Refundable Federal Tax Credit Could Remove Barrier to Community Wind

Date: 8 Mar 2012 | posted in: Energy, Energy Self Reliant States | 1 Facebooktwitterredditmail

Update 3/9/12:Turns out I would be a lousy tax attorney and that the form of tax credit does not affect the passive loss rules.

What if a small change in federal renewable energy policy could make community wind development easier?

Last month, President Obama’s Treasury Department released proposed reforms to a number of business taxes including the federal Production Tax Credit (PTC) for wind power projects.  The reform proposal would make the tax credit permanent, but more importantly, it would make it refundable. 

A regular tax credit reduces the amount of taxes a business or person pays dollar for dollar, down to zero.  In the case of the PTC, it provides 2.2 cents for every kilowatt-hour produced by the wind power project, over 10 years.  But for the many individuals and businesses that don’t owe a lot of taxes, they have limited use.  That’s why there’s an entire “tax equity industry” made up of large banks and Wall Street firms that partner with wind and solar developers to reduce their tax bills.  The drawback of these partnerships is that as much as half of the tax credit’s value is consumed by the Wall Street firms and not the renewable energy project.  

With a refundable tax credit, wind and solar project owners wouldn’t require big tax bills or Wall Street to finance projects.  Instead, any participant in a community renewable energy project would receive a check equal to the tax credit’s value.  

The implications are significant.  The South Dakota Wind Partners project, for example, collected over 600 owners for 7 wind turbines, thanks to a temporary option to take the federal PTC as a cash grant.  Brian Minish, who helped develop the South Dakota Wind Partners community wind project, says that a refundable tax credit will similarly make a community wind project easier: “it would be much simpler to monetize the credit and attract investors that can get the cash refund.”  

Since community-owned wind projects create up to twice the jobs and over three times the local economic impact compared to absentee-owned projects, small policy changes that make community ownership easier can have a big impact.  

There are other solutions afoot for community wind, including the Community Wind Act.  This U.S. Senate bill would allow distributed wind projects – 20 megawatts and smaller – to take the upfront Investment Tax Credit instead of the PTC.  The change provides a two-fold one advantage: community wind projects have a harder time getting capital, so upfront cash helps secure financing; additionally, the Investment Tax Credit can be taken against ordinary income rather than passive income (from “trade or business activities in which you do not materially participate,” like rental property).

Legal and tax barriers have created an uphill struggle for community ownership of renewable energy, so it’s nice to see improvements on the radar of the Obama administration and in Congress.

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John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power.