How Would Oklahoma’s Anti-Wind Tax Affect The State’s Industry?

Contributors
Written by David K. Burton & Binyomin Koff
on February 28, 2017 2 Comments
Categories : Featured, New & Noteworthy

Gov. Mary Fallin, R-Okla., recently released her proposed 2018 executive budget, which includes two new anti-wind tax proposals. The first proposal would end the zero-emission tax credit for wind facilities placed in service after 2017. The second proposal would begin taxing the production of wind energy at $0.005/kWh produced.

Oklahoma is facing a budget shortfall that has been projected to be nearly $900 million. One of the primary causes of the revenue shortfall is less tax revenue due to low oil prices and an increase in wind energy production, resulting in greater tax credits. Fallin’s tax proposals would reduce the number of tax credits available for wind energy production and increase revenue by imposing a new production tax of electricity generated by wind.

Under current law, Oklahoma grants a $0.0050/kWh tax credit for electricity generated by zero-emission facilities (the zero-emission tax credit). The credit is available during the 10-year period following the date the facility is placed in operation and is refundable for up to 85% of its face amount.

Fallin’s first proposal would “accelerate the sunset of the tax credit.” The zero-emission tax credit is currently slated to sunset at the end of 2020. The governor’s proposal does not specify how fast she proposes to sunset the tax credit; however, Michael McNutt, Fallin’s press secretary, has reportedly said that the proposal will limit the credit to facilities placed in operation prior to the end of calendar year 2017.

This proposal will impact the decisions of developers and investors on where to place new wind projects. New projects are unlikely to be able to be placed in operation this year and, under this proposal, will not be eligible for the zero-emission tax credit.

Further, wind projects that are currently in construction in Oklahoma may or may not be able to be placed in operation during 2017 and may not be eligible for tax credits that incentivized the decision to place them in Oklahoma in the first place.

Fallin’s second proposal is a new production tax of 0.5 cents per kilowatt-hour on electricity generated by wind. The governor’s budget estimates revenues of $36.6 million from the new production tax on wind energy for fiscal year 2018. If this proposal is enacted, Oklahoma would become only the second state to tax the production of wind energy. The only other state to do so is Wyoming, which currently taxes wind production at 0.1 cent per kilowatt-hour. Oklahoma’s proposed wind tax is five times as high.

Although not entirely clear, it appears that this new production tax on wind would apply to all wind production in Oklahoma and would not be limited to projects that are newly placed in operation. This is based on the budget proposal’s revenue estimates of $36.6 million in FY2018. With the proposed tax rate being 0.5 cents per kilowatt-hour, it seems that such a revenue estimate is possible only if projects that are already in operation would also be subject to the tax. Owners of existing wind farms could find a new tax on their projects to result in a material and unexpected reduction in their equity returns.

Such a new tax imposed on existing projects might make wind and other types of developers think twice before making large capital investments in Oklahoma.

Should these new proposals be enacted, Oklahoma’s wind energy sector would face a trio of higher taxes: the recently expired ad valorem exemption, the end of the zero-emission tax credit and the new production tax credit. Together, these changes, according to Fallin’s own numbers, would cost the Oklahoman wind sector nearly $140 million each year.

These proposals are not guaranteed to become law. Oklahoma faces the most restrictive rules in the nation (along with Arkansas) for tax amendments: It requires tax proposals to pass the Oklahoma Senate and House of Representatives with a three-quarters majority or receive a majority of votes in a public referendum.

As a new tax, the proposed production tax would be required to satisfy this rule. Although Republicans easily clear the three-quarters threshold in the Senate, holding a 42-6 advantage, Republicans currently hold a 74-26 majority in the House – short of the three-quarters threshold.

David K. Burton is a partner and Binyomin Koff is an associate at law firm Mayer Brown LLP.

Comments

  1. Have you investigated that Salt River Project (SRP) in Phoenix, AZ is proposing a $50 a month tax on rooftop solar homes? Solar City is taking them to court, and solar installations have fallen to near zero. SRP has no oversight, and none of the 16 directors have solar installations. I know because I asked them at a public meeting.

  2. Lived here for 11 years…and have backyard solar (off-grid). Modern house, average size, suburbia, and am able to offset 70% power use from local provider. Their loss! Oklahoma is nothing but big oil/gas and SOME wind turbine generation (~20%). Forget about “rooftop solar” ever taking foot here, the legislature has pretty much squashed that business from ever taking hold (let alone making any practical grid-tie sell back reasonable). They are in bed with OCC, OGE, and every other good ‘ol boy energy provider. Oklahoma has some of the BEST wind/sun in the country along with oil and natural gas. There is room for it all…but, this state is run but Devon, Chesepeke, and a few others that obviously see renewable energy as a direct threat. It’s all about the money (or lack thereof) in this state.

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