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

SPONSOR Gonzales

ORIGINAL DATE

LAST UPDATED

1/25/06

2/1/06 HB 295

SHORT TITLE Solar Market Development Income Tax Credit

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(352.3)

(655.5)

(1234.0) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates SB 269

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY06

FY07

FY08 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

30.0

30.0

60.0 Recurring General

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Energy Minerals and Natural Resources Department (EMNRD)

US Department of Energy, Energy Information Agency (EIA)

Responses Received From

Taxation and Revenue Department (TRD)

Energy Minerals and Natural Resources Department (EMNRD)

SUMMARY

Synopsis of Bill

House Bill 295 amends the Income Tax Act by adding a new credit against personal income tax

liability for the purchase and installation of a solar thermal or photovoltaic system in a residence,

House Bill 295 – Page

2

business or agricultural enterprise. The credit is equal to 30 percent of the cost of the system less

applicable federal tax credits up to a maximum of $9,000 and can be carried forward for a maxi-

mum of 10 years. The bill also includes an emergency clause to make it effect immediately upon

becoming law. Also included is a sunset date of 2015 on an eligible purchase. The total amount

of credits available is $5 million: $2 million for solar thermal systems and $3 million for photo-

voltaic systems.

FISCAL IMPLICATIONS

In FY06, the amount claimed against income taxes is estimated to be $352 thousand, with $180

thousand for photovoltaics and $172 thousand for solar thermal. In FY07, the amount claimed

will almost double in size as more people take advantage of the credit and the industry matures.

The FY07 reduction in revenues will be $655 thousand and go over $1 million by FY08 where it

will cost $1.2 million.

It is assumed that all of the credits will be used since there has been an extraordinary degree of

interest in developing renewable sources and the combination of this credit and the federal credit

of $2,000 makes the purchase and installation much more affordable. EMNRD has indicated

that the credit will grow in usage until it is completely used in FY14 based on industry trends.

Additional budget impacts include ½ FTE for TRD to coordinate with EMNRD on the credit

process. This is estimated to cost $30 thousand based on the FTE cost of a typical TRD em-

ployee.

SIGNIFICANT ISSUES

A photovoltaic system is an energy system that collects or absorbs sunlight for conversion into

electricity.

A solar thermal system is an energy system that collects or absorbs sunlight for conversion into

heat for the purposes of space heating, space cooling, or water heating.

HB 295 is only applicable to the personal income tax and not the corporate income tax which

may limit its usefulness to some businesses.

EMNRD:

A federal solar tax credit is in place, offering a 30% tax credit on a solar system’s capital

cost, up to $2,000. It is available during the January 2006 to December 2007 timeframe.

This incentive is attractive only for purchasing small solar domestic hot water systems in the

$6,000-$8,000 capital cost range. It does not greatly affect decisions for purchasing photo-

voltaic or large solar thermal systems. In addition, it is only available, at this time, for two

tax years.

Several solar system types are not allowed to receive tax credits, as proposed by HB 295 (see

page 2, Section B). Solar swimming pool heating systems are generally cost-effective under

current economic conditions. Hot tubs are luxury items, as opposed to conventional water

and space heating needs of homes and small businesses that the state should support through

tax credits. Commercial and industrial photovoltaic systems that are distant from any electric

utility service are generally cost-effective under current economic conditions.

House Bill 295 – Page

3

PERFORMANCE IMPLICATIONS

EMNRD reports that the ten year duration of the credit is necessary to allow the industry, still in

its infancy, to grow. With the increased demand for solar products, there will be increased need

for technicians and installers. EMNRD suggests that a training program should be set up to make

sure New Mexicans are trained for these jobs.

ADMINISTRATIVE IMPLICATIONS

TRD: The proposal would impose moderate additional administrative costs on the Department

for the development of new forms and coordination with EMNRD. The Department will be re-

quired to monitor that aggregate credit claims for each system does not exceed caps. A manual

process for this credit will require 1/2 FTE to monitor, approve and track the tax credit. The ten-

year carry-forward period would require a significant amount of record keeping on the Depart-

ment’s (and the taxpayers’) part. This provision would be cheaper to administer if the carry-

forward period were limited to five years.

Using an estimate for a tax auditor, ½ FTE is estimated to have an appropriation impact for TRD

of $30 thousand.

EMNRD: EMNRD would administer rules and a quality assurance program in order to maintain

a high level of system performance and to certify to the Taxation and Revenue Department

(TRD) the taxpayers that are eligible for tax credits. Upon enactment of HB 295, the immediate

need would be for EMNRD to establish solar tax credit program rules by July 1, 2006 through a

public process. The rules would provide instructions on an application process for EMNRD’s

certification. EMNRD would then manage the application process for the duration of the solar

tax credit program, for two reasons: 1) to establish a means of not exceeding the tax credit cap

limits and 2) to certify taxpayers to TRD. EMNRD would provide an annual certification report

to TRD in the early part of each calendar year.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

HB295 is a duplicate of SB 269.

TECHNICAL ISSUES

TRD: The “Department” is not defined.

The procedures for applying for and claiming the credit could be clarified. For example, it is

not clear over what time period the “maximum annual aggregate” amount of credit is to be

calculated. This provision would be easier to administer if the calculation were specified to

be “total credits approved by the Department during one calendar year may not exceed”.

There is little guidance regarding when the taxpayer may apply for the credit or if there is a

statute of limitation for applying for the credit. For example: it appears that we may allow up

to $5 million total in 2018, but the credit may be based on equipment installed between Janu-

ary 1, 2006, and December 31, 2015.

House Bill 295 – Page

4

OTHER SUBSTANTIVE ISSUES

EMNRD: While the above projections only address revenue impact to the General Fund, it

should be noted that other taxation mechanisms within state and local governments will benefit

from increased revenue flows. For example, the increased purchases of solar equipment and ser-

vices, as well as expanded payrolls due to the additional employees needed by New Mexico’s

solar businesses would lead to increased taxes collected by state and local governments.

NF/mt:yr