A quirk in the way the state treats the value of solar energy projects for tax purposes could throttle Virginia’s solar industry in its infancy, according to an analysis prepared by SolUnesco, a Reston-based developer of solar energy projects.
In theory, a major investment in solar energy should benefit the jurisdiction where the project is located by generating significant new property tax revenues. But under current practice, any gain in revenue for a locality would be more than offset by cuts in state support for public schools. If local governments calculate that solar projects will cost them revenue rather than boost their tax base, they will have a strong incentive to deny necessary permits rather than approve them.
“Bureaucratic bookkeeping might grind solar development to a halt,” states a SolUnesco white paper, “The Composite Index and How It Relates to Solar Development in Virginia.”
SolUnesco has proposed building an 11-megawatt solar facility in Albemarle County, but the county zoning code prohibits solar farms. The Board of Supervisors has asked the county planning commission to study the issue. A repeal of the restriction might encounter opposition from NIMBYs intent upon protecting the rural character of the county, as I blogged here. Albemarle’s decision could well hinge on its calculus of whether the project will benefit or hurt the county fiscally.
Under state law, solar energy projects are assessed for property tax purposes as “certified pollution control equipment.” That qualifies solar farms for an 80% reduction in property taxes. That exemption improves the economics of solar projects but it reduces the tax benefits to local governments.
By contrast, the state Department of Taxation counts the full market value of solar farms when calculating the Composite Index (CI), which is used to measure local governments’ relative fiscal health and ability to support public K-12 education. The state distributes state support for education on a sliding scale that gives a higher share to localities with a low CI (a smaller real estate tax base per capita) and a smaller share to wealthier jurisdictions. As SolUnesco summarizes: “Increased taxable property increases the Composite Index, which reduces the share paid by the state.”
So, how does that work out in practice? SolUnesco provides the hypothetical example of a solar project that creates taxable value of $100 million. Here’s how the numbers work out for a “representative county.” The county generates $80,000 in new tax revenue on $20 million of assessed value. But the county would lose $147,597 in state funding for schools based on the full $100 million added to the Composite Index. The net loss: $67,597.
If the Department of Taxation used the same value as the local government in calculating the Composite Index, our hypothetical county would experience a $52,083 revenue gain.
“Counties that have permitted utility-scale projects may regret their decision if they believe these projects will result in a net revenue loss,” states the white paper “Many projects have received their county [conditional use] permit, but many have yet to file for their building, electrical and other construction permits.”
“The state is aware of this inconsistency in their treatment of tax exemptions,” says SolUnesco. The Department of Taxation, Department of Education, and the State Corporation Commission “are all working together on a resolution.”