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The steep price of extending the sunset on a special-interest tax credit

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In 2005, the North Carolina General Assembly established a 35 percent credit for investing in renewable energy. This credit was slated to sunset at the end of 2010. By 2010-11, the Tax Research Division of the Department of Revenue estimated, the credits taken would cost the state $5.65 million.

According to Department of Revenue figures, however, in 2011 the full amount of credits generated for solar (not all renewable energy credits, just credits for solar energy) was $68.4 million, which is over twelve times the original 2010-11 estimate for all renewable energy credits. (In 2005 DOR expected 90 percent of credits generated to be used in the same year, as opposed to portioned out equally over the five-year period, so this year saw the last $13.7 million’s worth of 2011 credits taken.)

That is, it would have been over twelve times the 2010-11 estimate, had the credits sunset at the end of 2010 as originally planned — and, it is important to add, originally thought sufficient.

Instead, in 2009 the General Assembly voted to extend the credit through the end of 2015. And in the interim, since 2010-11, the full amount of credits generated for solar (not all renewable energy credits, just credits for solar energy) is $6,627.8 million so far. Which, for those with a morbid curiosity, is about 1,173 times over the 2010-11 estimate for all renewable energy credits.

Over 6.6 billion dollars. That is how much the General Assembly’s decision back in 2009 to override the credits’ planned sunset is projected to cost the state so far.

And that was just the decision to put off the credits’ sunset another five years. Renewable energy lobbyists and big corporation friends profiting from them are exerting tremendous pressure on the General Assembly to put off the sunset again, perhaps indefinitely.

There’s a big reason for it. It’s one more number: 100. As in the almost 100 percent guaranteed return on all investment that the state’s 35 percent investment tax credit helps them achieve. As described by the N.C. Dept. of Environment and Natural Resources in its March 2015 Energy Report,

Solar energy investors with sufficient tax liability may combine the 35 percent state ITC with the 30 percent federal ITC and the bonus accelerated depreciation schedule to return almost all of their investment within six years and may receive 57.8 percent of their investment back through tax credits and depreciation deductions within 12 months of placing into service. For an investor subject to a 35 percent federal tax rate and a 5 percent state tax rate, the [following] demonstrates how much of the solar energy investment is returned each year through tax incentives.

Source: N.C. Dept. of Environment and Natural Resources

This investment scheme is reminiscent of the Construction Work In Progress (CWIP) laws for new nuclear power plants. Even though federal law offers federal loan guarantees of up to 80 percent for new nuclear construction, private investors and banks argued that it wasn’t enough. CWIP filled that risk hole for nuclear investment like the 35 percent renewable energy credit covers this risk hole, being "that last bit of government guarantee needed to get utilities and investment banks to the magic 100 percent."

That’s why it seemingly takes an act of bravery by the state legislature to have the tax credits sunset this year as is written in the law. That’s why responsible legislators have to withstand the torrents of public attacks by a powerful, wealthy special-interest lobby in order to let the credits sunset five years past their original expiration date.

The renewable-energy cycle over the decades: from the 1970s through today

Year after year, decade after decade, the public and its elected representatives are promised that renewable energy is just a few short years away from being cost competitive with traditional energy sources, almost capable of powering the state and nation, and for just a few short years more will need tax credits.

But that time of cost-competitiveness without generous government subsidies never arrives. What does arrive, instead, are lobbyists offering more promises of future self-reliance this time, as sure as the sun does shine, we swear, and threatening to assail skeptical policymakers with slanders about them hating jobs and the industry and ripsnorters about them being anti-free-market (in opposing subsidies and purchase mandates for a moneyed special interest? go figure that one).

Six years ago, the Institute for Energy Research asked "Will renewables become cost-competitive anytime soon?" and still the answer from its lobbyists (six years later and looking several years in the future) is an emphatic NO. Robert L. Bradley Jr., CEO and founder of the Institute for Energy Research, wrote a twopart series on the long history of the solar industry, which still relies on the "infant industry" canard in these recurring subsidy debates.

Reading the quotations compiled in the above links, it’s striking how the discussions today sound like discussions from a generation ago. Here’s a teaser example from the 1980s:

"In 1986, Amory Lovins of the Rocky Mountain Institute lamented the untimely scale back of tax breaks for renewable energy since the competitive viability of wind and solar technologies was ‘one to three years away.’

Normally one had to turn the FM dial to find soothing sounds of the 1970s, ’80s, ’90s, 2000s, and today. Now one need only follow the renewable energy lobby.

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Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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