As the year’s end nears, accountants are reminding their clients to avoid paying more than they have to — either by moving income into the next tax year or making payments that qualify as deductions, reducing their client’s taxable income.
This year’s tax scramble is not so much for shifting income and deductions from one year to the next as much as about getting solar energy devices up and operating by Dec. 31. After that, the state’s rules will change, tightening the cap on how much of a credit a homeowner may claim.
The homeowner’s claim ceiling is $5,000 per system, according to the law. Drafters of the legislation assumed one residence would have one system. Thus, when the Department of Taxation issued clarifying rules after the new credit was adopted, it defined a system as having a single inverter, the mechanism that converts the direct current produced by the sun’s rays into alternating current, which is what a household uses.
As a result, a single-family residence could have a number of inverters, meaning one house could have a number of systems, where each system’s tax credit ceiling is $5,000. Thus, where lawmakers and perhaps department officials envisioned one system per single-family residence and therefore a cap of one $5,000 tax credit, as defined, a single-family residence could have more than one system and each of those systems would qualify for $5,000.
Now the department has come forward with revised rules that define a system based on the amount of power that can be produced. Given that system was never defined in the state law and the interpretation of the term system was guidance given by the department in its original analysis of the term, rewriting the interpretation seems entirely within the department’s jurisdiction.
While advocates of the credit wish to keep the status quo, arguing it is up to the Legislature to change the definition, they must remember it was the Legislature that left the vague part of the law, while providing no further guidance. Advocates may believe it is up to the Legislature to make a change, until the time when a change is made, it is in the department’s hands to interpret what a system is.
The department’s change is in reaction to multiple system installations on a single-family residence, allowing a taxpayer to collect more than the intended $5,000 per residence. The outfall is the state will lose millions of dollars more than lawmakers had anticipated when they adopted the most recent version of the credit. That loss of revenue will have a direct impact on the amount of money the administration and the Legislature will be able to spend during the next fiscal biennium. This shortfall of resources will prompt lawmakers to either raise taxes or cut spending, both highly unpopular choices.
While tax credits themselves aren’t bad, misuse and misunderstanding of how they can alleviate an extraordinary tax burden has led the department to the point it needs to tighten the credit’s drawstrings. The solar credit, as drafted, is unbridled. There is no control over how many taxpayers will claim the credit and how much will be claimed.
As a result, soaring losses, well beyond what was anticipated, means the tax burden will have to be shifted to other taxpayers who could not avail themselves of the credit. That tax burden can take the form of increased taxes or reduced spending on other government programs and services. Inasmuch as lawmakers dislike telling their constituents they can’t have this-or-that program, the only viable alternative is to raise more revenue via tax increase or with user fees and charges. Either way results in an additional burden imposed on the community and the economy at large.
Aren’t you glad you helped pay for your neighbor’s photovoltaic system while you keep on paying higher electric bills and higher taxes?
Lowell L. Kalapa is the president of the Tax Foundation of Hawaii.
