Tax Reform, a Looming Threat to a Booming Solar Industry

Author:  Mueller, James | Ronen, Amit
Organization:  GW Solar Institute
Report Date: 
2014
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Summary: 

This policy brief investigates the impact that recent Congressional tax reform proposals would have on the solar industry. As the first policy brief in an ongoing series, it outlines both the challenges and the opportunities for the solar industry within tax reform. The GW Solar Institute's analysis finds that all recent tax reform proposals would increase the cost of solar energy substantially compared to current policy. Even the Baucus tax reform proposal, which includes a 20 percent Investment Tax Credit (ITC) for solar, would increase costs by 34 percent over current policy due to its drastic changes to current depreciation schedules and the minimal impact from a lower corporate rate. No matter which other broader changes to the tax system Congress adopts in tax reform, additional energy sector policies would still be necessary to maintain solar’s economic competitiveness relative to current law.

Key Take-Aways: 
  • The current regime of clean energy tax incentives is coming to an end, and no viable replacement has been proposed.
  • Tax reform threatens to slow down the solar industry's rapid expansion by making projects less competitive relative to current law, under which the ITC already will revert to 10 percent from 30 percent at the end of 2016.
  • Last-minute, stopgap extensions or changes to existing energy incentives are unlikely and would only postpone their inevitable expiration for a year or two.
  • No matter what broader changes that Congress adopts as a part of tax reform, sector-specific policies for clean energy would still be required to maintain solar’s economic competitiveness relative to current law -- i.e. the inclusion of additional measures would be required as a part of any tax reform proposal, if Congress employs a “do-no-harm” approach to the competitiveness of the solar industry.
  • Potential solutions include technology-neutral energy credits, full expensing for priority sectors like clean energy, and policies that lower the cost of capital for clean energy projects.
Key Facts: 
  • Although accelerated depreciation is one of the top five corporate tax expenditures, eliminating it will not actually broaden the tax base because it will change as corporate profits increase or decrease.
  • Slower depreciation schedules sacrifice future tax receipts for short term tax reciepts and would negatively impact economic growth.
  • The Baucus tax reform proposal, which includes a 20 percent Investment Tax Credit (ITC) for solar, would increase costs by 34 percent over current policy due to its drastic changes to current depreciation schedules and the minimal impact from a lower corporate rate.
  • Both the Camp and Wyden-Coats tax reform proposals could increase the cost of solar energy by up to 58 percent compared to current policy due to slower depreciation schedules and no incentives for clean energy.
  • Preliminary analysis suggests that clean energy master limited partnerships (MLPs) and real estate investment trusts (REITs) would not be effective substitutes for federal tax or other incentives (i.e. accelerated depreciation and ITC) and would have to be modified legislatively to work together with other incentives.