Investment Tax Credit Research Articles

How to design down-and-out barrier option contracts so that firms invest when it is socially efficient

This paper investigates how to design down-and-out barrier options contracts so as firms invest when it is socially efficient. A government initially offers a firm a privileged right to exercise an investment opportunity that exhibits external benefits to society, but will eliminate this opportunity if its prospects are sufficiently bleak. The firm will invest at the date further away from that is socially efficient if the firm either is less uncertain about the return of the investment or incurs lower investment costs, or the government owns a more valuable knock-out option. Consequently, under these three scenarios the government can efficiently either offer the firm a higher investment tax credit or impose the firm a higher lease fee for holding the option to invest.

Assessing the role of renewable energy policies in landfill gas to energy projects

Methane (CH4) is the second most prevalent greenhouse gas and has a global warming potential at least 28 times as high as carbon dioxide (CO2). In the United States, Municipal Solid Waste (MSW) landfills are reported to be the third-largest source of human-made methane emissions, responsible for 18% of methane emissions in 2011. Capturing landfill gas (LFG) for use as an energy source for electricity or heat produces alternative energy as well as environmental benefits. A host of federal and state policies encourage the development of landfill gas to energy (LFGE) projects. This research provides the first systematic economic assessment of the role of these policies on adoption decisions. Results suggest that Renewable Portfolio Standards and investment tax credits have contributed to the development of these projects, accounting for 13 of 277 projects during our data period from 1991 to 2010. These policy-induced projects lead to 10.4 MMTCO2e reductions in greenhouse gas emissions and a net benefit of $41.8 million.

The effect of stock market pressure on the tradeoff between corporate and shareholders’ tax benefits

The Taiwanese government offers firms that invest in qualified projects in emerging high-tech industries two mutually exclusive tax incentives—a corporate 5-year tax exemption or shareholder investment tax credits. This study examines whether corporate managers take shareholder tax benefits into account in their corporate tax planning. The results show that privately held firms are more likely than listed firms to choose shareholder investment tax credits and forego corporate tax benefits. Listed firms with relatively high earnings response coefficients tend to choose a corporate 5-year tax exemption, as it can enhance reported after-tax earnings. Further, in the 5-year period following their choice of a particular tax incentive, firms choosing a corporate 5-year tax exemption exhibit significantly lower earnings persistence than those choosing shareholder investment tax credits. Taken together, these results suggest that stock market pressure has a significant effect on firms’ choices between corporate and shareholder tax benefits, and that the choice of tax incentives has an effect on future earnings quality.

The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists

We quantify how sensitive is migration by star scientists to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists' migration patterns. The long-run elasticity of mobility relative to taxes is 1.8 for personal income taxes, 1.9 for state corporate income tax, and −1.7 for the investment tax credit. While there are many other factors that drive when innovative individuals and innovative companies decide to locate, there are enough firms and workers on the margin that state taxes matter. (JEL H24, H25, H71, H73, J44, J61, R32)

The effect of state taxes on the geographical location of top earners: evidence from star scientists

Using data on the universe of U.S. patents filed between 1976 and 2010, we quantify how sensitive is migration by star scientist to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns. The long run elasticity of mobility relative to taxes is 1.6 for personal income taxes, 2.3 for state corporate income tax and -2.6 for the investment tax credit. The effect on mobility is small in the short run, and tends to grow over time. We find no evidence of pre-trends: Changes in mobility follow changes in taxes and do not to precede them. Consistent with their high income, star scientists migratory flows are sensitive to changes in the 99th percentile marginal tax rate, but are insensitive to changes in taxes for the median income. As expected, the effect of corporate income taxes is concentrated among private sector inventors: no effect is found on academic and government researchers. Moreover, corporate taxes only matter in states where the wage bill enters the state’s formula for apportioning multi-state income. No effect is found in states that apportion income based only on sales (in which case labor’s location has little or no effect on the tax bill). We also find no evidence that changes in state taxes are correlated with changes in the fortunes of local firms in the innovation sector in the years leading up to the tax change. Overall, we conclude that state taxes have significant effect of the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.

