Some Points of Agreement on Tax Policy

Evan Manvel

As someone who has been generally supportive of Oregon's efforts to create a clean energy economy, I appreciate The Oregonian's current three-part series examining our tax credits for some of Oregon’s signature sustainable industries. While not perfect, the series makes me proud to be an Oregonian subscriber, helping fund the fourth estate’s efforts to look deeply into questions to ensure our tax dollars are used efficiently.

Ted Sickinger and Harry Esteve’s reporting about the Business Energy Tax Credit relies somewhat on anecdote, in part because of the state's incomplete data, and in part because newspaper readers prefer stories to academic studies. Despite that reliance, their story provides convincing evidence some projects have been over-subsidized, and we've been giving corporations more tax credits than needed to see the projects built.

But painting all clean energy projects with that brush would be a mistake. The Oregonian notes five new solar facilities are projected to provide about 2,000 permanent jobs, in exchange for about $180 million in state subsidies. That’s still a lot of money - but the solar facilities will create twice as many permanent jobs as the CRC Megaproject, for less than 5% of the money.

When thinking about how we can better target our tax policy, I’m disappointed The Oregonian has focused so much of its reporting on our limited clean energy investments when we provide $31.1 billion in tax breaks every two years. The home mortgage deduction, for example, is a hugely expensive, inefficient, ineffective tax break. As Chuck Sheketoff has demonstrated, the mortgage deduction is regressive and isn’t clearly increasing homeownership, while costing $1.6 billion a biennium.

It’s probably providing increased profits to home sellers, as well as homebuilders, bankers, and realtors – who would still do their jobs without it. The home mortgage deduction is a good lesson in tax incidence, whereby tax credits targeted to one group are passed through to others, and yet The Oregonian is pretty silent on it, despite it being several-fold larger than clean energy tax breaks. Similarly, we give away hundreds of millions of dollars to timber companies each biennium through our tax policy on standing timber. And so forth.

We’ll probably continue to disagree about how much we should invest in Oregon’s clean energy future and how best to target those investments. But despite some disagreements, I imagine there are some things we could agree on.

First, we should remember it's not just about the jobs – we’re trying to accomplish other things with tax policy. With the climate crisis projected to cost us 5 to 20% of our GDP, investing in green energy could have huge long-term economic benefits. But we’re also supporting energy independence, cutting air pollution and protecting our health, and preserving the fragile web of life on earth. Notably, the Oregonian series about building wind and solar plants has shared front-page news with the stunning stories about radiation from Japan’s failing nuclear power plants, and comes soon after the BP oil spill.

Second, we should have quality reports on what we’re getting out of our tax incentives. We need to hold corporations accountable and know how much bang we’re getting for our precious bucks. Current legislative efforts are aimed at improving this transparency, with House Bill 2825. A 2009 ECONorthwest study finds in 2008 the BETC and RETC created 806 jobs, spurred $390 million in economic output and brought a net tax benefit of $16.3 million. We should be able to compare that with other potential investments, as well as continually review whether we could get those benefits without the tax breaks.

Third, we should work towards using clearer measurements. The Oregonian series generally skates over construction jobs in reporting on solar and wind investments, while their editorial board relies on construction jobs to push for the CRC. A measurement and reporting of “X two-year construction jobs and Y projected 30-year jobs” would allow for better comparisons. Of course, we also want to know whether these are family-wage jobs or minimum wage jobs, and how many of these jobs go to current Oregonians, versus bringing in experts from other places. If we’re investing hundreds of millions of dollars, we should get credible, if inexact, answers to these questions.

Finally, we should treat tax credits as public expenditures. Our legislative voting rules for cutting tax breaks should be the same as passing budgets or creating tax breaks. Currently, closing tax loopholes is considered a tax increase and requires 3/5ths majorities of each house (though some tax breaks are now set to automatically expire). Rep. Jefferson Smith has introduced a bill to allow simple majorities to close tax loopholes – HJR 19. The Legislature and voters should pass that bill. Moreover, our discussions and reporting on Oregon's budget should report and show the tax credits as a front and center expense, rather than an occasional mention in a newspaper story. They need to be in the pie charts.

Again, thanks to the reporters The Oregonian for digging into some important questions, and helping us better target our tax policy. While we should continue to adjust our clean energy policies, we must also focus a critical eye on the bigger fish in the sea.

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    Thank you, Evan, for this. Good stuff.

    From a political standpoint, I don't think we should be investing time and energy trying to repeal the home mortgage deduction (though some limits around the edges may be plausible.)

    That said, your broader point is spot on -- we should be talking about all tax expenditures and stacking them up against each other - and against other spending.

    Also, one thing to add: the point of the clean energy program isn't to produce jobs - though that's a nice side effect. It's to produce clean energy. I'd hate to see that program evaluated purely on the basis of how many jobs it produces. It also has important benefits with regard to pollution, energy security, and national security.

    (By the same token, for example, we should evaluate programs that feed hungry children based on how many hungry children get fed - not how many jobs we create to feed those hungry kids.)

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      Kari -- You are raising a straw man in saying that people are trying to repeal the home mortgage interest deduction. No one is arguing for that. At OCPP we believe that state spending subsiding home purchases needs to be better targeted and the costs better controlled.

