News: CJ Exclusives

Green Tax Credits Big Business for Big Business

Duke Energy, Blue Cross Blue Shield are top companies to benefit

While Duke Energy is passing higher costs to ratepayers because state law forces it to purchase renewable energy, the utility also claimed $62.8 million in tax write-offs in 2014 for its own investments in green power projects.

The electric giant accounted for roughly half of the state’s $126,661,982 renewable tax credit payments in 2014, with Blue Cross and Blue Shield a distant second at $16.8 million, according to state Department of Revenue records.

Dating back to 2010, Duke has claimed an additional $3,112,503 in tax credits, and BCBS has been issued another $12,696,204.

The state grants tax credits for 35 percent of investments in renewable energy projects, most of which are solar farms. Developers also can claim a 30 percent federal tax credit for solar projects. In addition, the NC Clean Energy Technology Center at N.C. State University lists 113 programs under which renewable projects in North Carolina can qualify for various state and federal incentives.

State Revenue Department records show that big solar is big business for big business. The state has issued $224,508,181 in tax credits since 2010, according to Revenue Department records.

Aside from Duke and BCBS, the lion’s share of the largest tax credits since 2010 went to huge insurance companies and large banks. Those include Metropolitan Life ($15,203,523) Bank of America ($7,969,794), and BB&T ($6,672,487).

“It is very common for banks or insurance companies with tax liability in North Carolina to have full or partial ownership in renewable energy, historic preservation, and low-income housing projects” to reap associated tax credits that offset their tax burden, said Allison Eckley, spokeswoman for the N.C. Sustainable Energy Association.

She said the 2014 Revenue Department report shows that $717.6 million was invested in renewable energy projects that utilized the Renewable Energy Investment Tax Credit.

“These investments from banks, insurance, and other companies in North Carolina are leading to $1.54 in tax revenue for state and local governments for every $1 of tax credit claimed,” Eckley said.

“This tax revenue generated as a result of renewable energy projects allows local governments to invest in education, infrastructure, and public safety with funds they would not otherwise have,” she said. “Local governments and their taxpayers are better off due to investments in renewable energy” because the projects don’t require new infrastructure or government services.

Economists at the Beacon Hill Institute of Suffolk University criticized the study touted by the renewable industry showing tax revenue and jobs gains in North Carolina from renewables.

Some state lawmakers disagree with the renewable industry’s study as well, and want to eliminate the state’s renewable tax credits, which are set to expire at the end of this year.

Among objections to the renewable tax credits is their uniquely transferrable nature. While the credits cannot change ownership and, thus, are not technically transferred, the law is written in such a way as to make that the practical outcome.

Here’s how that works. The original developer and investor form a flow-through partnership that allocates installment shares of the tax credits over a period of years.

According to the state Department of Revenue, if a partner sells his interest in the flow-through entity after the first taxable year, the buyer is allowed to claim the former partner’s share of the credit because of that legal accommodation. Technically, the credit stayed with the partnership, even though the partners changed.

There are doubts about how closely the program is monitored for abuse or fraud. And there are concerns about the high costs of the program because development partnerships may claim multiple, separate tax credits on the same project rather than limiting them to one tax credit per facility.

The solar industry, particularly, is pushing back hard against legislation now being debated to cap the legislatively mandated purchase of renewable energy at 6 percent of utilities’ power mix. Without the cap, the requirement to use the more expensive renewable energy will rise to 12.5 percent by 2021.

One of the most vocal critics of the tax credits is state Rep. Chris Millis, R-Pender, who pushed legislation which did not pass this session sunsetting the 35 percent tax credit.

“In regard to a scheme that gives tax dollars to underwrite the prosperity of a single industry by way of a 35 percent fully transferable credit, we must never lose sight of the cost to the proper role of government this subsidy requires,” Millis said.

“Why should the hard-earned dollars of my constituents be taken by way of their tax bills and their power bills to underwrite the prosperity of an industry that provides no net economic or environmental benefit to their person?”

The $224.5 million in tax credits issued since 2010 may be just the tip of the iceberg.

State law allows the credits to be taken over a period of five years, rather than in one lump sum in the year they were earned. An extension of five years is possible under certain circumstances.

“Since the credit is taken in five installments, and due to the extent of the growth in the credit in recent years, there are significant amounts of credits earned but not yet used that will impact future tax collections,” legislative Fiscal Research Division staff said in an e-mail to Millis dated June 8.

Duke Energy’s 2014 tax credit claim is an example of that delayed issuance.

The Revenue Department’s report for the 2014 calendar year “includes amended tax returns that combined four years of solar, hydro and other renewable projects into one year,” said Duke spokeswoman Anne Sheffield.

“The report includes a pilot rooftop solar program launched by Duke Energy Carolinas in 2009, and N.C. projects launched by Duke Energy’s commercial business unit,” Sheffield said. “The amount reflects what was processed by the Department of Revenue versus what was used by Duke Energy in 2014.”

