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.