BILL ANALYSIS Ó SJR 10 Page A 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.; SJR 10 Page B 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 SJR 10 Page C 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 SJR 10 Page D 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. SJR 10 Page E 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. SJR 10 Page F 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 SJR 10 Page G 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) SJR 10 Page H 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. SJR 10 Page I 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. SJR 10 Page J 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 SJR 10 Page K