Financial Incentives
State Renewable Energy Tax Incentives
A variety of tax incentives have been used to help stimulate the development of solar energy. By eliminating part or all of the a tax, tax incentives directly reduce the cost to the consumer of solar energy and the equipment used in its production. They are immediate in impact and straight forward to administer. Property tax reductions and sales tax reductions are the most common tax incentives used by states to support solar.
These taxes can be significant for solar technologies because of their capital intensive nature. However, tax incentives, while useful, are generally not as effective as other types of solar policy tools. There may be advantages in having state government agencies related to the energy sector to participate in the administration of the renewable energy tax incentives to ensure they are well designed and effective.
Sales Tax Incentives
Sales tax incentives typically provide an exemption from the state sales tax for the cost of renewable energy equipment. To date, fifteen states have adopted some form of sales tax incentive.
The existence of a state sales tax incentive can have implications for both utility-scale and customer-sited renewable energy installations. The state sales tax incentive plays into interstate competition and can serve to attract a renewable energy developer to one state over another. From the customer generator perspective, the existence of a sales tax incentive can serve as the deciding factor for a customer debating whether or not to install a residential renewable energy system. A sales tax incentive plays an important rule in reducing the up front costs of a project.
The significance of a sales tax exemption is entirely dependent on its size. Obviously, if a state’s sales tax is at six percent, an exemption is far more enticing then if the sales tax is at three percent.
Property Tax Incentives
Property tax incentives typically follow one of three basic structures: exemptions, exclusions, and credits. The majority of the property tax provisions for renewable energy follow a simple model that provides that the added cost of the renewable energy device, in comparison to other conventional technologies, is not included in the valuation of the property for taxation purposes. That is, if a renewable energy heating system costs $1,500 to install versus $1,000 for a conventional heating system, then the renewable energy system is assessed at $1,000.
Because most property taxes are collected locally, so some states allow the local authorities the option of providing a property tax incentive for renewable energy devices. Six states have such provisions: Connecticut, Iowa, Maryland, New Hampshire, Vermont, and Virginia. To date, nineteen states have adopted some form of property tax incentive for renewable energy technologies.
A property tax incentive helps reduce the high capital costs of renewable energy systems. The property tax is one of the biggest taxes faced by renewable energy developers and customer generators.
However, the value of a property tax incentive depends on how the incentive is structured—whether it is a full or partial exemption—and what technologies the incentive applies to. A substantial, broad-based renewable energy incentive can be a detriment to a local community’s tax base, while an incentive that is too low will not achieve the desired policy outcome.
Kansas provides an example of a state with a full property tax exemption for renewable energy projects. The state’s property tax classifications are outlined in the state constitution, with utilities taxed at the highest rate. The legislature cannot adjust the percentage, so instead it has provided an exemption for renewable energy developments.