METR MODEL FOR MEASURING TAX BURDEN ON INVESTMENT IN UKRAINE

Taxation is one of the most important determinants of investment. It has a major impact on the cost of capital and the expected net revenue from a given investment. Moreover, different tax burdens distort investment allocation. Recognizing the importance of these effects, this study tries to identify the tax induced distortions associated with the current system of taxation, and to find out which tax incentives are the most important for inducing investments in Ukraine. The study attempts to measure the real tax burden on capital investment by using the marginal effective tax rate (METR) as a quantitative indicator. The research includes both general and selective tax incentives, drawing high attention to the incentives acting through the system of corporate income taxation. The calculations are divided into two main parts: the first part - with due regard to general tax provisions (CIT – corporate income tax rate, treatment of dividends, capital recovery incentives, and import duty); the second one – with widening METR calculation by taking into account selective investment tax incentives (tax holidays, investment tax credits, preferential CIT rates). The paper also examines whether general or selective tax incentives’ implication changes the results of calculations.

Optimization of carbon-capture-enabled coal-gas-solar power generation

Computational optimization is used to determine the optimal design and time-varying operations of a carbon dioxide capture retrofit to a coal-fired power plant. The retrofit consists of an amine-based temperature-swing absorption system, to which process steam is supplied from an auxiliary unit. Two candidate auxiliary heat sources are explored: natural gas and solar thermal. The NPV (net present value) of the retrofitted facility is maximized to determine which auxiliary system is preferable, under a variety of economic conditions. Optimized NPV is found to be most sensitive to the price of natural gas and the electricity price. At an 8% real discount rate, without renewable energy incentives, natural gas prices must be high (in excess of 10 USD/GJ) for a solar thermal design to be preferable, and electricity prices must reach ≈55 USD/MWh in order for solar-thermal-based designs to have a positive NPV. Incentives such as investment tax credits and solar power purchase agreements can make solar-thermal-based designs preferable to natural-gas-based designs under certain circumstances.

Tax Equity and Accounting Considerations in the Solar ABS Structure

In both residential and commercial/industrial solar finance structures, tax equity usually occupies a significant portion of the capital stack. By definition, tax equity is usually provided by large financial institutions or operating companies with sufficient tax exposure to utilize the investment tax credits, depreciation, and other tax benefits that compose their overall yield. In order to realize the tax benefits from solar projects, tax equity investors must have either a real or deemed ownership interest in the assets generating the investment tax credit and depreciation, and they usually acquire this in the form of participation in a partnership or limited liability company taxed as a partnership for federal income tax purposes. Tax equity investment structures generally take one of three forms: the partnership flip structure, the inverted lease or lease pass-through structure, or the sale-leaseback structure. As long as tax equity is a significant component of the capital structure of solar development financing, it will cause a significant headwind for efforts to provide liquidity to the solar sector through securitization. In addition to the potential tax consequences for the tax equity investors of securitization, consideration should also be given to the accounting treatment of the three predominant tax equity structures and to the impact on such structures of a securitization transaction. Because most of the significant providers of tax equity are public financial institutions or operating companies, accounting results can be not only relevant but also determinative with respect to their willingness to permit a securitization transaction to occur.

Lumpy Investment and Corporate Tax Policy

In the presence of both convex and nonconvex capital adjustment costs in a dynamic general equilibrium model, corporate tax policy generates both intensive and extensive margin effects via the channel of marginal Q. Its impact is determined largely by the strength of the extensive margin effect, which, in turn, depends on the cross‐sectional distribution of firms. Depending on the initial distribution of firms, the economy displays asymmetric responses to tax changes. Moreover, an anticipated increase in the future investment tax credit reduces investment and adjustment rate initially.

