An energy incentive is drifting in the wind
Federal tax law discourages individual investment and local ownership of turbines.
By John Farrell, originally published in the Minneapolis Star Tribune, May 1, 2008
A wind turbine can power up to 600 homes, but 600 homeowners can’t get together to own a wind turbine. Why? Because federal law makes local ownership virtually impossible.
Here’s how. The federal wind tax credit of 2 cents per kilowatt-hour can be taken only against taxes on passive income. Passive income does not include wages or salary; it only counts income from investments or real estate. Most Americans do not have any passive income. Those who do have very little. Thus wind turbines are financed by a handful of firms that attract investments from a few hundred or a few thousand wealthy individuals who can use the tax incentives.
The federal wind-energy incentives — up for renewal this year — discriminate against local ownership and favor absentee ownership. They also severely restrict the number of investors who can finance wind-energy generators.
Changing the incentives would pave the way for rural Americans to own wind turbines and for the economic benefits of wind energy to truly accrue to the host community’s advantage. It would reward self-reliance. And it would level the playing field for average citizens.
A few stalwart entrepreneurs, mostly in Minnesota, have tried to use the current tax code to create locally owned wind projects. But the process is frightfully cumbersome. A wind farm is developed as a partnership between local landowners and an equity investment firm. The firm retains full ownership of the project, the tax incentives and most of the revenue flows for at least the first 10 years. The local partners become true owners only after 10, 14 or even 20 years. The local owners stand to make out well, assuming the turbines continue spinning after that long — there’s little data on the longevity of modern wind turbines. But the process is costly, with several middlemen taking a cut and all of the federal incentives flowing out of the local community.
One solution has been offered at the federal level by U.S. Rep. Tim Walz, D-Minn. His bill would allow up to $40,000 of the tax credits to be taken against any income taxes, not just taxes on passive income. This would allow as many as 1.5 million households to become investors in Minnesota and tens of millions more nationwide.
Think how much faster America can achieve energy security if it can add millions more investors to the renewable-energy market. Think how much better investment can be if these locally owned projects are returning significant dividends to their rural communities.
Energy independence shouldn’t be limited to avoiding oil or gas from the Middle East. It should also mean individuals and communities becoming energy producers. Community-based energy projects create a preference for clean energy, since the owners live next to the power plant. Locally owned energy projects double the return on our investments in wind energy and, more importantly, mean paying ourselves for our own power.
John Farrell is a researcher with the Minneapolis- and Washington, D.C.-based Institute for Local Self-Reliance and is the author of the recent policy brief “Broadening Wind Energy Ownership by Changing Federal Incentives”
About ILSR: The Institute for Local Self-Reliance is a nonprofit organization founded in 1974 to advance sustainable, equitable, and community-centered economic development through research and educational activities and technical assistance. More at http://www.ilsr.org