BILL ANALYSIS                                                                                                                                                                                                    Ó






                                                                     SJR 10


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          Date of Hearing:   September 9, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          SJR  
          10 (Stone) - As Amended September 4, 2015


          SENATE VOTE:  38-0


          SUBJECT:  Federal Investment Tax Credit:  solar energy


          SUMMARY:  Requests that the United States (U.S.) Congress take  
          immediate action to extend the federal investment tax credit in  
          Sections 48 and 25D of Title 26 of the U.S. Code (U.S.C.).      
          Specifically, this resolution:  


          1)Contains the following recitals:


             a)   The U.S. has an abundance of solar energy resources that  
               are sufficient to supply a significant portion of the  
               energy needs of the U.S.;













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             b)   Farmers can become more economically resilient to the  
               unique and difficult challenges facing farming communities  
               through solar power;


             c)   Schools and educational institutions, as well as other  
               governmental entities and nonprofit entities, can save  
               considerable amounts of limited public moneys by investing  
               in solar power;


             d)   Homeowners, renters, and businesses statewide can  
               control for rising energy costs through the investment in  
               solar power; 


             e)   Rural communities can benefit from the construction of  
               utility scale solar energy projects;


             f)   All of these markets rely on the federal investment tax  
               credit to make solar energy affordable for all who want it;


             g)   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;


             h)   The loss of the investment tax credit would lead to  
               significant job losses in California and beyond in 2017;


             i)   Accelerated development and use of solar energy  
               technologies would provide numerous benefits to all  
               citizens of California and the U.S., including improved  
               national security, healthier rural economies, improved air  











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               and environmental quality, and abundant, reliable, and  
               affordable energy;


             j)   The solar industry adds more than $15 billion to the  
               U.S. economy and increased energy production from domestic  
               solar energy resources would attract substantial new  
               investments in energy infrastructure and create local  
               economic growth;


             aa)  Increased use of solar energy is practical and can be  
               cost effective with the help of consistent, long-term  
               supportive policies and proper incentives to stimulate  
               markets and infrastructure, such as the investment tax  
               credit;


             bb)  Long-term supportive policies and proper incentives at  
               the local, state, and federal levels have brought about  
               significant cost reductions within the solar industry in  
               California and across the country;


             cc)  Public policies aimed at enhancing solar energy  
               production and accelerating technological improvements will  
               further reduce energy costs over time and increase market  
               demand; and, 


             dd)  The federal investment tax credit for solar power is set  
               to decrease from 30% to 10% for commercial consumers and  
               from 30% to 0% for residential consumers after December 31,  
               2016. 


          2)Directs the Secretary of the Senate to transmit copies of this  
            resolution to the President and Vice President, to the Speaker  
            of the House of Representatives, to the Majority Leader of the  











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            Senate, and to each Senator and Representative from California  
            in the U.S. Congress.  


          EXISTING FEDERAL LAW:   


          1)Allows a tax credit for residential energy efficient property.  
             Specifically allows individuals, under 26 U.S.C. Section 25D,  
            a credit equal to 30% of the:


             a)   "Qualified solar electric property expenditures" made by  
               the taxpayer during the year; and, 


             b)   "Qualified solar water heating property expenditures"  
               made by the taxpayer during the year.


          2)Defines a "qualified solar electric property expenditure" as  
            an expenditure for property that uses solar energy to generate  
            electricity for use in a dwelling unit located in the U.S. and  
            used as a residence by the taxpayer.


          3)Defines a "qualified solar water heating property expenditure"  
            to mean an expenditure for property to heat water for use in a  
            dwelling unit located in the U.S. and used as a residence by  
            the taxpayer if at least half of the energy used by such  
            property for such purpose is derived from the sun.


          4)Provides that the credit allowed under 26 U.S.C. Section 25D  
            shall not apply to property placed in service after December  
            31, 2016.


          5)Allows a business energy investment credit under 26 U.S.C.  