STIMULATION OF INNOVATIVE-INVESTMENT PROCESS: WORLD EXPERIENCE

In the article results of the comparative analysis of world experience of stimulation of innovative-investment process through theformation of a favorable tax climate are generalized. Development of tax stimulation of innovation activity is considered as a crucialfactor in building a new model of economic growth. It is concluded that within the subject principle there are three elements of thestimulation instrument: amortization privileges, preferences concerning the profits tax, indirect measures of tax stimulation. Conclusionson potential use of foreign tax instruments of stimulation of innovation activity in the Russian conditions are presented.KEY WORDS: tax stimulation, innovation activity, tax credits, investment tax credit, tax research credit, amortization, profit tax ofthe organizations, R&D, modernization.

Assessing the Role of Renewable Energy Policies in Landfill Gas to Energy Projects

Methane is the second most prevalent greenhouse gas and has a global warming potential at least 28 times as high as carbon dioxide. Municipal solid waste landfills are reported to be the third-largest source of anthropogenic methane emissions in the United States, responsible for 18 percent of emissions in 2011. Capturing landfill gas for use as an energy source for electricity or heat produces alternative energy as well as environmental benefits. A host of federal and state policies encourage the development of landfill-gas-to-energy projects. Our research provides the first systematic economic assessment of the role these policies play in adoption decisions. Results suggest that renewable portfolio standards and investment tax credits have contributed to the development of these projects, accounting for 13 of 277 projects during our data period from 1991 to 2010. These policy-induced projects have led to 12.5 million metric tons of carbon dioxide-equivalent reductions in greenhouse gas emissions and a net benefit of $52.59 million.

Energy policy and financing options to achieve solar energy grid penetration targets: Accounting for external costs

Abstract This paper presents a review and assessment of public-policy options for supporting large-scale penetration of photovoltaics (PV) in the United States. The goal therein is to reduce the costs both of solar technology and of grid integration, so enabling solar deployment nationwide. In this context, we analyze the solar PV markets and the solar industry globally, and discuss the external benefits of PV that must be advertised, and perhaps marketed, to assure an increase in social support for PV. We discuss existing energy-policy mixes in those countries leading to the development of solar power, highlighting the lessons learnt, and outlining areas of improvement of the existing policy mix in the United States. We highlight that there is a need for a holistic approach including social in addition to economic considerations, and we discuss policy options for supporting the continuation of PV market growth when the current investment tax credits expire.

Assessing the Role of Renewable Energy Policies in Landfill Gas Energy Projects

Methane is the second most prevalent greenhouse gas and has a global warming potential at least 28 times as high as carbon dioxide. Municipal solid waste landfills are reported to be the third-largest source of anthropogenic methane emissions in the United States, responsible for 18 percent of emissions in 2011. Capturing landfill gas for use as an energy source for electricity or heat produces alternative energy as well as environmental benefits. A host of federal and state policies encourage the development of landfill-gas-to-energy projects. Our research provides the first systematic economic assessment of the role these policies play in adoption decisions. Results suggest that renewable portfolio standards and investment tax credits have contributed to the development of these projects, accounting for 13 of 277 projects during our data period from 1991 to 2010. These policy-induced projects have led to 12.5 million metric tons of carbon dioxide–equivalent reductions in greenhouse gas emissions and a net benefit of $52.59 million.

Optimization of Thermal Energy Storage Integration Strategies for Peak Power Production by Concentrating Solar Power Plants

The integration of thermal energy storage systems in concentrating solar thermal power plants allows power production to be shifted from times where there is low demand to periods where electricity prices are higher. Although increasing the total investment, thermal energy storage can therefore enhance profitability of the solar power plant. The present study presents optimum power plant configurations for a given location considering different price-based grid integration strategies. Such optimum plant configurations were determined using a thermo-economic optimization approach to compare the profitability of generating electricity assuming an instant-dispatch strategy with respect to a selective operating strategy where electricity is produced only during peak price hours of the day. For each of these price-operating strategies, optimum plant configurations were found by varying two solar-related design parameters, namely the solar multiple and the storage size, whilst simultaneously evaluating the economic performance of each design. Results show that for the case of smaller storage units and solar field size a peaking approach will yield more revenues at the end of the project, thus highlighting the importance of the availability of reliable predictable demand and meteorological data for the plant operators. Moreover, results confirm that for the location considered, the best plant configurations encompass large storage units and solar field sizes, for which the gain of a peaking operation strategy becomes negligible since the plants start behaving similar to a baseload power generation station. Finally, it is performed a sensitivity analysis with respect to the available price data and the influence of renewable electricity incentives, particularly the investment tax credit treasury cash grant, showing the positive impact that such measurements could have in augmenting the economic viability of concentrating solar power and thus serve as a driving force for technology deployment.

