Origer: ‘Solar development tax abatements make cents

Solar development and tax abatements
by Nathan Origer

Let me preface this essay: it is not a defense of solar-energy projects. I believe that, with adequate protections in place, they are good, and the Community Development Commission has expressed support for this kind of investment, but this isn’t the place for that discussion. Additionally, I’m not going to investigate the more complicated, and sometime fuzzier, impacts on the local economy. This disquisition is meant solely to be an exploration of how these projects, with the tax abatements being requested for them, could affect the County’s fiscal health and other taxpayers.

First, a basic understanding of the relationship among the property-tax levy, net assessed value (NAV), and tax rates is necessary. (If you already have a firm grasp of this, you can skip down to the paragraph beginning with “What we call”.)

The County (and every other taxing unit) has an annual maximum levy (MaxLev): the most revenue (with a couple of exceptions) that the unit may generate from property taxes in any given year. The MaxLev grows annually by no more than the rate established by the State. Pulaski County’s 2022 MaxLev growth is about $160,000.

The NAV is the cumulative assessed value of all taxable property across the district after various deductions — e.g., mortgage and homestead deductions and tax abatements — applied to all qualifying property have been subtracted from the district’s gross assessed value (GAV).

NAV = GAV minus deductions

MaxLev = previous year’s MaxLev plus State-determined increase

The tax rate applied in a district is determined by this equation:

Rate = MaxLev divided by (NAV divided by $100)

So, in a district with a MaxLev of $4-million and a NAV of $1-billion, the tax rate is $0.40 per $100 of NAV:

Rate = $4,000,000 / ($1,000,000,000/$100)

Rate = $4,000,000 / $10,000,000

Rate = $0.40.

(This could be, for instance, the County’s MaxLev, NAV, and rate; once the same equation is applied to all other taxing units with authority in a certain geography, the total rate is determined. For example, Harrison Township, with taxes collected by the County, Eastern Pulaski Schools, Pulaski County Public Library (PCPL), and Harrison Township, has a rate of $1.3171 per $100 of NAV.)

What we call a ‘tax abatement’ is better described as a ‘deduction to assessed value’ (DAV). The common understanding of an abatement is that it reduces revenue, but as the explanation above tells us, these discounts are applied before the tax rate is calculated. The County doesn’t say, “Now that we’ve awarded you a 50-percent abatement, we’re going to slash your tax bill in half.” Rather, the County says, “Now that we have awarded you a 50-percent abatement, we will subtract that reduction to your GAV from the entire district’s GAV to determine the cumulative NAV that we’ll use to establish the tax rate that we’ll apply to your NAV and to everyone else’s.”

Let’s say that, without any DAV, the proposed Mammoth Solar project would yield approximately $2.5-million per year in taxes from the equipment installed. (I’ll get to the taxes on land later.) This would be a huge boon to the County’s treasury, so awarding them a DAV would be criminally insane, right?

Remember what I said about MaxLev growth: the County’s revenue increase for 2022 will only be about $160,000. Add the three school corporations that would benefit from this project, PCPL, and the five townships where Mammoth is slated to be built, and that total growth is roughly $500,000. (That’s a highly oversimplified calculation: most of NJ-SP’s territory is in Starke County, and our schools, PCPL, and the County government cover more townships than just the five where this project would be built.) What about the other $2-million? The County and other units would each get their share of that money, but it wouldn’t be net revenue: all of the other taxpayers in the county would see a discount on their tax bills so that each unit’s revenue still equaled the MaxLev.

In short, great for taxpayers (which, of course, isn’t a bad thing), but not especially helpful for shoring up the County’s finances, paying off annual public-works debt without raising taxes, or allowing us to make investments in projects and programs that could help to strengthen our community and to grow our economy.

Now, let us assume that the Mammoth Solar project receives a 100-percent DAV for 20 years. In exchange for that, they enter into an economic-development agreement with the County that guarantees an annual minimum payment and promises additional revenue beyond that amount based on energy production. Perhaps that guaranteed minimum is $1.5-million, or 60 percent of what their total tax obligation would be.

Under a normal tax abatement, during a ten-year period, a recipient pays about half of what they would with no DAV; by the end of ten-year period, the equipment has depreciated enough that paying 100 percent of taxes owed is equivalent to paying about 30 percent of first-year taxes (assuming a static tax rate for the sake of simplicity). Even though, in this instance, the developer isn’t paying taxes, they’re still paying a consistent amount for the entire life of the agreement. Because the money is coming in the form of economic-development payments, and not taxes, the MaxLev and its annual growth rate become irrelevant: the County receives 100 percent of the payment as “free” revenue (some of which it may then share with the other affected taxing units).

In this scenario, the County and other units still get their MaxLev increase (which, yes, means an increase in property taxes that would happen if the project didn’t move forward, anyway), plus another $1.5-million or more to take pressure off of County General and to invest in Pulaski County’s future.

What about that increase to property-tax payments?

Nobody likes to pay more taxes!

Even with a 100-percent DAV, the Mammoth project doesn’t get away with paying no taxes: Indiana law prohibits the abatement of taxes on land. Although how every acre in a solar project would be assessed — depending on whether it has panels or ancillary equipment on it, is within the fenced area but not host to equipment, or outside of the fence — remains to be determined, solar development would lead to an increase in NAV. Our Assessor’s Office would reassess the land as some form of utility classification; on the average, the farmland’s NAV could rise from, say, $1,300 per acre to $8,000 per acre. An average jump of $6,700 per acre over 9,000 acres is an increase to the County’s NAV of $60,300,000. Based on the equation above and the County’s 2021 median property-tax rate of $1.30 per $100 of NAV, that’s more than $700,000 in new revenue: a quarter of a million dollars; 50 percent more than that cumulative 2022 MaxLev increase.

The recently approved Moss Creek Solar project, which is much smaller than the Mammoth project, is expected to request a traditional, rather than “super,” tax abatement. This means that the developer would owe significantly less in annual economic-development payments, but would be contributing to an increase in our NAV with new taxable equipment starting in the second year of operations in addition to an immediate increase to the NAV attributable to the reclassification of the land involved. That would further aid in minimizing the annual increases to property-tax bills resulting from the annual MaxLev growth.

I am not here to convince the reader that solar-energy projects are good. However, regardless of how one feels about solar energy, I hope that the reader has a better understanding of the relationship among the MaxLev, NAV, and tax rate; of how tax abatements work; and of the greater benefit that these projects, if they move forward, would have under arrangements involving tax abatements and economic-development payments than they would with straight tax payments and no incentives for development.