Watchdog Catches Tax Abuse

Weekly WastebasketWatchdog Catches Tax AbuseCompanies take advantage of a decade of lax monitoring.

Though we’re doggedly tracking the trillions of dollars going out the door through COVID-19 response legislation, we also keep an eye on the ball for more “garden variety” waste, fraud, and abuse. Last month, the Treasury Inspector General for Tax Administration (TIGTA) revealed massive fraud involving $1 billion in tax credits claimed over the last decade for “capturing and storing” carbon dioxide.

In all, 672 private entities claimed $1.03 billion in credits for capturing and storing CO2. However, all but a few of the credits (99.9 percent) were claimed by just 10 businesses, who apparently played fast-and-loose with requirements to claim the credit. These 10 companies claimed $894 million in credits without having an approved plan to ensure CO2 stored underground actually stayed there. The IRS has yet to examine all these credits, but so far has determined that $531 million – more than half – were claimed improperly and were disallowed.

The original motivation for funding carbon capture and sequestration (CCS) technologies was not only to reduce climate change-driving emissions but accommodate our existing energy sector, particularly coal plants. To that end the Department of Energy (DOE) began pumping money into carbon capture research and development (R&D) as early as 1997. Since then, we’ve spent more than $5 billion just on CCS R&D. DOE also poured another $5 billion into projects that promised to demonstrate CCS technologies. We’ve seen little progress, and some high-profile busts (looking at you FutureGen).

Taking a belt and suspenders approach to supporting CCS, lawmakers went beyond appropriations, and turned to tax subsidies creating the “Tax Credit for Carbon Dioxide Sequestration” in the Emergency Economic Stabilization Act of 2008, aka TARP aka the Bank Bailout. These are the credits now in question. To put it simply, for every ton of CO2 captured, power plant owners or industrial facilities could claim a tax credit worth $20 if the CO2 is stored in underground rock formations directly, or $10 if it’s used for enhanced oil recovery (EOR) (pumped into dying oil wells to eke a few more drops out) before being stored underground.

The idea now was to spur the creation of a new industry practice and then end the subsidy. The original tax code provision was only effective until credits for 75 million tons of CO2 had been claimed. Congress’s nonpartisan tax scorekeepers – the Joint Committee on Taxation (JCT) – originally projected the credit would cost taxpayers $1.1 billion between 2011 and 2019.

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By May 2017, credits had been claimed for 53 million tons of CO2, and the Treasury Department was projecting the 75 million mark would be hit in 2019. But as we’ve seen, claims don’t necessarily equal reality. And like many tax incentives, its beneficiaries didn’t want to see it end.

In the Bipartisan Budget Act of 2018, Congress dramatically expanded the credit, ramping up amounts over 10 years from $20 to $50 per ton stored directly and $10 to $35 per ton stored after EOR or other use. The provision also effectively eliminated the 75 million-ton cap and allowed the credit to be claimed for all CO2 captured from a facility under construction by 2024 in its first 12 years. The JCT projected the expansion would cost taxpayers $689 million by 2027. But over the full lifetime of the credit, its price tag is in the billions of dollars.

Back to recent news, the whole credit was premised on the idea that companies would be preventing tons of CO2 from reaching the atmosphere. To this end, the IRS directed claimants to comply with EPA guidance for what constituted “secure geological storage.” That guidance required companies to submit a Monitor, Report and Verify plan for EPA approval. But the IRS and EPA don’t compare notes – something some folks in industry exploited.

According to the TIGTA report, 10 companies chose to simply ignore the EPA guidance and claimed hundreds of millions of dollars in credits anyway. Faith-based monitoring is never good for taxpayers. It took some hill staffers looking into limited public data to prompt a review of the credit after more than a decade in practice. How many other tax credits are being awarded with no verification and no visibility to the public? Tax expenditures are virtually never reviewed to establish whether they are having the intended policy impacts on the ground. It’s past time that they should.

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