BETC Scandal Highlights Bigger
Problems in State Government
by Oregon Senator Doug Whitsett 12/15/15
Governments often attempt to impose their social and
political doctrines by using public funds to influence
investment behavior. One method of choice is issuing tax
credits that encourage and induce speculation in
ventures that free market investors would normally avoid
due to high risk and low probability of profit.
Many of those who do choose to invest understand the
importance of maintaining close and favored
relationships with the politicians and bureaucrats who
create and manage the distribution of the tax credits.
They recognize how favored status can result in immense
profits being reaped.
The state of Oregon has issued more than $1 billion in
tax credits designed to promote free market investments
in high-risk renewable energy enterprises. Even if the
public agrees that government-driven market distortion
is an appropriate objective, tax credits are a very
inefficient and costly way to achieve that goal.
Most Oregon Business Energy Tax Credits (BETC) have been
issued to municipalities, special districts, school
districts and non-profit organizations that are tax
exempt, or to businesses that have little hope of
earning taxable profits. The tax credits are of little
of no value to an entity with no tax liability, unless
they can be sold. For that reason, the Legislative
Assembly created a market for the sale of tax credits to
business ventures that do have Oregon tax liabilities.
Businesses purchase tax credits to offset their own
taxable income dollar-for-dollar. The tax credits are
sold at discounted rates, allowing the purchaser to earn
capital gains profits on the difference between the face
value of the tax credit and the discounted purchase
price of the tax credit.
For example, TriMet is a tax-exempt entity that was
issued $1.8 million in Oregon BETCs. It sold the tax
credits through a brokerage for $1.35 million, a 25
percent discount. This transaction provided the
purchasers $450,000 in potential capital gain profits.
Further, tax credit sellers often pay as much as a five
percent fee to a third party to broker the sale. After
selling a tax credit at a 25 percent discount and paying
a five percent brokerage fee, only 70 cents of each tax
credit dollar may actually be applied to the intended
purpose of creating renewable energy or greenhouse gas
It is our understanding that some Oregon tax credits,
issued to promote affordable housing, have recently sold
for less than 55 cents on the dollar. After applying a
brokerage fee, only about half of the tax credit can be
applied to the intended purpose of building affordable
Nevertheless, state tax revenue is reduced one dollar
for every dollar of tax credit that is issued and used
to offset taxes owed. The program allows selected
purchasers of tax credits and their brokers to make
enormous profits off the public dime.
Oregon news media has done an
impressive job exposing the scheme, including reports
that the sale of state tax credits
may have been made contrary to
Oregon statutes and administrative rules.
Further, favoritism may have occurred in the selection
of tax credit purchasers and the brokers who
participated in the sales. Finally, the potential exists
that capital gains taxes may not have been properly
reported or paid.
The Legislative Assembly intended for the Department of
Energy (DOE) staff to broker the sale of BETCs at
minimal discount rates established by DOE formula.
However, a significant number of sales occurred as early
as 2012 with substantially higher discount rates. These
sales were brokered by private firms, providing the
potential for much larger profits for the buyers.
DOE officials claim they began allowing these apparently
extra-legal sales based on advice of their Department of
Justice (DOJ) attorney. Allegedly based on that advice,
the agency then implemented temporary administrative
rules in March of 2015 that served to retroactively
authorize privately brokered BETC sales, with negotiated
discount rates greater than the DOE formula allowed,
dating back to July 2010. DOE has declined to share the
legal advice with its own staff, or other interested
parties, claiming attorney-client privilege.
Moreover, DOE’s management
acknowledged to the
Secretary of State's audit team
“it did not fully communicate, externally or internally,
its 2012 decision to accept privately negotiated
discounts. As a result, few financial firms were aware
that discount restrictions had been lifted, and
department staff gave conflicting advice when asked
about transfer discounting.”
It also appears DOE provided significant preference for
third-party brokerage to one or more Portland-based
finance firms. It appears that one firm consistently
negotiated discount rates significantly greater than the
limit established by DOE’s formula.
Those “preferred” firms may have brokered the
preponderance of the third-party negotiated BETCs. It
appears that DOE did not keep records on the brokerage
fees charged by these financial firms. It also appears
that DOE may not have filed the appropriate tax forms to
document taxable capital gains resulting from the
discounted sale of BETCs.
At least one Department of Revenue (DOR) auditor has
told both Legislators and media reporters that the
agency’s auditors were specifically instructed by
management not to select transactions with potential
BETC capital gains for audit procedures.
It is alleged that DOR management was working with
then-Governor Kitzhaber to introduce legislation during
the 2013 session designed to retroactively cancel
potential capital gains on BETC sales. That alleged
effort did not result in a law being enacted.
Still, the audit moratorium was in affect for about 15
months. It served to permanently prohibit audits of
hundreds of millions of dollars of BETC sales, due to
the statute of limitation on Oregon tax audits.
According to the DOR auditor, the instruction may have
caused the loss of as much as $20 million in state
capital gain tax revenue. Once again, it is unclear
whether the federal taxable capital gains were
appropriately reported to the Internal Revenue Service.
The credit for bringing this
scandal to light is owed to Oregonian
Willamette Week’s Pulitzer Prize-winning
and the Portland Tribune’s
Their excellent investigations and series of separate
in-depth news reports uncovered the extent of this
ongoing multi-department debacle.
The Secretary of State’s Audit Division initiated its
fiscal investigation of the DOE after receiving a
“hotline tip” from a concerned citizen regarding ongoing
practices within the agency.
DOE's Chief Financial Officer
resigned soon after the
reporters began publishing their investigative findings.
A former DOE fiscal officer and a current DOR auditor
contacted five Legislators this fall, including all four
Republican members of the House Revenue Committee. After
spending several hours on the phone with these
“whistleblowers,” and conferring with Legislative
Counsel, the five Legislators agreed on a course of
wrote a letter
expressing our concerns to several state and federal law
enforcement agencies. Several seemingly related actions
have occurred since that letter was sent and made public
on December 7.
On December 9, the Legislative
Assembly’s Presiding Officers made public
their agreement to appoint a
bicameral committee to
investigate the DOE. The Committee will begin hearings
in February 2016 and will be directed to report its
recommendations to the 2017 Legislative Assembly.
Also on December 9, Governor
Kate Brown announced
she would assemble a task force comprised of mainly
agency directors to look into the DOE’s actions.
The first, and to date the only,
response from the law enforcement agencies is a
letter from Fred Boss,
deputy director of the Oregon DOJ. His letter requests
more specific information about allegations regarding
DOE, but does not specifically address allegations
regarding the DOR.
Earlier this month, the Department
of Revenue director
announced to his staff that he
plans to retire as of February 1.
In my opinion, misuse of public funds most likely did
occur. I am greatly concerned that some of the
malfeasance described may constitute criminal activity.
It is my hope that our letter will result in parallel
state and federal criminal probes that will definitively
determine whether criminal acts occurred, the extent of
those acts, if any, and seek appropriate punishment in
the event that laws were broken.
Please remember--if we do not stand up for rural Oregon,
no one will.
Senate District 28
I Phone: 503-986-1728
Address: 900 Court St NE, S-311, Salem, OR 97301