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        Excellent. Sorry, Chuck, I haven't been following that particular policy debate.

        Just seemed to me that Evan's post was holding up the home mortgage interest deduction as one that should be repealed -- but I note now that he didn't actually say "repeal".

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          I'd love an exposé on the home mortgage deduction, to focus attention on it (and other stories on other large tax giveaways.)

          In the long uphill battle to make the home deduction more targeted, I think The Oregonian's reporters could serve an important role, as they have over the years in shining a light on the BETC.

          I spent a lot of time on it in my piece because it's so large and seems to be less effective than the BETC.

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            OK, Evan - file this in the "be careful what you ask for" category.

            This study focuses on Federal tax expenditures supporting asset building, and underscores the point that these programs do need to be modified: more than half the benefits go to the top 5% of taxpayers, increasing the assets of those who are already relatively well off.

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              Thanks, Dan - looks very interesting.

              I actually want it to be a campaign of the Oregonian - much like the BETC series has been. There have been a fair amount of studies, etc. by groups and academics, but I want something that's in the public eye.

              That's in part why we have a fourth estate.

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    While there might be a goal of promoting clean energy in the future, right now we get wind at the expense of hydro, which I think would surprise a lot of people that are paying the extra $10 a month for the clean energy special.

    There is no mention of any environmental benefit provided by wind energy in the O's three-parter.

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    Thank you for looking at tax expenditures as spending. Otherwise an over-focus on the General Fund will allow sloppy thinking (and spending) to flourish in other parts of the budget.

    Let me invite you to expand your scope. Rather than demanding quality metrics and clear measurements for corporate welfare, how about demanding it everywhere taxpayer dollars are spent?

    If we had better metrics, we'd have a more honest debate on public sector pay. In particular, the unsung "lean" heroes of SAIF would get annual performance bonuses for all the savings they have generated, and DHS would be getting some credit for the ongoing progress they're making in their transformation projects ($100 million saved so far).

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      Tom, it's worth noting that the Oregon Progress Board -- the very agency that was responsible for producing the "better metrics" that you cite -- has been defunded.

      That is a tragedy of the highest order. Before we can argue about the merits of particular programs, we should at least have the data to determine whether things in Oregon are improving or declining.

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    Evan’s post raises a number of issues, and I feel compelled to respond to a few of them.

    Evan claims that in keeping the BETC program going "we’re also supporting energy independence, cutting air pollution and protecting our health, and preserving the fragile web of life on earth."

    That’s only partially true. It is not true for the solar manufacturing that BETC has supported.

    BETC supported manufacturing doesn’t really do that. In fact, solar manufacturing such as SolarWorld's is very energy intensive, is not supported by its own solar panels in any meaningful way, and has waste byproducts that the environmental community likes to ignore. We should be honest and stop clothing the tax breaks for energy and resource intensive manufacturing in that sort of rhetoric. It should be taken out of BETC and just be a manufacturing incentive that produces a component of “green energy;” the plants themselves are not necessarily green. Oregon is no more energy independent because of the solar manufacturing that is occurring here and we ought to admit that. And while we’re at it, as long as BETC is funding wind generation that is being sold out of state, stop saying wind subsidies make Oregonians more energy independent or protect our health.

    Even says "A 2009 ECONorthwest study finds in 2008 the BETC and RETC created 806 jobs, spurred $390 million in economic output and brought a net tax benefit of $16.3 million." Not exactly. ECONorthwest's study did NOT include a regression analysis to show any causation.

    When there are a variety of potential causes for a certain action, a regression analysis is a statistician's way of estimating if there is causation between one action and another action. ECO's report merely says "the state spent x on BETC" and "investments by the business community that are associated with BETC investments had xyz impact". The report does NOT say that the state's spending caused that impact. There are a host of other factors, such as rising energy prices that motivated some of the investments, the renewable portfolio standard that motivated some of the investments, the crazy concept that saving energy saves money over the long term that might have motivated some of the investments, the equally crazy idea that some of the businesses wanted to do something to avoid global warming....... you get the idea.

    And even if you assume that all those jobs were the result of BETC, the jobs per $1 million spent is not impressive. To get the estimated 806 jobs Evan cites, ECONorthwest notes the state spent about $171 million on tax credits and administrative costs. That means for every $1 million spent, Oregon is estimated to have created just 5 jobs.

    Compare that to ECONorthwest’s estimate of jobs created by an investment of $1 million in long term care under the Department of Human Services. There a $1 million investment of state dollars creates 56 jobs.

    Explanation in next comment due to space limitations.

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    Why does long-term care do so well compared to BETC and RETC?

    The primary reason is that investments in long term care bring federal dollars into Oregon’s economy. Outside money – in this case federal Medicaid dollars – is what impacts the economy. You don’t see “new” or out-of-state money delineated in the ECO report on BETC/RETC – the author conveniently ignores the issue, but that’s the key.

    ECONorthwest President John Tapogna explained this to the City Club of Portland on Friday, February 13, 2009.

