Waste Management 2006 Annual Report Download - page 78

Provision for (Benefit from) Income Taxes
We recorded a provision for income taxes of $325 million in 2006, a benefit from income taxes of $90 million
in 2005, and a provision for income taxes of $247 million in 2004 resulting in an effective income tax rate of
approximately 22.1%, (8.2)%, and 21.0% for each of the three years, respectively. When excluding the effect of
interest income related to audit settlements, the settlement of various federal and state tax audit matters during 2006,
2005 and 2004 resulted in a reduction in our provision for income taxes of $149 million, (representing a
10.1 percentage point reduction in our effective tax rate), $398 million, (representing a 36.4 percentage point
reduction in our effective tax rate) and $101 million, (representing an 8.5 percentage point reduction in our effective
tax rate), respectively.
The benefit of non-conventional fuel tax credits is derived from methane gas projects at our landfills and our
investments in two coal-based synthetic fuel production facilities, which are discussed in the Equity in Net Losses of
Unconsolidated Entities section above. These tax credits are available through 2007 pursuant to Section 45K of the
Internal Revenue Code, and are phased-out if the price of crude oil exceeds a threshold annual average price
determined by the IRS. Our effective tax rate for 2006 reflects a phase-out of 36% of Section 45K tax credits
generated during 2006 and a temporary shut down of the synthetic fuel production facilities. We have developed our
estimate of the phase-out using market information for crude oil prices as of December 31, 2006. Our synthetic fuel
production facility investments resulted in a decrease in our tax provision of $64 million for 2006, $145 million for
2005 and $131 million for 2004, which more than offset the related equity losses and interest expense for those
entities. Refer to Note 8 of our Consolidated Financial Statements for additional information regarding the impact
of these investments on our provision for taxes.
For all periods, a portion of the difference in income taxes computed at the federal statutory rate and reported
income taxes is due to state and local income taxes.
Additionally, in 2006, we recorded reductions to income tax expense related to (i) a decrease in our effective
state tax rate resulting in a $9 million benefit related to the revaluation of net accumulated deferred tax liabilities;
(ii) a $20 million tax benefit due to scheduled tax rate reductions in Canada and the resulting revaluation of related
net accumulated deferred tax liabilities; and (iii) an $11 million state tax benefit arising from the reduction in the
valuation allowance related to the expected utilization of state net operating loss and credit carryforwards.
In 2005, we recorded additional income tax expense related to (i) the accrual of $4 million to increase net
accumulated deferred tax liabilities resulting from a change in the provincial tax rate in Quebec and (ii) the accrual
of $34 million of taxes associated with our plan to repatriate $496 million of accumulated earnings and capital from
certain of our Canadian subsidiaries under the American Jobs Creation Act of 2004. These amounts were offset in
part by a change in our estimated state effective tax rate causing us to realize a benefit of $16 million related to the
revaluation of net accumulated deferred tax liabilities.
Cumulative Effect of Change in Accounting Principle
On March 31, 2004, we recorded a credit of $8 million, net of taxes, or $0.01 per diluted share, to “Cumulative
effect of change in accounting principle” as a result of the consolidation of previously unrecorded trusts as required
by FIN 46(R). See Notes 2 and 19 to the Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
General
We have consistently generated cash flows from operations in excess of our reinvestment needs. However, we
operate in a capital-intensive business and continued access to various financing resources is vital to our continued
financial strength. In the past, we have been successful in obtaining financing from a variety of sources on terms we
consider attractive. Based on several key factors we believe are considered important by credit rating agencies and
financial markets in determining our access to attractive financing alternatives, we expect to continue to maintain
access to capital sources in the future. These factors include:
• the essential nature of the services we provide and our large and diverse customer base;
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