“We need more education, hard work and shoe leather”

ON THE cusp of Solar Power International (SPI 2013), Renewable Energy Focus magazine recently caught up with Rhone Resch, president and CEO of the Solar Energy Industries Association (SEIA), the national trade association for the solar energy industry in the United States. Representing an industry of more than 5,600 companies and 119,000 employees, Resch is the architect of the Association's strategic priorities designed to achieve a 10 GW annual market in the US by 2015, including all Federal and state advocacy on behalf of the industry. In the last 8 years as the President of SEIA, he helped create the 30% investment tax credit, the 1603 Treasury Program, and more than 18 other provisions that have helped grow the industry from 52 MW/year market in 2004 to 3,300 MW in 2012.

Mobilizing for the Market: Organized Business, Wage-Price Controls, and the Politics of Inflation, 1971-1974

On Sunday evening, August 15, 1971, President Richard M. Nixon preempted the beloved television western Bonanza to announce a historic change in federal economic policy. (The show was in summer reruns, but an always-insecure Nixon still worried that his interruptive prime-time address would annoy its fans.) After a frantic weekend conferring with his economic advisers at Camp David, the president announced a multifaceted New Economic Policy (nep) to address the interrelated problems of “unemployment, inflation, and international speculation.” A crisis in international monetary policy loomed, brought on by deficits in America's balance-of-payments and balance-of-trade accounts and the consequent outflow of U.S. dollars to foreign central banks. Under the terms of the Bretton Woods agreement of 1944, the United States promised to redeem dollars for gold at a fixed rate ($35 per ounce), but the quantity of greenbacks in circulation far outstripped the nation's gold supply. To prevent a devastating run on American reserves, Nixon suspended gold convertibility. To redress the trade balance, he imposed a 10 percent surtax on imports. And to stave off recession, Nixon called on Congress to enact an economic stimulus plan that would reinstate an investment tax credit, repeal excise taxes on cars, and increase the personal exemption for individual income taxes. Those provisions all became law in December 1971.1

Demand-Pull and Innovation in the U.S. Solar Market

It is widely known that demand-pull policies in the United States, especially the federal investment tax credits (ITC) and the California Solar Initiative (CSI), have led to a rapid escalation in the installation of solar photovoltaic (PV) systems. But there has been little systematic study into the impacts of the ITC and CSI on technological innovation. To understand the extent and nature of innovations spurred by major solar demand-pull policies, we examine patent activity in four categories of the distributed solar PV balance of system (BOS) — inverters, mounting systems, monitoring, and site assessment. Using patent counts from a unique dataset, we find that patent activity for each of these four BOS categories has increased substantially since 2005-06: ~200-400% increase in 2006-08 and ~100-200% increase in 2009-10 over prior periods (2002-05 and 2006-08, respectively). Through examining correlations of measured patent activity with cost trends of BOS and with the timing of major demand-pull policies, we conclude that demand-pull policies have largely engendered the new wave of innovations in PV BOS. We also find that new entrants account for a significant portion (34% - 74%) of patent activity in all four BOS categories. New business model innovations that tap into the large markets created through ITC and CSI have driven demand for new technological innovations in areas that had largely been untouched by incumbents, thereby allowing new entrants the opportunity to compete in and shape the market landscape.

