Analyzing the Interaction Between State Tax Incentives and the Federal Production Tax Credit for Wind Power

This study analyzes the potential impact of state tax incentives on the federal production tax credit (PTC) for large-scale wind power projects.1 While the federal PTC provides critical support to wind plants in the U.S., its so-called "double-dipping" provisions may also diminish the value of – or make ineffectual – certain types of state wind power incentives. In particular, if structured the wrong way, state assistance programs will undercut the value of the federal PTC to wind plant owners. It is therefore critical to determine which state incentives reduce the federal PTC, and the magnitude of this reduction. Such knowledge will help states determine which wind power incentives can be the most effective. This research concludes that certain kinds of state tax incentives are at risk of reducing the value of the federal PTC, but that federal tax law and IRS rulings are not sufficiently clear to specify exactly what kinds of incentives trigger this offset. State investment tax credits seem most likely to reduce federal PTC payments; the impact of state production tax credits as well as state property and sales tax incentives is more uncertain. Further IRS rulings will be necessary to gain clarity on these issues. State policymakers can seek such guidance from the IRS. While the IRS may not issue a definitive "revenue ruling" on requests from state policymakers, the IRS has in the past been willing to provide general information letters that can provide non-binding clarification on these matters. Private wind power developers, meanwhile, may seek guidance through "private letter" rulings. This work also illustrates that – even if the federal PTC offset is triggered – state tax incentives are still helpful because they provide some value to a wind project developer. This is because the value of the federal PTC is not offset one-for-one by the availability of state tax incentives (and because state tax incentives can provide a valuable backstop to wind power developers were the federal PTC to expire). Instead, we find that state tax incentive policies generally lose ~40% of their value through a reduction in the federal PTC, meaning that they retain a full 60% of their value to wind project owners even after the federal PTC offset. State aid that is provided up-front (e.g., sales tax exemptions) is generally found to result in a larger loss of the federal PTC than aid that is provided over the life of a wind power facility (e.g., property tax reductions). Nonetheless, state wind power incentives that clearly do not offset the federal PTC may be preferable to state tax incentives.