Sheffield said Duke’s solar credit installments for 2014 alone were actually about $5 million, and that is associated with its commercial business unit, Duke Energy Renewables.

Even so, in testimony before the state Joint Legislative Commission on Energy Policy in 2014, Paul Newton, president of Duke Energy North Carolina, said the utility’s lower-income customers subsidize more affluent customers who are more able to afford rooftop solar panels on their homes. Utilities are required to purchase solar power from “qualifying facilities” including residential solar installations.

Annual rate increases of $100 million for 15 years would be imposed on power customers if all renewable energy facilities that were under consideration in 2014 were completed, Newton said at the time.

Duke has not provided Carolina Journal with a total dollar cost of the renewable mandates to date.

“I don’t have an aggregate amount on what we’ve invested. There’s a lot of stuff in the pipeline, and the investments are passed on through a rate-making procedural matter,” said Duke spokesman Tom Williams.

But the utility has raised customers’ annual bills to meet the direct costs of the renewable mandates.

“Duke Energy Carolinas is closer to $6, Duke Energy Progress is closer to $10,” depending on how far along they are to meet the mandates, Williams said.

Duke has not taken a position on the tax credit debate in the legislature, and has not participated in discussions about it, he said.

“We believe a decision on whether to extend or allow the program to sunset is a decision best suited for state lawmakers,” Williams said.

If there are major changes to the state’s renewable mandates, “we have been suggesting that it be done through a collaborative stakeholder approach to consider the many renewable issues before the state — the same approach that created the RPS in 2007 — and involved legislators from both parties, industry groups, consumer advocates and environmental groups,” Williams said.

“I am not against the form of energy they promote but against the subsidization of the industry on the backs of the taxpayers and energy ratepayers,” Millis said. Aside from the loss of hundreds of millions of tax dollars, he also is concerned about the lack of scrutiny the tax credits receive.

“I’m pretty comfortable in saying we definitely know that California is ahead of our state in regard to reporting fraud aspects associated with these fully transferable tax credits, and that the lack of verification, the lack of auditing and reporting should be a major concern of the taxpayers,” Millis said.

“Those credits cost. It’s not like you’re just forgoing tax burden,” Millis said. “You’re actually granting money based on someone’s expenses, so these are resources lost from the proper role of government.”

“From my understanding from the Department of Revenue there is no audit on what individuals are claiming as expenses [and] whether the expenses are valid,” Millis said.

Bill Holmes, a spokesman in the State Auditor’s Office, said that agency does not audit the tax credits. But in an e-mailed response to a query from CJ, the Revenue Department said its Examination Division has oversight of the tax credits.

“Unfortunately, due to secrecy measures found in N.C. Gen. Stat. 105-259, the agency’s audit practices and standards used are prohibited from disclosure,” the Revenue Department response stated.

Millis also suggested that state law is written in a solar-friendly way, letting solar farms avoid the $2.5 million cap on allowable tax credits per energy facility.

He believes developers are collecting multiple credits on individual arrays of solar panels at a solar farm rather than being limited to one credit per entire project. So a $100 million solar farm with 10 allowable components might generate $25 million in tax credits rather than $2.5 million for the overall project.

In its e-mail response, the Revenue Department said the law allows an “installation of renewable energy property” to receive the tax credit. An installation is defined as “property that standing alone or in combination with other machinery, equipment, or real property is able to produce usable energy on its own. Therefore a single project may be comprised of multiple installations of renewable energy property” eligible for the tax credit.

WHO BENEFITS

Aside from Duke Energy, and Blue Cross and Blue Shield, the companies that benefited most from large renewable tax credits claimed on renewable energy projects in 2014 were:

• Hartford Insurance through eight separate companies ($4,018,118)

• USAA Casualty Insurance, USAA General Indemnity, and USAA Life Insurance companies ($2,688,210)

• United Services Automobile Association ($2,368,258)

• Northwestern Mutual Life Ins. Co. ($2,240,000)

• BB&T ($1,870,869)

• Southern Farm Bureau Life Insurance ($1,556,785)

• First Citizens Bancshares ($1,103,769)

• Glenworth Life and Annuity and Glenworth Life Insurance Co. ($1,026,571)

• Builders Mutual Insurance Co. ($1,005,391)

• Federal Insurance Co. ($996,266)

• Owners Insurance Co. ($551,926)

• Transamerica Life. Insurance ($543,480)

• Southern Power Company ($520,435)

• Sentinel Insurance ($378,352)

• Standard Insurance ($327,289)

• United States Surgical Corp. ($293,590)

• Peoples Bank ($200,000)

• Union Security Insurance ($191,339)

• Synergy Insurance ($183,195)

• Time Insurance ($166,430)

• Vigilant Insurance Co. ($138,184)

• Trumbull Insurance ($114,889)

Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.