Tax Isn’t a Peanut Butter Cup

by Tom Yamachika, President, Tax Foundation Hawaii

Once upon a time there were some property developers on Oahu.

They thought that agricultural development would be a good thing. There were lots of tax incentives associated with agricultural development.

Then they got the idea that putting some solar panels on the land would be a good thing too. There were lots of tax incentives associated with renewable energy.

So, they put some solar panels on the agricultural land too.

We have agriculture. And we have renewable energy. Are these two great tastes that taste great together?

Come on. Let’s be real. We’re talking about property tax, not a peanut butter cup. It turned out to be a recipe for disaster.

Clearway Energy Group, for example, submitted testimony to the Honolulu City Council of their plight. These folks built two solar projects on agricultural land, and, they said, incorporate compatible agriculture into their ongoing operations. Solar energy generation is an allowable use on agricultural zoned land under the city’s Land Use Ordinance, they argued.

But the real property tax folks saw the situation a little differently.

To get the special ultra-low property tax rate for agricultural use, the landowner had to make a “dedication agreement” with the tax authorities. Basically, the landowner promised to use the property for agriculture for a certain period of time. The tax folks saw solar panels on the properties and said, “Uhm, that’s not agriculture.” So, they took away the ultra-low tax rate, and, while they were at it, they took away the property’s agricultural classification. It’s industrial property, they said, which happens to be taxed at a rate more than double the agricultural rate even without any dedications.

At the end of the day, Clearway had a real property tax bill of $30,154 for the 2020-21 tax year (they go with a fiscal year ending June 30), but for the 2021-22 tax year the bill jumped to an eye-popping $835,710.

Clearway’s tale of woe attracted a lot of attention, so much that the Council is now considering Bill 39, which is supposed to address this problem, and state agencies aplenty, including the Governor, the State Energy Office, and DBEDT, have weighed in.

One of the reasons behind this kerfuffle is that this is not just Clearway’s problem. Any solar project that is located on agricultural land is subject to this kind of reclassification, and the financial impact would vary depending on how much solar went on the land and how much of the land was previously subject to the ultra-low rates for land dedicated to agriculture.

And then, of course, there is the issue of who is going to pay the enhanced tax if the real property tax folks’ methodology is upheld. Clearway and the other power producers have long-term agreements with power buyers such as Hawaiian Electric. If this enhanced charge becomes Hawaiian Electric’s problem, it then becomes a problem for all of us who pay electric bills. If the enhanced charge impacts the developers, it will send shock waves through the industry of people who finance renewable energy projects because of the risk of a property developer getting overwhelmed by this tax surprise and thereby going into default on its financing.

What a mess!

Ultimately, the City might legislate itself out of this situation, making some allowances for solar and agriculture peanut butter cups. But for the rest of us the moral of the story is that two great tax-favored tastes won’t always taste great together, and one must be extremely careful when mix-matching tax incentives.