Is a Federal Grant Really Income? (Wow, I Never Knew That – Sarcasm)

Here is an interesting lede from a story in RenewablesBiz.com titled Non-conformity Taxing Developers:

Ask any renewable energy project developer what saved the market from total collapse in 2009 and the unanimous answer would be the cash grants program from the U.S. Treasury. That’s the Section 1603 program changes in the Recovery Act in which project developers were given the option of accepting immediate cash payments of 30 percent of the project’s cost in lieu of 10 years of production tax credits for the generation output. But there’s some worry if that success can continue as some states are now considering the grants taxable income.

These gifts from the federal government amounting to 30% of the total cost of a project came in CASH, not as a standby guarantee – sort of like a co-signature – just in case something happened to a project during its development. Generally speaking, grants count as taxable income – just ask anyone who has filled out tax reports for a child who has earned a scholarship or two to attend college.

However, the federal legislation that provided the grants in lieu of production tax credits in an attempt to salvage uneconomic renewable energy projects recognized that giving with one arm of the U. S. Treasury and taking with the hand of the IRS would not provide the lift that the industry needed to stay afloat, so they specifically exempted the grants from federal income taxes.

(Aside: Should I have used the pejorative term of “bailout” like the anti-nuclear industry does for the loan guarantee program? End Aside.)

Despite what the federal government has decided to do for the renewable energy industry, the states that host the large scale renewable energy projects that received the grants in lieu of tax credits have real costs associated with providing services to the project and its employees. Transporting massive turbine blades snarls traffic and requires assistance from the local and state police. The employees send their children to school, they expect the local ambulances to be ready to serve, they put a strain on water systems, and they use state parks when the weekend comes around. In other words, the states do not have the same considerations as the federal government and do not necessarily have to decide to give tax exemptions in line with what the federal government decides to do.

The article goes on to indicate that the project developers are proceeding without resolving the issue, even though it represents a potentially large liability. I guess they have the same philosophy that some naval aviators I know have – “tis easier to seek forgiveness than to ask permission.” Perhaps they expect that they will win in court and not have to pay the tax on their federal gifts – or should I say “preemptive bailouts”.

When you read about the record deployment of wind turbines during 2009, and the often stated mantra from people like Amory Lovins that, compared to nuclear energy, “renewables are cheaper, faster, vaster, equally or more carbon-free, and more attractive to investors”, please remember that the US taxpayers picked up 30% of the initial cost with a program that is only available for projects that must begin construction between January 1, 2009 and December 31, 2010. There is only so much time available for developers to capture this free money, so they are moving fast.

Related Reading

From New York State: turbines exempt from sales tax – This article describes how wind turbines and their parts are exempt from sales tax in the state of New York. That is a nice subsidy for wind turbine manufacturers – you know, small, struggling companies like GE, Siemens and Vestas.