Property Tax Incentives

Description

Property tax incentives for solar energy offer exemptions, abatements, credits, or special assessments that mitigate or eliminate the increase in assessed value of a property (for tax purposes) attributable to a solar-energy system. Although solar fuel is free, the capital costs for solar-energy systems are high relative to conventional technologies, often resulting in a significantly higher property tax burden. Thus, the goal of property tax incentives is to bring the cost of owning a solar energy system in line with using a conventional heating and cooling system, or drawing electricity from the utility grid.

Although property taxes may be levied in some form at many levels of government (e.g., state, county, municipal, township, school district, and special district), nearly all property tax revenue is collected at the local level.[1] However, state legislatures typically set overall property tax policy and processes. In states where local governments have the authority to offer property tax incentives, a municipality or county may use this authority to protect residents and businesses that install solar-energy systems from higher property taxes.

Property taxes vary widely by county and state. They are usually calculated as a percentage of the assessed value of the property. Texas, New Jersey, and New Hampshire have the highest median tax rates, exceeding 1.8% of median home value. At the other end of the spectrum are Alabama, Hawaii and Louisiana, with median tax rates of 0.33%, 0.26% and 0.18%, respectively.[2]

Property tax incentives reduce the cost of owning a solar-energy system, but these savings alone are not likely to stimulate significant solar development. At the same time, high property tax rates and policies may hinder solar development. This policy option is especially valuable where property tax rates are high, which may be the case in states that have no income and/or sales tax, and where other complementary policies (e.g., direct cash incentives, net metering, solar access laws) are already in place.

Status & Trends

More than 30 U.S. states (and Puerto Rico) offer some form of property tax incentive for solar installations. In the majority of these states, the incentive follows a simple model that excludes the added value of solar-energy equipment in the valuation of the property for taxation purposes. Although most propert

Property Tax Incentives for Solar Projects

y tax incentives do not have an expiration date, a handful of states allow the tax break only for a limited period, ranging from five years in Iowa and North Dakota to 25 years in Hawaii. With a few exceptions, these policies apply to all sectors, and both to solar-thermal systems and solar-electric systems (and passive solar, in some cases). Some states specify that a system must produce energy for on-site use to qualify.

In addition, several states authorize, but do not require, local governments to provide property tax incentives for solar. New Hampshire, for example, allows cities and towns to offer exemptions from local property taxes for certain renewables. The Office of Energy and Planning web site lists more than 80 municipalities that offer the exemption for one or more types of renewable-energy systems. New York's exemption, on the other hand, is valid unless a local government opts out of the exemption, as opposed to the more common practice of requiring governments to opt in to grant an exemption. Other states with a “local option” policy include Alaska, Colorado, Rhode Island, Vermont and Virginia. Maryland, which requires a solar property tax exemption, allows counties to offer a property tax credit for solar systems for up to three years. Several counties in Maryland now offer such credits.

Due to the recent growth in large-scale solar and other renewables, a few states have developed separate policies for utility-scale renewables to preserve at least a portion of property tax revenue for local governments, or to assess such systems at a value comparable to a non-renewable energy facility. Arizona, Colorado, Montana and Nevada provide a partial abatement of property tax attributable to the solar facility using various assessment methods. Customer-sited installations, on the other hand, qualify for a full exemption in Arizona, Montana and Nevada, and, if authorized by the applicable local government, in Colorado. North Carolina's property tax incentive, established in 1977, stipulates that solar heating and cooling systems not be assessed at more than the value of a conventional system. In 2008, North Carolina created a new incentive for solar-electric systems by exempting 80% of the appraised value of the system from property tax.

Examples

Oregon’s property tax incentive follows a common model whereby the added value to any property from the installation of a qualifying renewable-energy system may not be included in the assessment of the property’s value for property tax purposes. In this case, the incentive is available for a wide range of renewables -- but only for those that are net-metered or primarily designed to offset on-site electricity use. The incentive is scheduled to expire for tax years after July 1, 2018.

Arizona has established separate property tax incentive provisions for renewable-energy systems depending on whether or not a system is designed for on-site energy use. Arizona’s property tax exemption applies to "equipment that is used to produce energy primarily for on-site consumption from renewable resources.” For property tax assessment purposes, these systems are considered to add no value to the property. Arizona’s property tax assessment for renewable-energy property, on the other hand, applies to facilities that generate and export electricity using solar, wind or other qualifying renewable resources. These facilities are assessed at 20% of their depreciated cost for the purpose of determining property tax.

New York City allows building owners to deduct from their total real property taxes 2.5% to 5% of photovoltaic (PV) installation expenditures annually for four years, with a total tax benefit of up to 20% of the installed system cost. The maximum abatement during a year is the lesser of $62,500 or the amount of real property taxes owed during the year. In effect, this incentive is similar to an investment tax credit, but it differs because the tax benefits are recouped through reduced property taxes on the host building instead of through reduced income taxes. This incentive is available only in New York City and is separate from the statewide property tax exemption that local governments are required to offer unless they opt out. New York City's exemption expires at the end of 2014.
Harford County, Maryland offers a credit against real property taxes imposed on residential or non-residential buildings or other structures that use solar or geothermal systems for heating, cooling or generating electricity for on-site consumption. The credit amount is equal to one year of total real property taxes or $2,500 per system (or $5,000 per property), whichever is less. A one-time application must be submitted to the Harford County director of administration on or before October 1 prior to the taxable year for which the credit is sought.

Ohio has two property tax exemptions: a property tax exemption for systems up to 250 kilowatts and a payment in lieu of property tax for systems greater than 250 kW. In June 2010, Ohio enacted legislation granting these exemptions from public utility tangible and real property taxes. Prior to this exemption, property taxes were cited as a major barrier for renewable-energy deployment in Ohio, as a renewable-energy facility that sold electricity to a third party was considered a "public utility" for tax purposes.

Resources

DSIRE: Summary of Property Tax Incentive Policies in the U.S. DSIRE, 2012.

The Cost of Value: PV and Property Taxes. Justin Barnes, Amy Heinemann and Brian Lips. North Carolina Solar Center, May 2012.

Footnotes

[1] http://www.taxpolicycenter.org/briefing-book/state-local/specific/property.cfm
[2] Property Taxes on Owner-Occupied Housing by State, 2004-2008. The Tax Foundation. The data represent property taxes paid by households on owner-occupied housing. As a result, they exclude property taxes paid by businesses, renters, and others.

Disclaimer: The information presented on the DSIRE web site provides an unofficial overview of financial incentives and other policies. It does not constitute professional tax advice or other professional financial guidance, and it should not be used as the only source of information when making purchasing decisions, investment decisions or tax decisions, or when executing other binding agreements. Please refer to the individual contact provided below each summary to verify that a specific financial incentive or other policy applies to your project.

While the DSIRE staff strives to provide the best information possible, the DSIRE staff, the N.C. Solar Center, N.C. State University and the Interstate Renewable Energy Council, Inc. make no representations or warranties, either express or implied, concerning the accuracy, completeness, reliability or suitability of the information. The DSIRE staff, the N.C. Solar Center, N.C. State University and the Interstate Renewable Energy Council, Inc. disclaim all liability of any kind arising out of your use or misuse of the information contained or referenced on DSIRE Web pages.

Copyright 2012 - 2013 North Carolina State University, under NREL Subcontract No. XEU-0-99515-01. Permission granted only for personal or educational use, or for use by or on behalf of the U.S. government. North Carolina State University prohibits the unauthorized display, reproduction, sale, and/or distribution of all or portions of the content of the Database of State Incentives for Renewables and Efficiency (DSIRE) without prior, written consent.