Report No. 2007-58
October 2007

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Wood Energy Tax Credit Provides Environmental and Economic Benefits, But Is More Costly than Anticipated

This audit reviewed the cost-benefit to the state for the Wood Energy tax credit. The tax credit has contributed environmental and economic benefits to Missouri; however, those benefits cost at least three times more annually than estimated. The Department of Natural Resources (DNR) manages this tax credit program. It was established as a production incentive for qualified wood producing facilities to produce processed wood products using Missouri forest product residue. As of June 30, 2007, $28.6 million in credits had been issued and $26.4 million redeemed. State law mandates the State Auditor's office perform cost-benefit analyses on state tax credit programs. This audit was performed as part of this ongoing work.

Emissions reduced

The Wood Energy tax credit provided financial support to charcoal producers facing increased costs from emission fees and installation of emission control devices. EPA statistics show air pollution levels caused by charcoal producers have decreased in Missouri since the mid 1990's and required installation of the emissions control devices. The Wood Energy tax credit, along with the Charcoal Producer's tax credit, were available resources for charcoal producers to offset additional funds spent on the required emissions control devices. (See page 8)

Tax credit helps wood products industry

The Wood Energy tax credit has helped support the charcoal and wood products industries in Missouri. Charcoal and wood energy firms that supplied sales data in survey responses showed increased sales and some workforce expansion since reinstatement of the tax credit in 1997. Representatives from charcoal producers responding to our survey also reported shifting production to Missouri due to the tax credit and depending on the credit to help support their operations. (See page 10)

Tax credit issuances more than expected

Actual annual tax credit issuances have been three to four times expected issuances since reinstatement of the tax credit in 1997. This result occurred because charcoal producers received a tax credit that is computed at four times the $5 per ton compensation discussed in the legislation establishing the credit. DNR officials included this conversion factor in the regulations covering the tax credit because analysis supported it took 4 units of wood residue to produce 1 unit of charcoal. The officials concluded the tax credit's authorizing laws, which states the tax credit shall be $5 per ton of processed material, were unclear whether processed material meant input or output material and attempted to clarify that in the regulations. (See page 11)

Performance measure does not reflect changes resulting from credit

DNR officials are using wood residue that is diverted from waterways and landfills as the performance measure to evaluate the cost-benefit of the tax credit in budgetary documents, but this measure is not accurately evaluated and fails to consider other program benefits. According to a DNR publication, the charcoal industry has traditionally used wood residue as a raw material for charcoal production. As a result, much of the diverted wood residue that was reported as a benefit would have occurred without the credit. In addition, one of the original purposes of the credit was to create wood energy product commercial operations that at the time did not exist in the state. The performance measure does not address this purpose. (See page 12)

Limited verification of application data

DNR personnel have not adequately validated the product sales and wood residue information provided by tax credit applicants. DNR personnel limit verification of sales and wood residue information to calling one purchaser per application and have not required applicants to provide documentation of the source of wood residue claimed. (See page 14)

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