Download Report: Taxing Wind Energy in Minnesota
In 1991, to spur the development of a wind-energy industry in Minnesota the state legislature exempt- ed wind-energy equipment from property taxes. In 1994 the Minnesota legislature enacted a wind mandate, ordering Northern States Power Company (NSP) to build or purchase a minimum of 425 megawatts (MW) of wind electricity by 2002. That law created a guaranteed market for about $400 million in wind-related investment.
The new wind mandate undermines the original justification for the wind-energy property tax exemption. Both the wind industry and local government officials agree that wind-energy facilities should now pay property taxes. But no agreement exists regarding the method and level of taxation. This paper addresses that issue, explores various tax-strategy options and offers guidance for state policymakers.
A fair tax policy for wind energy must balance four interests: the ratepayer interest in paying the low- est possible price for electricity; the wind industry interest in maximizing profits and accelerating wind- energy development; the interest of the community in which the wind facilities will locate in maximizing local tax revenues; and the interest of Minnesota in maximizing wind-energy development inside the state.
Wind energy can be a boon to Minnesota’s remote rural counties. The two counties with the highest wind speeds, Lincoln and Pipestone, will be the earliest beneficiaries of this kind of development. All five counties in that corner of Minnesota boast wind speeds sufficient to promote significant wind develop- ments. As wind-energy technologies advance and electricity can be competitively generated at lower wind speeds, more than a dozen other counties will become prime development sites.
Some county may benefit economically by becoming home to a major wind-turbine assembly or man- ufacturing plant. For most counties the greatest economic benefit will come in the form of wind develop- ers’ lease payments to landowners and tax payments to local governments.
A 425-MW wind “farm” will benefit the 150 or so landowners who lease parts of their land to wind developers. Landowners could collectively receive from a few hundred thousand dollars a year to as much as $3.5 million a year when 425 MW of wind power becomes operational, depending on the type of contract they negotiate.
Current Minnesota electric utility property tax policy channels virtually all of the revenues generated from taxing power plants to the benefit of the host community. The current state utility property tax rate is 4.6 percent. At that tax rate, a 200 MW wind facility would generate an additional tax capacity for Lincoln County of $6.7 million(see Table 1). That would constitute about two-thirds of the total tax capacity of the County after the wind facility was in place. The annual benefit to the County residents would be $3.23 million. This benefit could be taken either as improved services by county governments or reduced taxes on businesses and households or some combination of both. At 425 MW the annual tax benefits to the County residents would rise to almost $4 million.
Thus property taxes from wind-energy facilities likely would offer larger financial benefits than lease payments to landowners and the property tax benefits would be shared by a larger number of local residents.
This report begins by describing the way local property taxes are determined in Minnesota and how that affects wind-energy taxation. The second section examines the impact on local communities and on wind development of various tax-strategy options. The third section analyzes the impact that wind-energy taxes would have on the competitiveness of wind energy versus conventional electric generation technologies and on the competitiveness of Minnesota based wind-electric facilities compared to those in neighboring states.
The final section of this report offers our conclusions and contains specific guidance for Minnesota policymakers. Readers looking for a synthesis of the data contained in this paper can move directly to Section IV.
In designing a fair wind-energy tax policy it may be useful to work backwards. The first step is to determine what level of taxation would provide a significant and enduring financial benefit to the host community while not hindering the rapid expansion of wind-energy facilities. This report concludes that a wind energy tax of .25-.30 cents per kWh would not hinder the development of the wind industry in Minnesota and would provide substantial benefits to the rural communities that host these wind farms. Such a tax also would be in the range of existing utility taxes on power plants.
The second step is to design a specific method of taxation that achieves this level of tax. There are three general taxing strategies. One varies the existing utility class tax rate on wind-energy equipment and structures. We examine the impact on the community and on wind-energy developers of lowering the utility tax rate to 1 percent. A second tax strategy maintains the existing 4.6 percent utility class tax rate and varies the proportion of the wind-energy facility subject to the tax. We examine the impact of taxing only the foundation of the wind tower in the early years and then taxing only the foundation and the tower while excluding the other wind-energy equipment. A third tax strategy imposes a flat payment or royalty on every kWh generated. We examine the impacts of a .30 cent per kWh flat payment.
The first two options, varying the tax rate and varying the parts of the wind-energy facility to be taxed, are variations on the existing utility tax system and therefore will be more familiar to policymakers. However, these types of utility taxes may suffer from drawbacks that would not occur in a flat tax/royalty arrangement. Section IV explores the pros and cons of these three tax strategies.
The estimates used in this report are based on actual data from Lincoln County. We caution the reader that these represent only rough estimates and urge others to refine the numbers and explore still other tax strategies.