What the FEOC
I’ve been doing tiktoks again, looking at districts that people request. This recent batch of districts (Sarasota FL, Bexley OH, Lake Zurich IL, and Enfield CT) I’m doing in preparation for an interview for a podcast. And this week I wanted to write about something heartening I saw in Lake Zurich and then something disheartening I heard about Trump’s reconciliation budget bill.
Cheerleaders and green infrastructure
I’m pretty sure I got the request to look at Lake Zurich because some cheerleading coaches embezzled about $40,000 from the school district. While corrupt and a little funny this didn’t interest me much.
But while listening to a recent board meeting I heard the president of the board talking about the district’s solarization with a detail and frankness that I rarely get to hear (it’s at minute 25:30 if you want to listen too).
They did a pilot solarization on one of their schools, and the president said they’d seen significant savings (about $17,000 over nine months) and also received reimbursements from Inflation Reduction Act programs (about $625,000), making solarizing all their schools an “attractive” prospect.
As you probably know, the big legislative agenda coming out of the federal government right now is a budget bill, thousands of pages long, that costs about $2.4 trillion, making tax cuts permanent and increasing defense spending. There’s a lot of back and forth happening about this budget bill since it’s seen as the right wing’s big legislative contribution: undoing Biden’s agenda, setting the policy path of the country, etc.
The bill passed the House, and now it goes to the Senate, where Republicans will edit it and vote. Nothing’s for sure and all we have is the House version. When the Senate marks it up and votes it’ll go back to the House, so things could certainly change.
School districts are watching this closely, and one element they’re looking at is whether the tax credit programs in the Inflation Reduction Act are going to be taken away. These are the programs providing Lake Zurich with hundreds of thousands of dollars to use cleaner, less-expensive solar energy.
The school board president said: “There’s nothing in the reconciliation bill would threaten the money we’re getting back.” They’re seeing limits to the megawatt hours in the bill, and the regulations make it seem like they’ll have to remeter the buildings they solarize, but so far nothing is threatening the rebates.
He did mention that tariffs on China are a threat, since most of the technology and infrastructure they use for solarization come from Chinese companies. But he didn’t seem that worried about it. He finished with a heartening statement about green infrastructure finance in education:
These actions are consistent with sustainability goals--the money we’ve already spent we’re getting back. Energy expenses are going up, but we’ll be getting a very significant” savings. We are a district that cares about the future of our community, and this is one way to demonstrate that care and concern.
Warm fuzzies there! But those warm fuzzies cooled and withered when I saw a new analysis of some other stuff in the reconciliation bill.
FIE you stars
UnDauntedK12 updated their website recently with guidance about whether right wingers are taking away tax credits (thanks to them for bringing the following to my attentions). I heard through the grapevine that a recent Tax Law Center analysis shows the reconciliation bill threatens these credits in other, more esoteric ways.
The headline: technofascist neomercantilism is coming for derisked private green finance. And it all centers around Foreign Entities of Concern regulations, or FEOC.
While Tax Law Center wonks call the new FEOC stuff in the reconciliation bill “unworkable” I think we all know that the neofascists don’t let workability get in their way. Check out this passage:
The House-passed bill includes unworkable provisions regarding “prohibited foreign entities.” These rules are extremely overbroad, produce arbitrary results, and contain unnecessary tripwires that would effectively nullify key credits for many clean energy technologies. In so doing, they would decrease incentives to invest in U.S. manufacturing and to move supply chains away from China, which would be at odds with lawmakers’ stated goals.
What does it mean to be considered a “prohibited foreign entity”? You have to be a “specified foreign entity” (SFE) or “foreign influenced entity” (FIE).
An SFE means you’re on one of six lists relating to national security, Chinese battery makers, or forced labor, or any “foreign controlled entity.” If you’re influenced by an SFE then you’re an FIE. Who’s an FIE?
A taxpayer is deemed an FIE if:
the taxpayer is 25% controlled by SFEs in aggregate (or 10% controlled by a single SFE),
25% of the taxpayer’s debt is held by SFEs in aggregate,
a SFE has the ability to directly (or indirectly) appoint one or more board members or top executives, or
a taxpayer knowingly makes 25% or more in payments (including most types of payments other than payments of goods) to SFEs as a percentage of all payments made (or 10% to a single SFE) in the previous taxable year.
It looks like holders of school district bonds could be SFEs which would make school districts FIEs. Could that happen?
I don’t know. My understanding is that when a district goes to the marketplace to sell a bond, looking for credit for capital programs, etc., big banks and investment funds are the marketmakers, which means the banks and funds bring the bond to investors (and their agents) who then decide to invest in the bond or not through the bank.
The bondholders have zero interaction with the district. The banks are underwriting things, they're go-betweens. The districts, I think according to law if not in practice—the banks not publishing client lists, eg.—never know who the bondholders really are.
The districts can't know this: the underwriters are selling the bond to whomever will buy it, package that bond up, and float the money to the school district (through complex layers of the deal architecture called a bond indenture, which also passes through all kinds of bizarre conduits like the Depository Trust Company, Cede & Co, etc).
So the banks might know whether the bondholders are foreign, I guess. But to me, asking districts to know who their bondholders are is like asking a spider to give precise details about a human being trying to kill it. Not possible. It's actually one of the things that pretty much undermines democracy since bondholders are never elected by the people over whom they have so much power.
It would be especially punitive to say schools are FIEs because of their bondholders. But this is an especially punitive administration and I wouldn't put it past them. I think a court case could easily be brought if they do, which appears to be one of the few ways to gum up these awful works.
There are also proposed regulations about projects that will still get funding. If the project is implemented or started, and what those end up meaning in the legislation, could also threaten projects.
Revenge Tax
Okay. But even if this isn’t the case, I was reading in the Financial Times about Section 899 in the bill. As Gillian Tett writes:
This would enable the US Treasury to impose penalties on “applicable persons” from “discriminatory foreign countries” by increasing US federal income tax and withholding rates by up to 20 percentage points on their US investments, on a variable scale. It might thus be viewed as a novel “revenge tax” (as some lawyers call it) that Trump could use to bully friends and foes alike in trade negotiations.
So, at best, all this undermines prior efforts to build a collaborative global tax system via groups such as the OECD, with its undertaxed profits rules. At worst, it makes Trump look like a feudal European king intent on using tax as a capricious tool to extract foreign tribute. Either way, it undermines the idea that America is a place of consistent investment laws — and has shocked lawyers.
Not good! So even if the FIE rules don’t apply to the school districts, the muni bond market could be subject to a revenge tax where the administration levies taxes according to whatever rules they want to make, using foriegnness and national boundaries as an excuse.
District in the crosshairs
Getting back to little Lake Zurich, they might want to solarize their schools. And the IRA tax credits might be available, but now there are all these choke points in the financing regime that was letting the monies flow: at the bank level, the bondholder level, and the procurement level.
Will they be able to solarize their schools, even though it creates savings and saves the planet in its little way? Probably not. District budget offices don’t have capacity to navigate all this and instability isn’t their friend. Meanwhile, there could be a tax credit for vouchers, a dysfunctional federal department of education, and turmoil in markets...it’s a bad time.
Ultimately, this means it’s harder for Lake Zurich to solarize the rest of their buildings, which increases their energy costs and puts more carbon in the atmosphere, threatening the future they’re supposed to be preparing students for.