Changelog (Last Updated July 1, 2022)
This tool was developed by the Weldon Cooper Center at UVA, Virginia Energy and others. This tool is meant for use by localities to help them decide which taxation model to use for solar generating facilities, either the new Revenue Share model, or the M&T/Real Estate tax model. Each of these models has benefits and drawbacks depending on the types of solar facilities that are being developed and the various tax rates of the localities where they are being built.
With passage of HB1131 in 2020, Virginia now offers localities two options to generate revenues from utility-scale solar development. The default option is for localities to levy a Machinery and Tools (M&T)/Real Estate tax on capital investments in solar generation facilities. Alternatively, a locality may adopt an ordinance to replace the M&T/Real Estate tax with a Revenue Share arrangement. Under the Revenue Share model, localities receive income from solar facilities at a flat rate in dollars per megawatt of nameplate generation capacity per year. The revenues that a locality could realize under each of these two taxation arrangements involve calculations that are non-trivial in complexity.
The Virginia SolTax Model is designed to assist Virginia localities to estimate the revenues they could realize under these two distinct policy regimes. Its purpose is to provide local officials with insights regarding which model will provide the greatest financial benefits for a locality.
This tool permits the adjustment of project specifications as well as the ability to consider new investments in multiple years to allow examination of the revenue implications of alternative scenarios.
To create a new profile, select the "Create New Account" Button in the top right corner of the page. This will direct you to a page where you enter a username, email and password. Once the account is created, you will be asked to select a locality on which to base your initial profile parameters. Once selected, the locality cannot be changed on a given profile. In order to create new projects associated with another locality's parameters, you should create a new profile.
If you have already created an account, select "Login" above.
The Machinery & Tools (M&T)/Real Estate Tax is the default mechanism for localities to realize revenues from utility-scale solar projects. The tax is calculated as a percentage of the assessed value of certain capital investments made within a locality. In the case of utility-scale solar projects, the annual amount of the tax levy depends on several parameters:
For the M&T/Real Estate tax model, the tax rate, depreciation schedule, and exemption rate applied to projects can vary based on the size of the solar project and who is operating the project. There are three possible ways the M&T/Real Estate tax model can be applied to a project based on these parameters:
The 25 MW limit for projects comes from Virginia's definition of an electric supplier as defined in Virginia Code 58.1-2600 and the local taxation of electric suppliers defined in Virginia Code 58.1-2606 (Paragraph C). These two pieces of legislation state any electric supplier can not be taxed at a higher rate than the real property rate, and that an electric supplier is any person operating a facility that generates more than 25 MW of energy.
A breakdown of these categories of projects and their implications can be viewed in the image below.
In addition to these direct factors, the use of the M&T tax may cause an additional indirect effect on local revenues, through its influence on state funding for education. Under Virginia law, the costs of supporting public schools is effectively shared between state and local governments. The state’s per-pupil contribution varies by locality: it is lower for wealthier counties that are better positioned to fund schools on their own, and greater for poorer counties. The exact amount of the state’s contribution is based on the value of the Composite Index of Local Ability-to-Pay (CI), an estimate of each locality’s taxable wealth. To put the issue briefly: a new solar project may increase a locality’s CI, triggering a decrease in education funding from the state.
The tool will prompt the user for seven pieces of information:
In addition to these variables for each analysis, each user is tied to a locality with locality specific parameters including:
These variables can be changed by a user to make their analyses more accurate.
Based on this data, the tool will calculate the expected tax revenue for a locality for each of the two tax models. Results will be presented side by side, allowing for comparison.
To calculate the expected tax revenue from the M&T system, the model will take each year’s expected solar investments from the schedule provided by the user and break their lifetime into three periods that represent each stepdown in the M&T tax exemption. Within each period, the yearly expected tax revenue will be calculated by multiplying the project’s assessed value with the exemption level outlined in HB 1434 (80% exempt in the first 5 years, 70% for the next 5 years, then 60% for the rest of the project’s life) and the effective M&T tax rate for the indicated locality. The effective M&T tax rate is derived by multiplying a locality’s statutory rate per $100 by its depreciation schedule, should it have one.
Both the M&T tax and Revenue Share models will increase a locality's Composite Index value. As stated previously the Composite Index is used to determine how much money a locality must contribute to its education funding.
For the M&T tax, the increase in the Composite Index comes from the increase in taxable land value as a result of the new project and the value of the equipment for the project. However, for the revenue share model, the increase for the Composite Index is only due to the increase in taxable land value.
Important values are needed for the Composite Index calculations. These values will be assigned to a locality's profile and a user can change them across the locality's profile. The values that are needed for the Composite Index calculations are:
Under either taxation model, a stream of future revenue flows can be converted to present-value equivalents by discounting at an appropriate discount rate. Let \(t = 0, 1, \ldots, T\) index the several years over the planning period, where \(t=0\) corresponds to the present year (here, 2020), and \(T\) denotes the number of years until the limit of the planning horizon (say, \(T = 30\)). For each year \(t\), let \(c_t\) denote the cash flow received by the locality as revenue. The Net Present Value of this stream of cash flows is given by the well-known \(NPV\) formula
\[ NPV = \sum_{t=0}^T \frac{c_t}{(1+r)^t} \] where \(r\) denotes the discount rate the locality uses for its capital budgeting. The appropriate choice of the discount rate \(r\) is not obvious, and can have a significant effect on the NPV calculation. For our base case, we will assume a six-percent discount rate (\(r = 0.06\)). The tool will also allow users to enter alternative discount rates, allowing for the performance of a sensitivity analysis.
A special thanks is extended to the following people for the guidance and feedback they provided throughout the development process of the SolTax application.
Disclaimer
This is not a forecasting tool. This is a tool is to be used as a consulting tool for localities. The suggestions from models does not constitute legal advice.