BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SJR 10 |Hearing | 6/24/15 |
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|Author: |Stone |Tax Levy: | No |
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|Version: |6/19/15 |Fiscal: |No |
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|Consultant|Grinnell |
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FEDERAL INVESTMENT TAX CREDIT: SOLAR ENERGY
Requests Congress to extend two renewable energy tax credits.
Background and Existing Law
California law allows various income tax credits, deductions,
sales and use tax exemptions to provide incentives to compensate
taxpayers that incur certain expenses, such as child adoption,
or to influence behavior, including business practices and
decisions, such as research and development credits. The
Legislature typically enacts such tax incentives to encourage
taxpayers to do something that but for the tax credit, they
would not do. The Department of Finance is required to annually
publish a list of tax expenditures, currently totaling around
$51 billion per year. At the federal level, tax expenditures
reduced federal income tax revenue in 2014 by over $1.1
trillion, and payroll taxes and other revenues an additional
$122 billion, the single largest category of federal
expenditures.
I. Residential Energy Efficiency Tax Credit. Established by
the Energy Policy Act of 2005, Internal Revenue Code (IRC) 25(d)
allows taxpayers to claim a credit for residential energy
property initially applied to solar-electric systems, solar
water heating systems and fuel cells placed in service during
the taxable year. The Energy Improvement and Extension Act of
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2008 extended the tax credit to small wind-energy systems and
geothermal heat pumps, effective January 1, 2008, and the
American Recovery and Reinvestment Act of 2009 removed the
maximum credit amount for almost all eligible technologies
placed in service after 2008. A taxpayer may claim a credit of
30% of qualified expenditures for a system that serves "a
dwelling unit located in the United States that is owned and
used as a residence by the taxpayer." If the federal tax credit
exceeds tax liability, the excess amount may be carried forward
to the succeeding taxable year.
II. Investment Credit. IRC 48 allows taxpayers an investment
tax credit for 30% of the basis of a qualified energy property
placed in service during the taxable year, distinct from IRC
45's production credit, which awards a tax credit based on the
amount of energy produced. Among other, qualified energy
property includes fuel cells, microturbines, geothermal energy,
small wind energy, combined heat and power, and equipment that
uses solar energy to:
Generate electricity,
Heat, cool, or provide hot water use in a structure,
Provide solar process heat, except for swimming pools,
or
Illuminate the inside of a structure using fiber-optic
distributed sunlight
On January 1, 2017, the residential credit sunsets entirely, and
the percentage for the investment tax credit falls from 30% to
10%. The author wants the Legislature to request that Congress
extend the credits.
Proposed Law
Senate Joint Resolution 10 respectfully requests the Congress of
the United States to take immediate action to extend the federal
investment tax credit in Section 48 and 25D of the Internal
Revenue Code. The resolution makes several findings and
declarations supporting its purposes, and directs the Secretary
of the Senate to transmit copies of the resolution to the
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President, Vice President, the Speaker of the House of
Representatives, the Majority Leader of the Senate, and to each
Senator and representative from California in the Congress.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the author, "SJR 10 is a
resolution that calls on the U.S. Congress to extend the Federal
Investment Tax Credit for Solar Energy. The tax credit is set
to decrease from 30 percent to 10 percent for commercial
consumers and from 30 percent to 0 percent for residential
consumers after December 31, 2016. The solar energy industry
employs 54,000 Californians and is one of the nation's fastest
growing job creators, employing 173,807 people nationwide and
growing at a rate nearly 20 times faster than the overall
economy, according to The Solar Foundation. The solar industry
adds more than $15 billion to the United States economy and
increased energy production from domestic solar energy resources
would attract substantial new investments in energy
infrastructure and create local economic growth. The loss of
the investment tax credit would not only lead to significant job
losses in California and beyond in 2017, but would also make
solar energy less affordable to all who want to take advantage
of this source of clean energy. This is a worthy tax credit,
and is deserving of being extended."
2. Not so fast ? The effective period of the two federal tax
credits SJR 10 urges Congress to extend coincide with a rapid
increase in solar energy generation: solar energy installations
increased than 1,600 percent since the ITC was implemented in
2006. Tax credits supporters state that industry employment has
grown by 86% in the last four years, and creates jobs at a rate
nearly 20 times higher than employment growth in the overall
economy. Additionally, public investment in solar energy has
reduced its costs, thereby allowing more widespread deployment.
However, the renewable energy industry has matured significantly
since Congress enacted the credit, and will likely continue to
grow without a tax credit subsidy, which increases the current
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federal budget deficit by approximately $1.7 billion annually,
according to the Joint Committee on Taxation. Allowing the
credit to phase out under current law resembles the structure of
California's signature solar energy program, the California
Solar Initiative. Enacted by the Legislature in 2006 with the
goal of supporting 2,000 megawatts of solar energy in the state,
the initiative offered financial incentives to individuals that
shrank over time to account for lower costs as solar technology
advanced and demand increased. By 2014, the incentives had been
exhausted, yet solar energy installation in California continues
apace, indicating that installing solar energy makes sense
without a subsidy. It is unclear whether the Legislature should
request that Congress extend a tax credit for an industry that
may be sufficiently mature to thrive without government support.
3. One of many . A recent United States Government
Accountability Office (GAO) Report, "Federal Support for
Renewable and Advanced Energy Technologies," identified 82
federal wind-related projects implemented by nine different
federal agencies, including the tax credits SJR seeks to extend,
grants, loans, and loan guarantees. While seven of these
initiatives overlap, GAO states that they may address different
needs of wind project developers or the communities their
projects serve. GAO also states that many states additionally
offer tax incentives, grant and loan programs, and renewable
portfolio standards such as California's that further support
wind energy. GAO states that their review indicates that two
wind projects for which it reviewed documentation would've been
built without federal support. Given the scope and size of
federal and state government support for renewable energy, the
Committee may wish to consider whether the tax credit is the
best alternative to increasing wind energy production.
4. Financial innovation . Many renewable energy projects in
California use a novel model to monetize the federal tax credits
SJR 10 seeks to extend, leading to lower costs of renewable
energy capital, known as "tax equity financing." Tax equity
financing relies on the tax credit appetites of large financial
institutions, who receive a return based not only on cash flow
from the asset or project, but also on tax benefits. Unlike
financial institutions, developers generally don't have
sufficient income from other sources to make use of the federal
tax credit. The investor doesn't manage or operate the asset or
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project it owns, but can claim the credit because the law only
allows the owner of the asset or project to do so. Two tax
equity financing structures are currently in use: flip
partnerships and sale-leaseback models. In the flip partnership
model, the tax equity investor forms a partnership with a
developer, who has near complete ownership of the development
until a predetermined circumstance "flips" the ownership to the
project developer. Sale leasebacks involve a renewable energy
project developer selling the project's assets to a tax equity
investor, who then leases them back to the developer while
agreeing to be responsible for the operating expenses.
Support and
Opposition (6/17/15)
Support : Unknown.
Opposition : Unknown.
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