On March 11, 2011, an earthquake and subsequent tsunami devastated the Fukushima Dai-ichi nuclear power plant, which lies roughly 150 miles north of Tokyo on Japan’s eastern coast. The Fukushima nuclear disaster caused tremendous and far-reaching economic—and, of course, personal—losses. By statute, the operator of the Fukushima plant, Tokyo Electric Power Company Holdings (TEPCO), was held strictly liable for approximately $80 billion of damages that stemmed from the disaster. In a compelling recent article, Takayuki Nagato explores the tax consequences of TEPCO’s damage payments as a vehicle to interrogate the treatment of tax losses and risk-taking more generally. Nagato’s excellent and engaging analysis also adds a parallel strand to scholarly conversations about taxation’s direct and indirect role in disaster relief, as well as current commentaries on Pacific Gas & Electric’s wildfire-driven bankruptcy.
Nagato argues that two nontax factors have significant implications for the longstanding academic position that neutrality should provide the touchstone in setting the tax treatment of business losses. First, the corporate form confers limited liability on shareholders, and, second, governments exhibit a predictable propensity to pour cash into creaky companies deemed too big to fail. These factors promote inappropriate risk-taking, exemplified for Nagato by the government bailout of TEPCO following the Fukushima disaster.
The short, short version of TEPCO’s story may sound vaguely familiar to U.S. readers who lived and worked through the 2009 financial crisis. The Japanese government organized the Nuclear Damage Compensation Facilitation Corporation (NDCFC) to funnel cash to TEPCO for the payment of damage claims. TEPCO avoided bankruptcy, the NDCFC took a massive preferred stock interest in TEPCO, and TEPCO’s common shareholders retained their shares. In addition, TEPCO committed to make a series of deductible payments back to NDCFC over several decades. For Nagato, the principal problem with this bailout scheme is that it generated a series of moderate losses over time, while a single big loss in 2011 would have largely lapsed after ten years, when the carryover period expired. This tax benefit wasn’t intended, according to Nagato, and he proposes various fixes that would solve this problem.
Nagato’s rich exegesis of the Fukushima disaster’s aftermath deftly illustrates “the interaction between tax losses, limited liability, and bailout.” Although his article focuses on the tax aspects of these interactions, it’s hard not to read his narrative as a more trenchant critique of both bailouts and blanket limitations on owners’ liability. Alternatively, one could frame TEPCO’s story as a parable about the dangers of utility privatization (which, for Japan, occurred after World War II at the behest of U.S. advisors), or of thin capitalization (TEPCO’s debt-equity ratio, excluding damages, was 8.25:1), or of government’s failure to adequately engage with climate-related risks to aging infrastructure, especially in the context of nuclear power. The unintended unbunching of tax losses (which might be unbunched under, for example, the U.S. rules regarding economic performance) seem like small potatoes in comparison.
Furthermore, the beneficiaries of any inappropriate tax windfalls are a bit unclear. Nagato assigns the incidence of these benefits to shareholders, many of whom appear to be employees, municipalities, or (directly or indirectly) the general public. A little extra aid to these folks may not be terribly troubling. Alternatively, these tax benefits may inure, in part, to labor or customers, over either the short or long term. TEPCO’s monopoly position, rate regulation, and transition effects complicate this analysis. This type of uncertainty, including about whether TEPCO would survive in the absence of state intervention, seems to drive tax administrators’ more general impetus to relax the rules—or just look the other way—during times of crisis. Nagato’s article correctly urges us to scrutinize these purportedly interim arrangements more closely, though my intuition is that the underlying equity and distributional questions may be impossible to resolve.
Overall, Nagato’s insightful article provides a detailed and thoughtful perspective on non-U.S. responses to disasters, as well as their tax consequences. Legal academics of all stripes should find Nagato’s analysis and case study compelling in understanding a legal phenomenon that seems likely to increase in frequency.