Non-conformity Taxing Developers
Ask any renewable energy project developer what saved the market from total collapse in 2009 and the unanimous answer would be the cash grants program from the U.S. Treasury. That's the Section 1603 program changes in the Recovery Act in which project developers were given the option of accepting immediate cash payments of 30 percent of the project's cost in lieu of 10 years of production tax credits for the generation output. But there's some worry if that success can continue as some states are now considering the grants taxable income.
It's not a trivial matter, especially in California, which has gotten most of the attention, though the Golden State is not alone. That amount of tax gold could be as much of 9 percent, upsetting project viability. Other states with significant renewable energy resources that are at risk include Arizona, Hawaii, Iowa and Wisconsin.
"This is particularly a concern with the large solar projects in California that will cost well over a billion dollars, and a tax would really have an impact on their economics," said Ed Feo, a Los Angeles based attorney and co-chair of Milbank, Tweed, Hadley & McCloy's power, energy & utility practice. The cash grants are specifically exempt from federal income taxes, but the issue of state income levies was something that only became apparent later. "This looks like something that wasn't thought all the way through," Feo said.
The problem arises in the whole notion of conformity between what the IRS and the various states count as taxable income. Most states, by statute, count income the same way the federal government does and update their laws periodically. In some states, any time the federal tax code changes, separate legislation has to be passed to bring the law into conformity with the IRS. In many states that has not yet happened, creating that gap, so the law as it stood last February when the stimulus passed is what counts. One fix would be for state legislatures to pass a law specifically designed to eliminate the difference, which renewable energy industry interests are pushing.
In the meantime, Feo said developers are proceeding with their projects as if the fix will be made. With the tough budget situation in California that has gotten national publicity, they'd better be right.
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