Income Taxes

9 Months Ended

Sep. 30, 2023

Income Taxes

Income Taxes

4.    Income Taxes

Our effective income tax rate was 24.1% and 24.0% for the three and nine months ended September 30, 2023, respectively, compared with 22.8% and 23.5% for the three and nine months ended September 30, 2022, respectively.

The increase in our effective income tax rate when comparing the three and nine months ended September 30, 2023 and 2022 was primarily driven by (i) an unfavorable increase in permanent differences between taxable income and accounting income associated with our treatment of landfill closure and post-closure costs and (ii) a decrease in the excess tax benefits associated with equity-based compensation. The impacts of these items were partially offset by increased federal tax credits.

We evaluate our effective income tax rate at each interim period and adjust it as facts and circumstances warrant.

Permanent Differences — During the three and nine months ended September 30, 2023, we recognized additional income tax expense when compared to prior periods of $10 million and $16 million, respectively, related to permanent differences between taxable income and accounting income. This increase is largely due to an increase in taxable interest income associated with the Company’s election to deduct landfill closure and post-closure costs for income tax purposes when incurred and accrued. The increase in taxable interest income is due to the increase in the applicable federal rate published by the IRS.

Equity-Based Compensation – During the three and nine months ended September 30, 2023, we recognized a reduction in our income tax expense of $1 million and $11 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards compared with $5 million and $17 million, respectively, for the comparable prior year periods.

Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties. We support the operations of these entities in exchange for a pro-rata share of the tax credits they generate. The low-income housing investments qualify for federal tax credits that we expect to realize through 2033 under Section 42 or Section 45D of the Internal Revenue Code. We account for our investments in these entities using the equity method of accounting, recognizing our share of each entity’s results of operations and other reductions in the value of our investments in equity in net losses of unconsolidated entities, within our Condensed Consolidated Statements of Operations.

During the three and nine months ended September 30, 2023, we recognized $18 million and $43 million of net losses, respectively, and a reduction in our income tax expense of $28 million and $76 million, respectively, primarily due to federal tax credits realized from these investments as well as the tax benefits from the pre-tax losses realized. In addition, during the three and nine months ended September 30, 2023, we recognized interest expense of $3 million and $10 million, respectively, associated with our investments in low-income housing properties.

During the three and nine months ended September 30, 2022, we recognized $16 million and $47 million of net losses, respectively, and a reduction in our income tax expense of $26 million and $74 million, respectively, primarily due to federal tax credits realized from these investments as well as the tax benefits from the pre-tax losses realized. In addition, during the three and nine months ended September 30, 2022, we recognized interest expense of $5 million and $10 million,

respectively, associated with our investments in low-income housing properties. See Note 13 for additional information related to these unconsolidated variable interest entities.