An Analysis of the Effectiveness of Tax Incentives for Solar Energy

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2020-12

Authors

Caldas, Mariana
Wagner, Wendy

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Abstract

Tax expenditures are provisions in the tax codes which are designed to promote socially desirable and correct economic market efficiencies. However, because this specific type of government spending is not subject to an annual appropriations process and are not evaluated on a regular basis. These incentives cover a vast array of social concerns including education and healthcare. One major segment of the tax expenditure budget is aimed at promoting investments in renewable energy. Many states offer financial incentives for their citizens to invest in renewable energy. However, very little research has been conducted to determine whether or not these incentives are successful in achieving their objectives. This lack of information creates the opportunity to empirically evaluate the effectiveness of state tax incentive programs. Through linear regression modeling, this study examines whether or states which provide incentives for investment in renewable energy experience greater levels deployment of solar technology. The results of this analysis indicate that between 2009 – 2017, state income tax incentives had a positive, statistically significant impact on the installation of solar technology. This impact is moderated by the average price of electricity in a state. Income tax incentives tend to be more effective in sates with higher electricity costs. Following this empirical analysis, three different case studies provide insight into how states chose to design and evaluate their incentive programs for solar energy. Lessons learned from these case studies can benefit other states who are considering offering a tax credit for solar energy.

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