A rule of thumb whenever you hear about something called a “tax deal”: the devil is always in the details. And “tax deals” are always amazingly complex. So, the agreement we’ve been hearing about all week, the one so easily summarized as President Obama’s acceptance of a continuation of the Bush tax cuts (for everyone, including the very wealthy) in exchange for the GOP’s going along with extended unemployment benefits, is full of little surprises.

Here’s a surprise that alarms Lyndon Rive, the founder and CEO of SolarCity, a big solar power seller and installer based in Foster City. Rive’s story is this: The tax deal includes a major business tax break: a two-year provision that allows companies to take accelerated depreciation—100 percent of the value of capitalized assets. In essence, that will allow companies to cancel out their tax liabilities for the coming years. Rive argues that while that’s “a fantastic thing” for U.S. business as a whole, it has a bad and completely unintended consequence for the solar industry.

Rive explains that the carrot that’s driving the massive investment in solar and other renewable energy right now is the big federal incentive program for purchasers of solar systems (and wind and small hydro systems, too). One part of the program is a tax credit equal to 30 percent of the purchaser’s investment. Side-by-side with that program is a 30 percent Treasury cash grant tax called the 1603 program that’s part of the Obama administration’s stimulus program).

Here’s where the problem lies, according to Rive: by far the biggest investors in solar systems are large financial institutions: Wells Fargo, U.S. Bank, JPMorgan Chase, and Morgan Stanley among them. The banks purchase the systems and essentially lease them to end users like homeowners and small business, whose only ongoing payments are for the electricity the systems provide (end users also are credited for any surplus power generated and fed back into the grid). This arrangement allows the investors to get the benefits of the big federal tax credits or 1603 grants. However, with a 100 percent immediate depreciation of capitalized assets available, the banks and other investors have the ability to immediately zero out their tax liabilities. Since they no longer have any “tax appetite”—the term Rive repeatedly used for their need to find a strategy to reduce their tax bills–their incentive to buy solar systems for the 30 percent tax credit will go away, at least in the short term (you can’t take a credit if your tax bill is zero). He said the fix is to continue the 1603 Treasury cash grant, which will give the banks and other investors an incentive to continue to buy renewable energy systems.

Rive said that if this feature of the tax deal is not fixed, the effect on the industry would be far worse for solar and other renewable sectors than the financial industry meltdown two years ago. Because the renewable power industry relies so heavily on the banks for growth, it ground to a standstill and was only restarted by the 1603 program. (How bad was the pullback? Rive said Solar City had 380 employees when the meltdown hit; demand shrank so abruptly that the company laid off about 100 employees; since the advent of the stimulus package and the financial industry recovery, the sector has boomed, and Solar City’s workforce now stands at 930).

We’ve got calls out to renewable industry trade groups, to several solar companies, and to other industry analysts. The Solar Energy Industries Association in Washington is working on an analysis of the new tax legislation, and we hope to have more on that later today.

In the meantime, our researches have disclosed that the solar industry’s concern about the 1603 program pre-dates this week’s tax deal. The program—remember, it’s part of the 2009 stimulus package— is set to expire December 31. So the renewable sector has been lobbying since the beginning of the year to get it extended. The tax deal, with its 100 percent depreciation provision, has merely accelerated the concern for some.

Author

Dan Brekke

Dan Brekke (Twitter: @danbrekke) has worked in media ever since Nixon's first term, when newspapers were still using hot type. He had moved on to online news by the time Bill Clinton met Monica Lewinsky. He's been at KQED since 2007, is an enthusiastic practitioner of radio and online journalism and will talk to you about absolutely anything. Reach Dan Brekke at dbrekke@kqed.org.

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