    Here's an excerpt:

    From ECONorthwest’s perspective, you have to have two things truly for us to come up and say that you have economic impact in the state of Oregon. One is, you have to be attracting money from some place outside of the State of Oregon to generate a net economic impact inside the State of Oregon. If you have a business that is simply operating in Oregon taking money from Oregonians then in essence that’s a wash. But the businesses that genuinely drive the economy are those that can attract dollars from outside the state. In the long term care sector, that is being driven by the federal match that Leslie [Frane] referred to. The federal government up to this point for every dollar that the state spent on long term care, the federal government matches that dollar with $1.70. Now that is going to change under the stimulus package. There has been a …Medicaid match is a main pillar in the stimulus plan, they are increasing that match to more than $2.25 cents for every dollar that the state invests. So, again, if Oregon takes a dollar out of that program of its own dollars then $2.25 or more goes back to the federal treasury to, in a very small way, reduce the federal deficit, but that dollar is then lost to the Oregon economy and economic activity is reduced.
    The second thing that you need in order to generate economic activity is that when those dollars come here they need to be purchased, and provide services for Oregonians and by Oregonians. What sets long-term car apart is its very labor intensive nature. So when those dollars are coming in they are paying for jobs that are almost exclusively provided by Oregonians"
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      as long as BETC is funding wind generation that is being sold out of state, stop saying wind subsidies make Oregonians more energy independent or protect our health.

      A very important point.

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      The point of this piece wasn't to get into a back and forth on the BETC, though I appreciate your dedication, Chuck.

      The point was trying to find some areas of agreement, regardless of how we feel about the BETC.

      For those who want to read the ECONorthwest report for themselves, go here.

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    I basically agree with Chuck that the solar manufacturing incentives should not be lumped in with the energy conservation and renewal energy tax credits.

    Having said that, I think the solar manufacturing credits do serve a purpose beyond just their immediate job creation and that is helping Oregon gain a foothold in solar manufacturing, which clearly we've done.

    To some extent, this is always a dice roll and the success can only be evaluated in hindsight. Some would argue that our success in attracting computer memory chip manufacturers in the early 1990s proved fleeting, yet it may have contributed to Intel's longer term commitments to Oregon.

    Meanwhile, the fight to attract and build a manufacturing base in Oregon seems to me to be key to closing the income gap between Oregon and the rest of the country. Focusing exclusively on the short-term pay-offs of some of these programs can end up short-changing Oregon workers who need good jobs.

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    Great piece, Evan. Too often public discourse is dominated by situational attitudes. The Oregonian's approach to energy credits versus their approach to CRC is a good example.

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    We should treat all tax expenditures -- not just "credits" -- like we treat direct appropriations. We must demand proof that the money is well spent and accomplishing what the program says it is designed to accomplish. Too often that's not the case.

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      And that is the bottom line.

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      A method of insuring money is being well spent for accomplishing what the program says it is designed to accomplish is to use a "pay-for-performance" model. A legislatively approved tax credit/expenditure is payable upon performance. If the credit is to be amortized over a period of time, then it can be paid on a percentage of the objective being met. By this I mean, if company A is to receive a credit for creating 500 new positions and filling them within a five-year period, then they could receive 20% of the approved credit for each hundred of these new positions filled. I believe this meets a common indictment of the government which is to run it more like a business. "Pay-for-performance" is a well established business practice.

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    I don't agree, Tom. I thought the reference to the CRC was apples to oranges comparison.

    First, CRC is an infrastructure program, like Max or Streetcars or road maintenance or the Sellwood Bridge.

    None of these are sold as a permanent jobs creation program like BETC. Any of the other infrastructure projects listed above would not look good on a jobs per dollar basis.

    Second, BETC is fully funded out of Oregon tax expenditures, while many infrastructure projects are funded by federal dollars, gas tax funds, and potentially tolling. Once again, the comparison is invalid.

    The federal mortgage interest credit? Another apples to kumquats comparison. Why should the Oregonian, which is Oregon's paper of record, and reports mainly on Oregon issues, compare an Oregon tax credit adopted a short while ago to a federal tax credit that has been in place for decades?

    I like the principles that Evan proposes, I just don't understand why the misleading hand waves need to precede them.

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      What Chuck and Evan are talking about is the effect that the home mortgage deduction has on Oregon, not federal.

      From OCPP:

      In 2008, the Oregon Department of Revenue expected the home mortgage interest deduction would cost the state $905 million in the current two-year budget period (2009-11). However, they recently revised the projection to $1.3 billion. And state officials say the subsidy will cost $1.6 billion for the upcoming 2011-13 budget period, almost twice as expensive as in 2007-2009.

      Full disclosure: My firm built the OCPP website. I speak only for myself.

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        That's correct Kari - and it is a deduction, not a "credit."

        Nine states with income taxes (there are 42 including the District of Columbia) do not offer a home mortgage interest deduction and in 2007 (the last data OCPP reviewed a few years ago) seven of the nine had homeownership rates higher than the national average, while Oregon (which does offer the expensive deduction) did not beat the national average in homeownership. That's not surprising, given that so few taxpayers get to take advantage of it. It is time to disconnect from it and do something more efficient, more targeted and less costly.

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