Which Solar Investment Tax Credit Strategy Can Survive the Federal Political Climate?

What are the political options the United States solar industry faces as it seeks to avert the impact of the phase-out of the federal investment tax credit (ITC)? A policy paper produced by researchers at The George Washington University, “Softer Solar Landings: Options to Avoid the Investment Tax Credit Cliff,” explores four potential alternatives to the current plan and assesses their political viability.

James Mueller, director of research at GW Solar Institute and coauthor of the paper, said he recommends a hybrid solution: a modified two-year extension followed by either a gradual phase-out or a technology-neutral phase-out.

However, Mueller said he has not ruled out another option. “In the long run, the master limited partnership (MLP) and real estate investment trust (REIT) may be a viable replacement.”

A Profitable Tax Credit Lacking Political Traction

Flag over CapitolMueller said many Republicans are in favor of phasing out the ITC because they see it as interfering with the market. Meanwhile, he said, Democrats often want to prioritize other battles that are more important to them than solar tax credit preservation.

Because of these political dynamics, Mueller said, proposing to extend the ITC indefinitely – as Solar Energy Industries Association has recommended – is not seen as viable by either major party.

Mueller has been engaging in dialogue with legislators about the viable options for preserving the competitiveness of solar power as the industry expands. The data analysis he conducted reveals that phasing out the ITC as planned would severely impair the success of the industry, although the magnitude of the impact on employment is unclear.

Ironically, although solar power’s federal tax credit may be unpopular in Washington, it is actually bringing in income for the federal government. According to the policy paper, the ITC now generates a 10-percent internal rate of return via federal tax receipts. This does not include the financial value of environmental benefits and economic development, which Mueller said are not included in federal tax policy decisions at this time.

Four Alternatives to Continuing the ITC

One option the paper discusses is a gradual phase-out of the tax credit. This option is similar to the proposal from Stanford University that our website covered in May. It would involve stepping the tax credit down in even five-percent increments with an end date of 2022. This would allow solar power to become more economically competitive than it is now in time for the end of the credit. To allow utility-scale project developers to participate effectively, the allowable deadlines for receiving the credits would apply to project construction commencement dates rather than applying to the dates when the projects go live. Solar installation

A second option, a technology-neutral approach, would allow the tax credit to be applied to new technologies that are developed over time. It would phase out credits for mature technologies. The credits would have a ceiling of 30 percent – the level of the current ITC.

“We think the technology-neutral ITC is promising for a number of reasons,” Mueller said. “There will be new technology for solar somewhere down the road.”

Third, the ITC could be replaced by MLPs and REITs. Depending on federal tax reform decisions, these may someday be desirable options for the solar industry. However, according to Mueller, these are not practical choices to finance small-scale solar on residential rooftops unless leasing companies are involved. In addition, a system like this could not be set up and running by the end of 2016, when the ITC is scheduled to sunset.

Mueller said MLPs and REITs may be a viable model in the future, but this depends on federal decision makers’ choices about tax reform. A bipartisan bill that is currently under consideration, the Master Limited Partnerships Parity Act, would make it possible for renewable energy technologies to benefit from MLP structures for financing.

No bills to facilitate using REITs for solar power are currently in progress at the federal level. And according to Greentech Media, the IRS does not generally view solar power as a good candidate for REIT financing.

Mueller said the larger question of tax reform strategy may well drive the solutions that the solar industry will see. Specifically, MLPs may be eliminated through tax reform. Tax extenders may also not survive.

The fourth option the paper discussed is a two-year extension of the ITC – with a modification specifying that project developers can use the deadline dates when they commence construction rather than the dates when the projects go live. However, Mueller said, legislators may not be in favor of this strategy, since tax credit extenders add to the national deficit and are difficult to monitor in terms of their financial performance.

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