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F I S C A L I M P A C T R E P O R T

SPONSOR SCONC

DATE TYPED 03/18/05 HB

SHORT TITLE Solar Thermal Systems Tax Credit Act

SB 334/cs SCONC

ANALYST Padilla-Jackson

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$150. 0

Recurring

EMNRD

$50.0

Recurring

EMNRD

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

($500.0) ($4,000.0)

Recurring

General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Air Quality Bureau

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

The Senate Conservation Committee substitute for Senate Bill 334 contains two sets of provi-

sions. The first part of the bill would make a number of changes in the present law renewable

energy production tax credit. The second part of the bill would create a new Solar Thermal and

Photovoltaic Systems Tax Credit Act.

Senate Bill 334/SCONC -- Page 2

Changes to the Renewable Energy Production Tax Credit

•

Provide an increased credit rate of $0.02 per kilowatt-hour (vs. $0.01 under present law)

for the first 200 thousand megawatt-hours of electricity produced using solar-light or so-

lar-heat-derived resources;

•

Minimum size of an eligible facility is reduced to 1 megawatt from 10 megawatts;

•

Total eligible electricity generation by all eligible facilities is reduced to 1.6 million

megawatt-hours from 2 million;

•

For facilities placed in service after January 1, 2007, the credits would be refundable, i.e.

any credits in excess of a taxpayer’s liability would be paid to the taxpayer.

Senate Bill 334 provides a tax credit against personal or corporate income tax liability for 15

percent of the installation cost of a solar thermal system at a residence in New Mexico, not to

exceed $1,500. Additionally, the bill caps the total tax credits provided at $1 million. This tax

credit is available during tax years from January 1, 2006 through December 31, 2015. The tax-

payer can rollover any unused portion of the tax credit for seven years, or if the person claiming

the credit has no tax liability, then the tax credit may be refunded to that person.

Section four of this bill allows an additional tax credit against personal income and corporate in-

come tax liability. The credit for personal income is $3.50 per nameplate direct current wattage

of the photovoltaic system provided that: (1) the maximum tax credit shall not exceed $10 thou-

sand; and (2) the total tax credits do not exceed $2 million.

The credit for corporate income tax is $1.50 per nameplate direct current wattage of that photo-

voltaic system, not to exceed $75 thousand per credit and not to exceed a total of $1 million for

all credits provided by the department. This tax credit is also allowed during tax years from

January 1, 2006 through December 31, 2015. The taxpayer can rollover any unused portion of

the tax credit for seven years, or if the person claiming the credit has no tax liability, then the tax

credit may be refunded to that person. A “photovoltaic system” is a stand-alone or a grid-

connected energy system that collects or absorbs sunlight for conversion into electricity. It de-

fines “solar thermal system” to mean an energy system that collects or absorbs solar heat energy

for conversion into electricity.

The bill would appropriate $50 thousand from the general fund to Energy, Minerals, and Natural

Resources Department (EMNRD) in FY06 for the purpose of administering the provisions of this

act. The bill would appropriate an additional $150 thousand from the general fund to EMNRD

in FY06 to provide training to installers, inspectors, and the public on the tax credits allowed

pursuant to the act and on installation and operation of solar thermal and photovoltaic systems.

Any unencumbered balances of either of these appropriations at the end of FY06 would revert to

the General Fund.

The provisions of this bill apply to taxable years beginning on or after January 1, 2005.

Significant Issues

According to the Air Quality Bureau, the state is obligated to report every five years to the U.S.

Environmental Protection Agency its progress in achieving the renewable energy goal of 10 per-

cent of the regional power needs by 2005 and 20 percent by 2020. They agency believes that

implementation of Senate Bill 334 will help the state achieve these renewable energy goals and

better address regional haze in New Mexico's national parks and wilderness areas.

Senate Bill 334/SCONC -- Page 3

PERFORMANCE IMPLICATIONS

According to the Air Quality Bureau, one of its performance measures is improvement of visibil-

ity at all monitored locations in New Mexico. Air pollutants from power plants contribute sig-

nificantly to reductions in visibility. Implementation of energy efficiency and renewable energy

technologies could reduce demand for energy derived from combustion of fossil fuel. This could

potentially reduce air pollution and help the Air Quality Bureau meet its target for improving

visibility in New Mexico.

FISCAL IMPLICATIONS

According to TRD, the total fiscal impact of this bill is -$500 thousand in FY06 and -$4,000 in

the subsequent fiscal year to the General Fund.

Solar Energy Tax Credits

TRD impacts are primarily attributable to the new solar energy tax credits. The maximum total

credit amounts of $1 million for solar thermal, $2 million for residential photovoltaic and $1 mil-

lion for commercial photovoltaic -- are assumed to apply on an annual basis. Since the credits

are refundable, the use would not be limited by the level of tax liabilities. Combined utilization

of all the new credits is assumed to be $1 million in tax year 2006 – with 50 percent of that

amount accruing in fiscal year 2006. Credits would increase as more people become aware of

the availability of the credit. *The new solar energy credits are recurring until the credits expire

in 2015; however, carry forward measures may extend the credits for seven years beyond the

year 2015.

Renewable Energy Production Tax Credits

TRD notes that the smaller size threshold and increased credit rate for solar power could increase

utilization of the renewable energy production tax credit in the near term. The fiscal impacts are

limited, however, until the refundability provision takes effect in 2007. In the longer-run, the bill

could actually reduce the fiscal impacts of the credit, because it reduces the aggregate amount of

power production eligible for the credit. These effects are uncertain because the total credit

claims are not likely to exceed the new cap in the bill for a number of years.

ADMINISTRATIVE IMPLICATIONS

According to TRD, provisions of the bill may be complex to administer by TRD, depending on

the rules adopted by the Energy Minerals and Natural Resources Department (“EMNRD”). A

new application and claim form would need to be developed. Changes to instructions and publi-

cations would required. Manual review, approval and tracking of the credit claimed and the

carry-forward amounts would be required. Audit and compliance procedures must be developed.

Depending on the number of claimants for the new credits, the department may need as many as

1 to 2 FTEs to administer the credits. Thus, TRD's administrative costs could be comparable to

amounts appropriated to EMNRD by the proposed statute.

The bill would require the EMNRD to adopt rules no later than September 30, 2005. Addition-

ally, the bill’s provisions would require EMNRD to provide an update of the act and recommend

changes to the appropriate interim legislative subcommittee every two years.

OPJ/lg