Estimating the Impact of State Taxation Policies on the Cost of Wind Development in the West

Abstract

Wind development offers local economic growth opportunities, and for this reason, reducing the tax burden on wind development may be a policy advocated by communities wishing to attract such investment. Alternatively, increased local public costs, and the potential externalities caused by wind development may create a reason to raise taxes on wind. Increased taxation on wind presents a potential policy tradeoff as efforts to raise taxes and revenues from wind can reduce a state’s ability to attract wind development. Local tax environments can affect which regions successfully attract wind investment due to their effect on developer’s costs. Estimates of the potential tax elasticity of wind development are undeveloped in the academic and policy literatures, thus policy changes with respect to taxation often occur without any estimate of the potential impact on development. Absent such tax elasticity estimates, comparative estimates of regional wind costs and how they may be affected by state tax policy would be useful to policy-makers, but such estimates are also limited. To our knowledge, the only effort to compare state wind costs across western states and how they vary when state tax policies are included was conducted by a private firm in 2010 (see E3 (2010)), and that study is now well out of date. The study presented here develops such state wind cost estimates by describing the financial structure of a typical large utility-scale wind development. Consideration of the capital structure of a wind development is crucial to understand how different taxation and other incentive policies affect wind development, and to develop taxation strategies that minimize wind development and tax-policy tradeoffs.