Renewable energy

'Temporary' Solar Tax Credits Have Persisted For Decades. Now Senate Dems Can't Let Them Go.

There's nothing more permanent than a temporary solar investment tax credit.

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Senate Democrats appear hellbent on proving correct Milton Friedman's old quip that there's nothing more permanent than a temporary government program with their demand that the federal government's investment tax credit for solar installations be extended yet again.

"Solar energy alone has averaged 50 percent annual growth for a decade thanks in large part to this tax credit," tweeted Sen. Dianne Feinstein (D–Calif.) on Monday. "That's why we're calling on the Senate to extend it."

Feinstein's tweet came less than a week after 20 Senate Democrats sent a letter to Senate leadership as well as the heads of Senate Finance Committee asking that the feds' tax incentive for solar investments not be allowed to taper off as currently scheduled.

The absence of climate change initiatives from the Trump administration, they argue, requires that the tax credit be kept in place.

Currently, the federal government allows homeowners and investors to write off 30 percent of the costs of installing solar panels, either on homes, commercial buildings, or whole solar farms.

Beginning next year, that 30 percent credit is supposed to start tapering off. The tax incentive for residential installations is set to zero out by 2023. The credit for commercial solar installations will drop to 10 percent in the same year, where it is supposed to remain permanently.

Senate Democrats are asking that the 30 percent tax credit for both residential and commercial solar projects be maintained until a new technology-neutral incentive program for reducing carbon emissions from electricity generation can be developed.

The Solar Energy Industry Association (SEIA)—a trade group—has echoed this demand.

"Until we have comprehensive legislation addressing climate change, the ITC [investment tax credit] is the strongest policy there is to incent clean energy development," said Abigail Ross Hopper, president and CEO of the SEIA in a press release last week. "We already know that the ITC has generated hundreds of thousands of jobs and injected more than $140 billion in private investment into the economy."

Should Senate Democrats and the solar industry's demands be met, it will mark yet another extension of a decade-old tax credit that was initially supposed to be a temporary program.

According to the Congressional Research Service (CRS), federal tax credits for solar energy investments date back to 1978—when Congress created a 10 percent credit for all non-oil or natural gas energy investments.

The 1978 credit was supposed to sunset in 1982. This initial end date was later extended to 1985, and then 1988. A number of short-term extensions followed, keeping the 10 percent tax credit alive until 1992 when it was made a permanent program.

The current 30 percent solar tax credit was passed with overwhelming bipartisan support in 2005 and was supposed to drop back down to 10 percent in 2007. This planned reduction also never happened, however, instead being extended to 2008. The bank bailout legislation of that year later extended the 30 percent tax credit out to 2016.

In 2015, with Republicans in control of both chambers of Congress, there appeared a real chance that the more generous 30 percent tax credit might be allowed to expire.

Even some in the solar industry seemed ready to let the higher tax credit go.

"We do not believe an extension of this credit is necessary for the continued health of the solar industry," wrote John Berger, CEO of solar company Sunnova, in a 2015 letter to Congress' budget committees. "The industry made a deal with Congress in 2008 that it needed the ITC's support until 2016 and then it would be able to operate and, indeed, flourish without it. We, collectively as an industry, should honor that deal."

Other market analysts at the time seemed to agree with Berger, with one telling The New York Times that the solar market wasn't going to disappear in the absence of the 30 percent tax credit, but would just experience slower growth.

Eventually, however solar boosters got their way, cutting a deal to extend the tax credit until the end of 2019—after which a phase-down would begin—in exchange for them lending support for lifting a longtime ban on oil exports.

"The message was abundantly clear. This was going to be it, and here's the plan. Be ready," says Katie Tubb, a policy analyst with The Heritage Foundation. "Yet here we are having this conversation again. Which to the cynics out there is no surprise because we've been having this conversation over and over."

Tubb says tax credits for solar investment cause two problems. The first is that they make it more difficult for more solar companies to compete with less efficient rivals who depend on government support.

"It makes it very hard for viable companies with a good product and a good business model to stand out from a crowd of companies that may or not have that," she tells Reason.

The repeat-play of Congress almost letting solar tax credits expire before renewing them for another couple years also creates boom and bust cycles in the industry that have little to do with underlying demand, adds Tubb.

The stock of SolarCity—Elon Musk's solar venture—rose some 40 percent after a deal was reached to renew the solar investment tax credits in 2015, reported The New York Times.

In addition, there's the cost to the treasury, which lost out on $2.5 billion thanks to the solar tax credits last year, according to the CRS—up from less than $50 million a year a decade ago.

In part, this growth in the costs of tax credits is a sign that more and more solar panels are being installed on the roofs of homes and businesses across the country. Indeed, in making the case for extending tax credits, both the SEIA and their allies in Congress stress the phenomenal growth of the solar industry in recent years.

Yet, the more successful solar proves in the marketplace, the less convincing the case of tax credits becomes. Why should taxpayers be subsidizing the growth of an already-profitable industry?

Tubb argues that the federal government should ditch contradictory policies that aim to both help and hurt the solar industry. In addition to tax credits, the Trump administration has also levied tariffs on imported solar panels.

"It'd be nice if we could get cohesive pro-market, pro-solar policy out there," says Tubb. "I think that looks like getting rid of the tax credits and getting rid of the tariffs."

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