Whether to reduce the state’s 35 percent tax credit for solar systems was a hotly discussed topic among legislators a year ago but has been pushed to the back burner this year.
The state tax credit has contributed to Hawaii becoming the leading state in the nation for solar on a per capita basis. Fully 10 percent of electric utility customers on Oahu now have solar photovoltaic systems, compared with just 1.4 percent in California, the next-highest state.
The quick pace of solar installation has cost the state millions in lost tax revenue. The tax credit became an issue for lawmakers in the fall of 2012 due to concerns that it was a drain on revenues at a time when the state was trying to balance its budget.
The state Department of Business, Economic Development and Tourism forecast at the time that due to the rapid growth of solar photovoltaic installations, the cost of the tax credit would skyrocket to $174 million in 2012 from just $35 million just two years earlier.
The forecast was criticized by some in the solar industry as being much too high, and for not recognizing the job creation and other economic activity associated with the credit.
Eighteen months later, however, it turns out that the DBEDT forecast was actually in the ballpark. The latest figures show that taxpayers claimed $164 million in renewable tax credits in tax year 2012, and the number will likely go higher as late filings are processed, a Department of Taxation spokesman said.
The tax credit data were compiled at the request of state Sen. Mike Gabbard, chairman of the Senate Committee on Energy and Environment. Gabbard introduced a bill (SB 623) last year to incrementally reduce the 35 percent tax credit, but the measure died in the final days of the session when Senate and House conferees could not agree on how fast and by how much to reduce the credit.
Since then both the state’s fiscal situation and the landscape in the PV industry have evolved. The state closed fiscal 2013 with an $844 million surplus, and the Council on Revenues is projecting revenue growth of 3.3 percent in fiscal 2014 and 7.4 percent in fiscal 2015. In addition, the use of the tax credit is expected to slow due to a combination of tighter administrative tax rules and an easing in the pace of PV installations.
Gabbard said he was not surprised at the amount of tax credits claimed in 2012 given the popularity of solar energy among Hawaii residents seeking to shrink their high electrical bills.
No bills have been introduced this year to lower the tax credit.
"We need to end our addiction to imported fossil fuels and it’s clear that the fiscal impact of this credit is well worth it considering the economic benefits which solar provides in lowering electricity bills for homes & businesses," Gabbard said in an email last week.
"It seems that we are now well past the peak in terms of fiscal impact of the tax credit. I can say that it’s highly unlikely that the Energy and Environment Committee will revisit SB623 this session. All sides seems to agree that the current law and administrative rules make sense at this point," he said.
Rep. Chris Lee, chairman of the House Committee on Energy and Environmental Protection, said he was comfortable with the tax credit continuing in its current form, especially because the federal 30 percent renewable energy tax credit is on its way out. "The federal credit nearly disappears in 2016, so we don’t want to undermine our state credit before we know what impact that will have on affordability," Lee said.
"The challenge now is not how much tax credit is available, but rather how quickly utilities modernize their business model and grid to accommodate the public’s demand for more solar. The credit is still important because it has brought solar within reach of many families on the edge of affordability, leading to cost savings for families that need it most," Lee said.
The renewable energy tax credit is available in either a refundable or nonrefundable form. The nonrefundable option allows those with a Hawaii tax liability to receive a credit worth up to 35 percent of the value of the PV system, subject to a cap. The refundable option, put in place in 2009, allows those without a Hawaii tax liability to receive a cash payment worth up to 24.5 percent of the PV system.
Those opting for the refundable credit in 2012 accounted for half of the credits claimed, up from 10 percent in 2001. Industry observers say the growth in the refundable credit is probably due to the increase in the popularity of solar leases and power purchase agreements. Those options, which don’t require any upfront payment by customers, are mainly offered by mainland companies with no Hawaii tax liability.
Lee said the fact that some money from the tax credit may be going to the mainland should not be a mark against the program.
"In nearly every industry there’s going to be money flowing out of the state, but the most important focus is making sure the credit is doing its job and leading to the installation of renewables that are saving ratepayers money overall," Lee said.
"I’ve yet to see the comparison of how that portion of the credit squares with the economic activity generated and money saved in our economy, which needs to be quantified, so I’d say the jury is still out."
Still, others question whether the renewable energy tax credit is still needed given the success that the solar industry has enjoyed in Hawaii.
"Hawaii has had a solar tax credit in some form since 1976 — 38 years," said Marco Mangelsdorf, president of ProVision Solar in Hilo.
"With $340 million — and counting — of the public’s money doled out from 2003 to 2012, it really begs this question: Is this kind of tax credit supposed to be a subsidy in near perpetuity, or is it time for the solar industry to stand on its own? No industry wants to lose a handout, but come on. Isn’t it time to have a serious discussion on the subject?"
Tom Yamachika, interim president of the Tax Foundation of Hawaii, also questioned whether the tax credit has outlived its usefulness.
"Ideally you want a system that gives fledgling industries temporary relief, and then you pull the milk bag away after a while. You have to wean the baby at some point. There’s no denying that the tax credit has worked," Yamachika said.
