpayers have already invested $3 million in the company, and are lined up to invest $1.8 million more via BETCs. But unlike the other “angel investors” we’ll get none of that $90 million.

Because we don’t ask to be treated like all other “angels, “we don’t get any shares each time we add capital to the young company. Because we don’t loan the BETC money, P.V. Powered won’t be returning the money with interest. Oregon simply gives its investment dollars away. So far, P.V. Powered has received five BETCs and is in line for two more, mostly for research and development, but also for transportation and photovoltaics.

Likely many of their other investors have also written checks more than once. That’s typical of venture capital. But it’s an unusual business practice to invest $4.9 million and then walk away from the return on that investment. Business people certainly don’t.

Wouldn’t it make more sense if our R&D investments gave us a fair stake in the companies in which we invest? I’d love to see our fair share of the gains in P.V. Powered roll into the Rainy Day Fund, the next clean energy start-up, or the education of some college kids.

Comments

  • mp97303 (unverified)
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    based on the $3M BETC so far and with 90 employees, the state is most certainly getting a dividend of 9%+ annually in income taxes.

    Then throw in property and business personal property taxes and Bend and the county are getting a nice dividend annually.

  • Jason (unverified)
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    Jody,

    I'm not sure where your logic comes from that there is no return on the investment. Tax incentives are meant to help spur on activity, create family-wage jobs, new capital investments, and add to the tax base. When a company does all of that - especially when it's a trade-sector company doing business outside our local economies (like PV Powered) - the impact is far-reaching.

    "Because we don’t ask to be treated like all other “angels, “we don’t get any shares each time we add capital to the young company."

    For simplicity sake, let's consider the following:

    PV Powered expands its facility and adds 10 new jobs that pay $50,000 per year, which includes the benefits pkg. Let's say the new expansion costs $2.5-million dollars.

    1. That's $500,000 of new payroll now being circulated through the economy, mortgages being paid, and taxes collected, etc.
    2. Of the $2.5-million, let's say $1.5-million is in building, and $1,000,000 in equipment. Based on the city's tax rate of $2.80 per 1,000, and a CPR rate of 50%, the City of Bend would collect $13,000 per year in new taxes, or $41,000 over a three-year period. (This does not include money collected by Deschutes County, or other taxing districts.)
    3. Think about all the other impacts created by this one project: Architects, engineers, trades, subcontractors, staffing agencies, computer support, etc., all acquire business thanks to this new project.

    This is an extremely simplified response, but hopefully it makes the point. I agree that tax incentives shouldn't just be giveaways, and they should be meaningful. The BETC, while reducing a portion of tax liability, doesn't take away all of it. We live in a competitive world, and businesses will go (most of the time) where it's most cost-effective for them. If a firm, for example, is considering three communities that are equal, yet one offers a tax incentives that lowers the company's costs and tax liability, a majority of the time that company is going to choose that location. (There are always exceptions to the rule.)

    Oregon has billed itself as a state that wants to promote green energy and industry. Other states do, too. In order for Oregon to be competitive, the state must market/promote itself as a place that supports the industry. And because green projects tend to be very capital intensive, incentives are often the most meaningful way to attract such companies. I agree that BETC was flawed in a number of ways, but many of the loopholes have been fixed. I firmly believe BETC will continue to be an important tool for Oregon in its desire to attract renewable industries and projects.

  • (Show?)

    I would agree with you Jody, if the business or jobs it created was somehow disappearing from Oregon with the transfer of ownership. But it's not.

    The BETC isn't like the anti-patriotic GOP offering tax giveaways specifically to encourage companies to outsource U.S. jobs to China. Instead, it actually helps build the local economy. We should support that.

  • Jody Wiser (unverified)
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    I agree there are many benefits, not just new jobs. But it will take years for the state to get back it's $4.9 million in taxes. And if businesses need that money as much as is claimed, they'll likely bite. Why not. If I personally offer $4.9 as an individual investor, you can be sure they'll give me shares, and be happy to. You are correct that PV Powered may stay in Bend, their new owners say so. They might even move their Colorado facilities here in a few years. But the taxpayer investors have no control over that.

    Check out the solar manufacturing firm that is leaving Maryland after only three years.

    Ideally this won't happen in Oregon, though if the federal tax credits went away it would happen all over the country overnight. The sobering reality. Read the whole article. What did Maryland invest? We've so far invested $31 million in SolarWorld and Solaicx, we're lined up for another $63 million for solar manufacturing.

    http://livewire.electricalmarketing.com/2010/03/29/bp-to-close-u-s-pv-factory/

    Here's the why of it....and as you'll see, Sanyo's products are expensive, we know SolarWorld's are as well. http://www.electroiq.com/index/display/article-display/7743937544/articles/Photovoltaics-World/industry-news/2010/march/report_-foreign_suppliers.html

    By the way, will you be at ODOE in Salem tomorrow morning at 9:30 for the hearning on the new rules?

  • Kurt Chapman (unverified)
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    Hmmmmm, @ roughly $50k/yr income on average the state makes the money back in under 10 years before you figure in the increased property taxes and increased sales in the community.

    On the whole the idea of limiting BETC to companies rather than no-profits and public entities is a good one.

  • bjc (unverified)
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    Is there anything in the awarding of BETC's that keeps businesses in Oregon? Was it just dumb luck that the acquisition firm didn't move everyone to Colorado? For that matter is there anything to stop them from moving after collecting the remaining $1.8M?

    General skepticism aside, I think the state taking equity positions in startups would pose some pretty thorny conflict of interest problems.

  • William Neuhauser (unverified)
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    I would love to see someone take a deeper look at Jody's point.

    Today, businesses lobby for tax credits and favors and may get 1000x or more return for their lobbyist dollars. They have no incentive to consider broader concerns. There are no business tradeoffs to be made. There is no market. If company's had to treat getting public capital like getting private capital - shares for the money - it might be less like a treasure hunt. You could consider a share-giveback to the company as public goods were actually achieved/earned (# jobs, or personal taxes paid, or whatever the measure is).

    I'm not sure you could manage it to scale, but it is an interesting concept.

  • Patrick Story (unverified)
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    I'm all for green energy, and I'll accept the calculations above regarding the revenue payback over a number of years. But still, I thought business subsidies were supposed to be for startup purposes, not for adding to private profit. Doesn't that create a form of moral hazard for owners?

    BTW, today's O reports that the feds are now collecting bank bailout funds, including a nice rate of return, thank you (March 30).

    <h2>Full disclosure: as a part-time volunteer with Tax Fairness Oregon, I read the posting before it appeared.</h2>
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