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Taxing the sun

Solar energy installation on private home
Alexandra Beier/Getty Images

Olkahoma is considering a bill that would tax solar power; "green" energy advocates are upset about this, saying that it is a move by the petroleum industry to crush competition. Yet is it?

Renewable energy products get many incentives in today's world. Just to name one, New Jersey has a law forbidding local municipalities from increasing the assessed value of properties based on the value of newly-installed renewable energy systems such as solar and wind power. Certainly such properties are worth more, and the possibility that one can buy an existing home whose assessed value for property tax purposes is artificially lower makes such properties more attractive, and encourages installation of such systems. Meanwhile, these alternative energy companies are thriving, as prices of such systems fall and efficiency rises.

As a new industry, these programs needed some support to get started. Eventually, though, they will become ubiquitous--if every home is equipped with solar power, the logic to promoting it will fail, and such incentives will have to end. We no longer incentivize the construction of new rail lines, because we do not need more lines--in fact, we are struggling to support a failing rail industry precisely because it was built on incentives. Incentives must end, or they become, like farm subsidies, our tax money paying us to do what is not otherwise economically beneficial.

Oklahoma, though, is not yet there. They are addressing a different problem, one they attempted to address last year through their utility regulatory board (Arizona Corporation Commission). That law charged a small fee per kilowatt of production (seventy cents; observers expected it to be about a hundred times that). This new law is different, though, and in some ways better because it more directly addresses the problem that the fee did not address adequately.

If you have power generators on your property, you use the electricity from them to power devices on your property. If you are not generating enough for your needs, you draw power from "the grid", the regular power lines maintained by the electric companies out of the money you pay to buy that electricity. Then, when you are generating more electricity than you are using, you feed that power back to the grid and are paid for your contribution at the same rate that you pay when you are buying it. That usually means that you experience a reduction on your electric bill, because nearly everyone uses more electricity than we generate on our own properties. Yet in theory you could install enough alternative energy equipment that in any given month you were producing more than you were consuming, and instead of an electric bill you would receive payment for the power you sold to the grid.

Those who sell energy to the grid are already receiving that money. They are receiving it in cost reductions on their energy bill not because they are using less electricity but because they are selling a product to the world. No one objects to those who invest in alternative energy receiving income for their efforts; the objection is that they would receive tax free income for those investments. After all, at what point does your small energy production facility become a power company? Should farmers be able to install massive arrays of solar panels and wind turbines so as to make more money on electrical production than on farming, and still be treated as consumers who pay no tax on the power they sell to the rest of us because they are farms, not utility companies? At some point equity requires that those who sell electricity be taxed equally, whether it is their sole business or a side interest, whether they do so from traditional or innovative methods.

Besides, the inequity this addresses, the one addressed by the fee it hopefully replaces, is the maintenance of the grid. The price of electricity charged by utility companies includes the cost of delivering that electricity to consumers, including the wires that bring it to the homes of those who also generate their own power. That same system is used by those who sell power to the grid, who do not pay those costs. That gives them an unfair competitive advantage in the market, and unduly burdens power companies who then must raise prices to cover the costs--as if you could go into business as a package delivery company and make Fedex carry your packages free on their trucks and planes. Those who profit from the sale of electricity to the rest of us, even if that profit appears only as a credit on their own electric bills, should pay tax on what they earn.

The bill makes good economic sense.

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