No, the Federal Solar Power Subsidy Does Not Pay for Itself

Michael Giberson

Last Friday the US Partnership for Renewable Finance, a coalition of financiers who invest in renewable energy, issued a report in which they claimed the federal investment tax credit for solar power is not a taxpayer burden because the tax credit “pays for itself” (to use their phrase). As I explain below, the report fails to support its claims.

In essence the US PREF report sums up federal tax collections that can be somehow linked to subsidized solar PV projects and concludes that the sum of the future tax collections is greater than the cost of the current tax break. For example, they claim a $10,500 residential solar credit will eventually lead to $22,882 in federal tax revenues, and a $300,000 commercial solar credit would yield $677,627 in federal tax revenues over the life of the project. Most of the tax revenues are federal income taxes paid by the companies, investors, and employees on income that is associated with the subsidized solar project.

The report led to a couple of rewrites of the press release in the renewable energy trade press. RenewablesBiz: “federal tax credit that has helped energize the recent boom in solar construction pays for itself and even generates excess revenue…”; RenewableEnergyWorld): “finds that the solar investment tax credit … can deliver a 10% internal rate of return … on the government’s initial investment.” Clean Technica wasn’t content with the press release’s own puffery, so it puffed up the report more: “Contrary to erroneous, misleading assertions to the contrary, the federal government’s Solar Investment Tax Credit (ITC) is proving to be an excellent investment for US taxpayers and the federal budget.”

Let’s be clear: the report does not demonstrate that the solar subsidy “pays for itself.” First, the report does not discount future revenues as is traditional in this kind of analysis, so the effects of time value of money and inflation are completely ignored. In effect they suggest it doesn’t matter if the subsidy ‘investment’ is paid back tomorrow, next year, or thirty years from now. Do you know any lenders that loan out money on these terms? If the federal government and current taxpayers had absolutely no other currently useful tasks requiring investments (technically, if current decisions had no opportunity costs), maybe one could ignore the time value of money. An investment is excellent only if the net present value of the future revenues is better with the investment than it would be with any other investment. The report doesn’t tell us if that claim is true of the solar subsidy.

Second, the report mostly neglects the effects of depreciation on the calculated taxes. They did analyze the tax collections with and without depreciation, and it turned out that assuming depreciation has a significant effect on their results. In their residential case assuming a $10,500 tax credit, the eventual federal tax revenue is $12,469 with depreciation instead of the $22,882 in taxes they highlight. In their commercial case, the eventual federal tax revenue collected is $380,127 with depreciation instead of $677,627. But they claim they can ignore depreciation and focus on the larger results.

Their justification for ignoring depreciation is that they’re assessing the effect of the subsidy on eventual federal tax collections, and depreciation would be the same whether a company invested in subsidized solar PV projects or some other unsubsidized capital projects. In their words, they are ignoring depreciation “since the depreciation of capital improvements applies without regard to how the capital improvements have been financed” and “depreciation is not specific to the solar industry.” (See pp. 2-3.)

But income tax laws, too, apply the same for income from subsidized solar projects or income from elsewhere–well, of course, there are thousands of variations in how income gets taxed under the federal tax code, but generally speaking income taxes are “not specific to the solar industry.” If we should ignore depreciation, why don’t we also just ignore income taxes?

This point leads us to the most fundamental of problems with the US PREF analysis. To analyze the benefits of the solar investment tax credit, we’d want to compare the world with the tax credit to the world without the tax credit. For example, the US PREF report simply estimates the corporate income from sales of electricity from the solar projects and then counts a fraction of this as federal tax revenue. But a reasonably safe assumption about a “world without the tax credit” is that electricity sales would have been about the same, so income and income tax revenues would have been about the same. The net effect of the subsidy on future tax revenue is near zero. (In effect, US PREF’s analysis proceeds under the amazing assumption that without the subsidized projects, consumers would have just used less electric power.)

The same criticism applies to investor and employee incomes. In the absence of the subsidized projects, it is safe to assume that investors would have found other investments to profit from and employees would have found other jobs. US PREF might claim that subsidized solar projects are more profitable to investors and lead to higher pay for employees than otherwise, so income tax collections would be a little higher than otherwise. But in this case they should only claim the increment in tax revenue, not the whole of it, as a “return on investment.”

All of this preoccupation with net federal tax collections is mostly, if not entirely, beside the point. Even if the report was any good–and it isn’t–public policy analysis is much more that gross impact on the federal budget over the lives of subsidized projects. The usual first step for sound policy analysis is a benefit-cost analysis, and a reasonable second step is careful considerations of alternative approaches to achieving desired policy goals. There is still more to good policy analysis, but these are useful starts. The US PREF analysis stands woefully short of a complete policy analysis and therefore is mostly useless as an argument for the solar investment tax credit.