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            Section 48.  Specifically allows a credit generally equal to  
            10% of the taxpayer's basis in qualified energy property  
            placed in service during the tax year.  For property placed in  
            service before 2017, the credit percentage is increased to 30%  
            for equipment that uses solar energy to generate electricity,  
            to heat or cool a structure, or to provide solar process heat  
            (except when used to heat a swimming pool).


          


          FISCAL EFFECT:  None


          COMMENTS:  


          1)The author has provided the following statement in support of  
            this resolution:


               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.  












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               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 sources of clean energy.   
               This is a worthy tax credit, and is deserving of being  
               extended.  


          2)This resolution is supported by Environment California, which  
            notes the following:


               Thanks to the pairing of California's robust solar energy  
               polices and the Solar ITC at the federal level, California  
               has become the nationwide leader in solar power, putting  
               the state on the path towards fulfilling a number of  
               critical environmental goals.  This, in turn, has spurred  
               significant job creation and economic development in  
               communities across the state. 


               For example, solar power offers the agricultural community  
               an important tool for controlling rising energy costs and  
               making farmers more economically resilient and better able  
               to invest in local jobs.  In addition, solar offers school  
               districts an increasingly important tool for lowering  
               rising energy costs so as to put more scare public dollars  
               toward education.  Lastly, solar also gives homeowners and  
               small businesses important opportunities to control rising  
               energy costs.  All of these solar energy consumers directly  
               benefit from Sections 48 and 25D of [the] federal tax code,  
               also known as the Solar Investment Tax Credit.  


          3)Committee Staff comments:


              a)   General background  :  SJR 10 (Stone) urges Congress to  











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               extend two federal income tax credits:  the residential  
               energy efficiency tax credit and the investment tax credit  
               for qualified energy property.  The first tax credit is set  
               to expire on December 31, 2016; the second tax credit will  
               be substantially modified on January 1, 2017, when the  
               credit percentage will decrease from 30% to 10%.  


               The residential energy efficiency tax credit (Section 25D  
               of the Internal Revenue Code (IRC)) was initially  
               established by the Energy Policy Act of 2005, and then  
               substantially expanded in 2008 and 2009.  Thus, a taxpayer  
               may claim a credit equal to 30% of qualified expenditures  
               for a system or property that serves "a dwelling unit  
               located in the United States that is owned and used as a  
               residence by the taxpayer."  These qualified expenditures  
               must be incurred for, or in connection with, solar-electric  
               systems, solar water heating systems, fuel cells, small  
               wind energy property and geothermal heat pump property  
               placed in service during the taxable year.  If the federal  
               tax credit exceeds tax liability, the excess amount may be  
               carried forward to the succeeding taxable year. 

          In contrast, IRC Section 48 allows taxpayers an investment tax  
          credit for 30% of the basis of a qualified energy property  
          placed in service during the taxable year.<1>  The qualifying  
          energy property includes certain fuel cell, solar, geothermal  
          power production, small wind energy, combined heat and power  
          system, and geothermal heat pump property.  The investment  
          credit amount is generally equal to 30% of the taxpayer's basis  
          in qualified fuel cell property, certain solar energy property,  
          and wind energy property.  The credit amount is 10% of the  
          taxpayer's basis in all other types of qualifying energy  
          ---------------------------


          <1>


           This investment tax credit is also distinct from the energy  
          production credit, which awards a tax credit based on the amount  
          of energy produced (IRC Section 45)








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          property.  Energy property is defined, among others, as  
          equipment that uses solar energy to generate electricity to heat  
          or cool a structure or to provide solar process heat, except  
          property used to heat a swimming pool.  Energy property also  
          includes equipment that uses solar energy to illuminate the  
          inside of a structure using fiber-optic distributed sunlight.  
          The investment tax credit may be claimed entirely in the year  
          the facility is placed in service.  



