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fuel costs for the fossil fuel plant will be expensed and recovered immediately. However, the solar plant with no fuel cost and higher capital costs will have to wait until capital costs are depreciated to recover costs. Another important factor in after-tax analysis is any energy investment tax credit that might be availabletoasolarplant. Anafter-taxanalysiswillaccountfordepreciationdifferencesandtheeffects of the investment tax credit and, as such, is key to the analysis in this example. These examples deal with private entities deciding whether to invest in a technology. In these situations, taxes are a r e d cost that will have an impact on the decision. However, in analyses ftom a societal perspective, taxes are nothing more thantransfer payments, with the exception of those designed to correct for externalities.’’ An analysis could indicate that a given technology is beneficial from society’s perspective, but tax distortions prevent that technology from being economically viable from an investor’s viewpoint. Thus,insomeinstancesitmaybeadvantageoustoanalyzeaproject’sviabilitybothwithand without taxes. Discussion The financial treatment of taxes is a very large and complicated subject. The scope of this manual is such that corporate income taxes for the federal and state levels and other relevant taxes, such as property tax and payroll tax, cannot be thoroughly defined or explained through examples. Rather, some important points are brought forth that an analyst should be aware o f In performing after-tax analyses of investment alternatives, the analyst should be aware that the relevant tax considerations are what a company considers for tax purposes and not what a company considers for accounting or book purposes. In most cases, what a company does for accounting purposes or annual reports has no relevance to economic analyses. What the company does for tax purposes affects cash flow generation. An equally important point is that for tax calculation purposes, dl dollar d u e s should be expressed in nominal values. This is important because taxes are applied to actud dollar values, and if an analysis were to apply tax rates to dollar values corrected for inflation, the results would be skewed. It may be necessary to provide more detail for the analysis of a specific project or company. In these cases, there are other factors that should not be overlooked, such as the type of business organization. The three most common types of organizations are the sole proprietorship, the partnership, and the corporation. The tax treatment for these different types of organizations will vary. For EE analyses in which investor-specific data are not available, the use of the highest tax bracket or marginal tax rate is appropriate. This tax rate for corporations is 39%13for corporations with over $100,000 taxable income; for individuals it also varies with income up to 36%. State tax rates will vary. The marginal state tax rates for corporations as of October 1991 are provided in Table 2-5. The analyst is advised to use these rates only as a quick guide and to further research state tax rates for a detailed analysis because rates may have changed and the marginal tax rates shown i n the table may have different applications. For example, the 9.3% state income tax rate for California is applied to Californianetincome,whereasthe9.3%rateforArizonaisappliedtofederaltaxableincome. Stateand ~~~~~ ~ 12See the subsection Externalities in Section 5 for an explanation of externalities. 1 3 ~ 0 ttehat a11 examples in this manual use a 34% lax rate, which was the marginal corporate rate before August 1993. 15PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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