Does Foreign Environmental Policy Influence Domestic Innovation? Evidence from the Wind Industry

This paper examines the relative influence of domestic and foreign renewable energy policies on innovation activity in wind power using patent data from OECD countries from 1995 to 2005. We distinguish between the impact of demand-pull policies (e.g. guaranteed tariffs, investment and production tax credits), as reflected by wind power capacity installed annually, and technology-push policies (government support to R&D). We show that inventors respond to both domestic and foreign new wind capacity by increasing their innovation effort. However, the effect of the marginal wind turbine installed at home on the rate of innovation is between 36 to 55 times stronger than that of the marginal wind turbine installed abroad. Unlike demand-pull policies, public R&D expenditures only affect domestic inventors. A simple calculation suggests that the marginal million dollars spent on R&D support generates between 0.67 and 0.86 new inventions, whereas the same amount spent on the deployment of wind turbines induces, at best, 0.09 new inventions (0.05 locally and 0.04 abroad).

Charles T. Horngren: Mentor, Role Model, Colleague, and Friend

This expresses the feeling of inadequacy of doing justice to the life and career of Charles Thomas Horngren. Chuck, the son of William and Grace Horngren, was born on October 28, 1926, in Milwaukee, Wisconsin. His father worked for over 40 years as a railway mail clerk on the Milwaukee Road. His father was an avid baseball fan, a passion he passed on to his son. Chuck often reminisced about his dad taking him to the baseball games and meeting many of the day’s baseball luminaries. He also had a collection of baseball memorabilia, including Yogi Berra’s autograph in his book, Yogi: It Ain’t Over. . . , co-written by Chuck’s close friend, Tom Horton. Chuck graduated from Washington High School in 1944 and joined the Army. The Army sent him to pre-engineering classes at Ripon College and to engineering classes at what is today known as Texas A&M University. After over two years in the Army, Chuck enrolled at Marquette University and was elected to Beta Alpha Psi. While at Marquette he gained an appreciation for teaching after tutoring basketball players and disabled veterans. He graduated from Marquette as valedictorian in 1949 and remained very loyal to Marquette throughout his life. Upon graduation, he joined Peat, Marwick, Mitchell & Co. (now part of KPMG) as a staff auditor. A year later, he taught full time at Spencerian College, a commercial business college,

Repairing Canada’s Mining-Tax System to Be Less Distorting and Complex

The province of Ontario ended its most recent fiscal year with a $12 billion deficit and the Fraser Institute has calculated that the province is in worse financial shape than even the fiscally appalling state of California. One would think that a province so financially debilitated would want to avoid giving unnecessary and wasteful tax breaks to resource companies. Yet, a review of the mining-tax regimes across the country finds that Ontario’s system — specifically its provincial resource allowance, which duplicates the allowances provided by Ottawa that shield miners from risk — is redundant, expensive and wasteful. Ontario is not the only province requiring a modernization of its mining-tax regime. In every province except Nova Scotia and New Brunswick, mining firms enjoy a lower marginal rate for taxes and royalties than for non-resource companies. The inevitable result has been a distortion of investment toward mining projects that might otherwise be economically inefficient. That means that in major oil-producing provinces, such as Alberta, Saskatchewan and Newfoundland, mining investment benefits from larger tax incentives than oil and gas investment. The reasons for favouring the mining of metal over oil are at least unclear and certainly economically unjustifiable. The federal government has already begun making several changes to its tax policies to scale back preferential and irrational inducements for mining investment, including, most recently, reducing accelerated depreciation allowances for certain mining assets and phasing out the corporate Mineral Exploration Tax Credit and the Atlantic Investment Tax Credit for resources. But Ottawa’s efforts to modernize Canada’s mining-tax structure can only go so far, when provinces continue to rely on what are often overly complex tax systems that have a distortionary effect on economic decisions being made by investors. The next step in modernizing Canada’s mining-tax system requires provinces to start eliminating preferential and wasteful tax breaks for miners. Provincial treasuries certainly cannot afford these breaks, and neither can the Canadian economy as a whole.