          In February 2009, Congress enacted, and President Obama signed,  
          the American Recovery and Reinvestment Act, which, among other  
          things, allowed taxpayers to make an irrevocable election to  
          receive a federal grant payment in lieu of the investment tax  
          credit, provided that a qualified facility was placed in service  
          in 2009, 2010, 2011 or 2012.  The grant program was created to  
          help developers of renewable energy projects to finance these  
          projects.  Often, developers seek investors that are allocated  
          99% of the income, gains, losses, deductions and tax credits of  
          the project.  However, during the last economic downturn, the  
          potential investors did not have enough tax liability to utilize  
          those deductions and credits.  The creation of the grant program  
          allowed developers to receive a federal subsidy to continue with  
          the renewable energy projects.  However, by choosing to receive  
          these payments, applicants elected to forego tax credits under  
          IRC Sections 48 and 45 with respect to such property for the  
          taxable year in which the payment is made or any subsequent  
          taxable year.<2>  

              b)   Reducing the investment tax credit and eliminating the  
               residential energy efficiency tax credit  :  The federal  
               energy tax credits reduce tax liability for individuals and  
               businesses that purchase qualifying solar energy  
               technologies, which should encourage additional private  
             --------------------------
          <2> Congress excluded the grant proceeds from a taxpayer's  
          income but required that the basis of the property be reduced by  
          50% of the amount of the grant.  











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               sector investment in solar manufacturing and solar project  
               construction.  As explained by the author's office, the  
               solar industry is an important component of the U.S.  
               economy, and long-term incentive programs can make solar  
               energy practical and cost effective.  The goal of this  
               resolution, in part, is to prevent the significant job  
               losses in California that would occur as a result of the  
               federal tax credits being phased out.  Despite this  
               concern, however, job losses have not been shown to occur  
               when other subsidies have been eliminated.  In fact, even  
               after exhausting the $2.2 billion California Solar  
               Initiative, which offered financial incentives to  
               individuals with the goal of supporting 2,000 megawatts of  
               solar energy in the state, the industry has enjoyed a job  
               growth rate that is 20 times higher than the overall  
               economy.  As such, the phasing out of the federal tax  
               credits may not have the detrimental impact that this  
               resolution aims to prevent.  This contention is supported  
               by the fact that the federal energy credits and the  
               California Solar Initiative may not be the primary reason  
               why over one-half of all solar panel installations have  
               been made in California.  According to Severin Borenstein,  
               Professor at the Berkeley Hass School of Business, the  
               reason why California leads the nation in residential solar  
               panel installations is, in part, because California's two  
               largest utilities have some of the country's highest  
               average residential electricity prices and because the  
               rates are tiered.<3>  The higher average prices make the  
               installation of solar panels much more attractive.   
               Although the elimination and reduction of the federal  
               energy credits will have an impact, it may only eliminate  
               marginal projects.



              c)   Should the tariff be eliminated  ?  This resolution urges  

             --------------------------
          <3> What Put California at the Top of Residential Solar? Energy  
          Institute at Hass, University of California, Berkeley.  May 26,  
          2015.










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               Congress to extend immediately the federal energy credits;  
               but if the goal is to increase the number of solar panel  
               installations in California, this resolution may also want  
               to encourage the Commerce Department to eliminate tariffs  
               on solar cells imported from China.  Over the last few  
               years, China has been subsidizing the production of solar  
               panels.  Many of these solar panels have been flooding the  
               U.S. market, forcing the closure of many domestic  
               producers.  Unfortunately, the tariff and the federal  
               energy credits appear to be working at odds with each  
               other.  On the one hand, the U.S. is providing huge  
               subsidies to encourage more businesses and households to  
               install solar panels; on the other hand, the U.S. is making  
               it more expensive to purchase inexpensive Chinese made  
               solar panels.  As a result, the Commerce Department has  
               potentially made the federal energy credits less effective.
          REGISTERED SUPPORT / OPPOSITION:




          Support


          Environment California




          Opposition


          None on file




          Analysis Prepared by:Oksana Jaffe, M. David Ruff, & Carlos  
          Anguiano / REV. & TAX. / (916) 319-2098











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