New rules issued by the Hawaii Department of Taxation last week aimed at clarifying how solar tax credits should be calculated are pitting solar companies against each other, angering environmental groups and forcing legislative leaders to grapple with how to manage an increasingly hostile debate this upcoming legislative session.
The tax department’s new rules effectively restrict the number of tax credits that homeowners and solar companies can claim on solar arrays.
The tax department, which has raised concerns in the past about solar owners gaming the system to claim more credits than intended, says the rule changes are necessary to clarify confusion in the existing tax instructions.
“We have gotten thousands of calls over the past year asking for assistance,” Mallory Fujitani, a spokeswoman for the tax department, told a group of lawmakers, energy executives and policy advocates who convened at the State Capitol on Tuesday as part of a legislative working group. “Tax preparers say the (past) guidance doesn’t help them. They are unable with certainty to know that it’s calculated correctly.”
Overstepping Legal Authority?
But the Sierra Club and Earthjustice say the changes are illegal because they flout the legislative intent of the tax credit law which is to encourage more solar. They are considering filing a lawsuit over the rule changes.
“The Department of Taxation is allowed to issue rules but only if those rules implement the intent of the Legislature,” David Henkin, an attorney with Earthjustice, told Civil Beat. “The intent of the Legislature was to expand the solar industry. They wanted more PV to meet energy goals. They wanted more businesses and jobs to promote economic growth.”
Gov. Neil Abercrombie’s administration has become a focus of the criticism.
“Even if (Abercrombie) doesn’t like it, it’s not his purview to dictate what tax policy and clean energy policy is,” said Henkin. “It’s pretty shocking.”
Lt. Gov. Brian Schatz, who oversees energy policy for the Abercrombie administration, did not respond to an interview request.
But even some in the solar industry say the environmental groups' concerns are off base.
“When the Department of Taxation issued (previous rules), without legislative direction, that allowed for two or more tax credits per PV facility, many in the solar industry applauded,” Marco Mangelsorf, president of ProVision Solar, said by email. “Now that DoTax is trying to bring some clarity and balance, some in the industry are getting hysterical. Can they have it both ways? Support DoTax when they like the rulings and clobber them when they don’t? Sounds hypocritical to me.”
And key lawmakers are also on the state agency's side. Sen. Mike Gabbard, chair of the Senate Energy and Environment Committee and Rep. Denny Coffman, chair of the House Energy and Environmental Protection Committee, both said they think the tax department has the authority to issue the new rules.
Major Solar Projects at Risk
The Sierra Club and Earthjustice predict that the new rules will reduce tax credit expenditures by 50 percent and some solar companies warn this could be devastating.
The changes ensure that homeowners can only take one state tax credit per system. The credits allow for a 35 percent credit for the system’s cost or a $5,000 refund, whichever is less.
For commercial systems, which are eligible for a 35 percent tax credit or $500,000 refund, the tax rules limit the number of tax credits by system size. Commercial projects can still claim multiple credits, but solar executives say it substantially reduces the number.
The Hawaii Solar Energy Association says the rules could derail or substantially increase the ratepayer costs of solar systems for some of the state’s largest projects.
The fight against the tax department’s new rules is expected to be picked up by lawmakers this legislative session, which begins in mid-January.
But the insecurity that the abrupt changes are creating in the industry is already causing concern.
“I can assure you right now that the business climate in Hawaii is extremely cautious because the rules change every day,” Doug McClaflin, who directs alternative energy policy for Castle & Cooke, said during Tuesday's meeting.
He and other executives say that large projects that have been in development for years and had millions of dollars expended upon them could go under as investors get nervous or costs no longer pencil out.
Fight in the Legislature
There is little consensus about what should be done about Hawaii’s solar tax credits going forward.
The tax credits are intended to make solar competitive with current electricity prices and are matched by a federal tax credit that covers 30 percent of the system cost.
The price of solar has dropped significantly in recent years, according to industry data, and the cost of electricity has spiked upward, raising questions about whether the credits are no longer needed. But the Hawaii Solar Energy Association says that scaling them back right now would hurt solar adoption and the economy — jobs in the industry have grown in recent years to account for about one in five construction jobs, according to state data.
HSEA, the state's largest trade group, and Mark Duda, representing the PV Coalition, presented two very different proposals at Tuesday's meeting that was convened by Gabbard.
Duda's plan calls for removing the cap on the tax credit and ramping the credit down during the course of the next several years. This would give investors and consumers security as to where the tax credit was going, he said.
But Leslie Cole-Brooks, executive director of the HSEA, argued that there should be no reduction. Instead, she said the cap on the residential tax credit should be raised to $12,500, from its current level of $5,000. She said that this would even the playing field for those with larger systems while making sure that the state's tax credit expenditures remained in check.