Sep 07, 2012
New tax revenue for states generated by increasing solar capacity
Some state legislators have voiced concerns that increasing the use of solar power may reduce state and local tax revenue by cutting into collections of utility usage taxes.
The more solar capacity generated throughout the state, the less energy”consumption tax,” as it’s known in Virginia, consumers are paying to state government. In an era of declining public revenue, the idea of a potential loss in taxes from an increase in solar capacity can carry a heavy weight and may dampen the enthusiasm of state legislators for solar power. No doubt it would be good news for the tax payer, however. Every American citizen must have an ITIN and pay taxes, and this burden can rest heavily on some shoulders. What is an ITIN? It is an Individual Taxpayer Identification Number and if you’re not eligible for social security, you will have one.
However, increasing renewable power generates jobs and new forms of tax revenue that more than offset the potential loss in electricity consumption tax and sales tax.
The Virginia legislature enacted an electricity consumption tax in 1999 as part of the Electric Utility Deregulation Act. Legislators intended the tax to protect incumbent utilities from new competition – to give incumbent utilities a “head start” on the market competition.
In 2007, policymakers deemed Virginia’s deregulation experiment a failure, and returned to a regulated monopoly structure, where utilities received exclusive service territories – holding the exclusive right to sell electricity to customers within their given territories.
Nevertheless, the electricity consumption tax remained intact. Customers today are continuing to pay taxes on their purchased electricity.
An increase in solar power means a decrease in customers consuming energy from the grid, and thus, from utilities. The direct result is a decrease in electricity consumption taxes accrued by the government – more consumers generating their own electricity means more consumers decreasing, or even eliminating taxes paid on electricity consumption from utilities.
Although solar may reduce electricity consumption taxes, it generates new forms of revenue, stabilizes future expenditures and drives an innovative future.
Consumption Tax vs. Income Tax
Indeed, for a 100kW system generating an estimated 125,000 kWh per year, the loss in revenues to state and local sources would be a mere $200 per year, following basic assumptions.[1] Over the life of a 20-year power purchase agreement, the loss in consumption taxes would be offset approximately three times over through the increase in state income taxes, even factoring in for a five-year rapid depreciation of the system. The total income tax between the years 6-20 would net over $12,600 in revenue ($634 per year), while consumption tax over the life of a PPA would net just over $4,000 ($210 per year). The result is a 302% increase in state revenues with third party PPAs vs. avoided consumption taxes for a tax-exempt customer owned system.
Lease Payments & Energy Savings
Further, local and state jurisdictions would benefit from other tax revenues, including sales taxes paid on solar equipment purchased, business and professional license taxes paid by solar services providers, and business property taxes. The solar industry has already demonstrated how it generates increased tax revenues in states embracing solar. Consider the examples below:
- In Boulder City, NV, the local government announced that it was able to increase its revenue due to lease payments on solar projects, with terms between 20-50 years, sited on its land. The contract will provide the town with $480 million in revenue over the solar system’s lifetime.
- In Westport, MA, solar developers are finalizing a lease agreement allowing construction of 13 acres of municipal landfill. The lease payments could reach as much as $250,000 annually for 20 years.
- In 2008, the Office of the Comptroller of the State of New York issued a report on municipal solar energy investments, concluding that solar energy systems will save nearly $1 million in electricity costs over 50 years. The report recommended that all NY municipalities pursue solar systems.
In a larger sense, the impact of innovative, clean energy in the long run can only affect public budgets in a positive manner – first, because of the increased efficiency in the use of society’s resources and second, because of the decreased need for expenditures relating to the harmful health and environmental effects of fossil fuel production.
Solar power remains a revenue generator – creating new forms of revenue for local and state governments, while decreasing long-term expenditures relating to the effects of coal, natural gas and oil. Solar energy becomes an attractive investment for a state like Virginia, decreasing the need to spend revenue on importing electricity, generating local and state revenue without raising taxes, and driving creative innovation in an economy that calls for an all of the above approach.
[1] 1) The state consumption tax rate based on monthly kWh usage 2) State corporate income tax rate of 6% paid by for-profit PPA providers 3) A tax exempt entity (e.x. private university) that owns its own system would not pay income tax 4) The income tax generated during a the period years of 6-20 after rapid depreciation of system 5) 100 kW system generate 126,000 kWh per year 6) Average cost of $0.12 per kWh for years 6-20 of a PPA contract (period after depreciation) 7) Escalation rate of 5% per year starting at grid parity or $0.065/kWh 8) Degradation rate of 0.5% per year on 126,000kW system.
Written by: Tony Smith
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About The Author
Anthony Smith, PhD, is President and Founder of Secure Solar Futures. He brings over 40 years’ experience in energy efficiency, solar energy, and community economic development in Vermont, Pennsylvania, West Virginia and Virginia. He founded Secure Solar Futures in 2004 as CEO and President and leads the company’s innovation development and strategic partnerships. He serves as a founding board member of the Virginia Renewable Energy Alliance (VA-REA). He served as co-director and associate professor of the Eastern Mennonite University MBA program from 2008 to 2015. He earned his Masters in Architecture from the University of Pennsylvania, and a PhD from the Wharton School of Management, University of Pennsylvania.