Renewable Energy Projects Will Hinge on State Tax Incentives

If you can’t model the tax incentives underpinning a solar project, it won’t get built.

The tax and spending package enacted last July phases out key federal solar and wind tax credits by the end of 2027. A patchwork of state and local incentives are determining winners and losers as renewables race to meet our extraordinary energy demands.

For most renewable projects, the tax incentives matter as much to deal structure as the underlying value of the completed facility—if not more. In the short term, we’re seeing a race to start and complete construction before the federal and/or state credits and incentives phase out. But afterward, we can see a pattern of potential winners and losers.

This isn’t to say renewable projects will halt in states that don’t incentivize them. The demand for energy is unlikely to subside any time soon and may actually increase. But projects in the losing states will almost certainly pass on additional costs to the end customers paying for electricity.

The Winners

States surging in solar power construction don’t always expend legislative or political energy on rolling out the welcome mat. You would expect that a fossil fuel powerhouse such as Texas might be hostile to renewables. It’s true that there aren’t a lot of explicit tax incentives aimed at solar power developers at the state level, with most incentives focused on individual homeowners.

But Texas does have a low corporate and personal income tax burden, and that is unlikely to change. That certainty, along with strong transmission infrastructure and plenty of space and sunshine, has led to Texas’ surge in solar power and dealmaking. According to the US Energy Information Administration, Texas produced 58,634 gigawatt-hours of solar power, surpassing California to become the country’s largest supplier.

The Northeast is also expected to show more momentum in solar power construction, owing to tax credits that are both favorable and stable. For example, New York offers 15-year property tax exemptions and a compensation structure for energy generation that is favorable to solar projects. The legislatures in these states are unlikely to overturn these incentives, making them easy to factor into a deal structure.

We also see New Mexico emerging as a winner in solar projects, because policy, geography, and economics are all coming together to meet the moment. Changes to property tax relief, production-based credits, and sales tax exemptions, as well as proximity to several high-cost or high-demand states, make development an attractive prospect.

The Losers

It might be unfair to call California a loser. It’s now second place in solar power generation, and solar projects benefit from structural realities such as decades of momentum and high power costs that make renewables attractive. But the tax and financial incentives underpinning those gains are facing fresh headwinds with certain provisions, like the Active Solar Energy System Exclusion, subject to sunset at the end of 2026.

The net energy metering reforms since 2023 have reduced the compensation for exported solar power. There are much higher corporate taxes and regulatory hurdles in California than in neighboring states. More telling, though, are the financial strains that California has faced. The state’s $3 billion projected shortfall was resolved by a capital gains windfall from anticipated AI company IPOs, showing the fragility of a tax base that depends on market-linked income from high earners.

Other states face a mix of limiting factors that have made it difficult for solar projects to take root. Pennsylvania’s solar growth has stalled for years, owing to a lack of tax incentives and a corporate tax rate that historically sat at 9%, which has recently lowered to 7.49% as part of a yearslong reduction.

And states such as Tennessee and West Virginia see no investments of scale comparable to the winning states. In these places, the low tax rate isn’t enough. State-level tax incentives would be needed to sweeten the deal, and few to none exist after the federal government sunsets their tax credits.

It’s not hard to imagine a future that looks like a K-shaped bifurcation of US solar buildout. Artificial intelligence infrastructure investment currently drives our economic growth, and we have already seen data center deals stall out for lack of energy.

Without federal incentives in place, renewable energy production will go to the states that incentivize it through low taxes or significant and stable incentives.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jan Michael Skidds is a partner and the national leader for the state and local tax practice at Leo Berwick, focusing on mergers and acquisitions.

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