Oklahoma governor Mary Fallin (R) recently released her proposed 2018 Executive Budget, which includes two new anti-wind tax proposals.[1] The first proposal would end the zero-emission tax credit for wind facilities placed in service after 2017. The second proposal would begin taxing the production of wind energy at $0.005 per KwH produced.

Oklahoma is facing a budget shortfall that has been projected to be nearly $900 million. One of the primary causes of the revenue shortfall is less tax revenue due to low oil prices and an increase in wind energy production resulting in greater tax credits. Governor Fallin’s tax proposals would reduce the amount of tax credits available for wind energy production and increase revenue by imposing a new production tax of electricity generated by wind.[2]

Under current law, Oklahoman grants a $0.0050 per kilowatt-hour tax credit for electricity generated by zero-emission facilities (the “zero-emission tax credit”).[3] The credit is available during the 10-year period following the date the facility is placed in operation and is refundable up to 85% of its face amount.[4]

Governor Fallin’s first proposal would “accelerate the sunset of the tax credit.”  The zero-emission tax credit is currently slated to sunset at the end of 2020.[5]  The Governor’s proposal does not specify how fast she proposes to sunset the tax credit. However, Michael McNutt, Governor Fallin’s press secretary, has reportedly said that the proposal will limit the credit to facilities placed in operation prior to the end of the calendar year 2017.[6]

Some projects that are in the process of being constructed may not be able to be placed in service in 2017, and, under this proposal, projects in service after 2017 would not be eligible for the zero-emission tax credit. It would be unfortunate for the owners of such post-2017 projects that their projects may not be eligible for tax credits that incentivized the decision to place such projects in Oklahoma in the first instance.  Concern about the proposal appears likely to impact the decisions of developers and investors on where to place new wind projects.

Governor Fallin’s second proposal is a new production tax of 0.5 cents per kilowatt hour on electricity generated by wind. The governor’s budget estimates revenue of $36.6 million from the new production tax on wind energy for fiscal year 2018. If this proposal is enacted, Oklahoma would become only the second state to tax the production of wind energy. The only other state to tax wind energy is Wyoming, which currently taxes wind production at 0.1 cent per kilowatt hour. Oklahoma’s proposed wind tax is five times as high.

Although not entirely clear, it appears that this new production tax on wind would apply to all wind production in Oklahoma, and not be limited to projects that are newly placed in operation. This is based on the budget proposal’s revenue estimates of $36.6 million in FY2018. With the proposed tax rate being 0.5 cents per Kwh, it seems that such a revenue estimate is only possible if projects that are already in operation would also be subject to the tax. Owners of existing wind farms could find a new tax on their projects to result in a material and unexpected reduction in their equity returns.  Such a new tax imposed on existing project might make wind and other types of developers think twice before making large capital investments in Oklahoma.

Should these new proposals be enacted, Oklahoma’s wind energy sector would face a trio of higher taxes: the recently expired ad valorem exemption, the end of the zero-emission tax credit, and the new production tax credit. Together, these changes, according to Governor Fallin’s own numbers, will cost the Oklahoman wind sector nearly $140 million each year.[7]

These proposals are not guaranteed to become law. Oklahoma faces the most restrictive rules in the nation (along with Arkansas) for tax amendments, requiring tax proposals to pass the Oklahoma Senate and House of Representatives with a three-quarters majority, or receive a majority of votes in a public referendum.[8] As a new tax, the proposed production tax would be required to satisfy this rule. Although Republicans easily clear the three-quarters threshold in the Senate, holding a 42-6 advantage, Republicans currently hold a 74-26 majority in the House, short of the three-quarters threshold.[9]

(The article below is similar to our article posted by North American WindPower on its website; however, the version below has endnotes and other changes.)

[1] Available at https://www.ok.gov/OSF/documents/bud18.pdf.

[2] The budget proposal also references the ad valorem exemption for the manufacturing of wind energy property as a unnecessary incentive for the wind industry. However, in a separate measure in 2015, Oklahoma ended the property tax exemption for  wind generation facilities starting January 1, 2017. See S.B. 498 (removing the generation of wind energy from the definition of “manufacturing” for purposes of the ad valorem exemption effective January 1, 2017).

[3]  68 OK Stat. § 68-2357.32A

[4]  68 OK Stat. § 68-2357.32A (B).

[5] Facilities must be placed in operation prior to January 1, 2021 to be eligible for the credit.

[6] While it is also not entirely clear from the budget proposal, facilities that are eligible for the credit will presumably be allowed to continue collecting the credit for the 10 year period after the facility is placed in operation.

[7] According to Governor Fallin’s budget proposal, the ad valorem exemption equaled $40 million in FY-2017, the zero-emission tax credit will average $60 million a year for the next 15 years, and an estimated $36.6 million will be raised from the new production tax.

[8] See Article 5, Section 33 of the Oklahoma Constitution.  State Question 640 amended the Oklahoma Constitution to provide that no revenue bills can become law unless (i) it receives a three-fourths majority in both legislative chambers, or (ii) it is referred by the legislature to a vote of the people at the next general election and receives majority approval.

[9] There is currently one vacancy in Oklahoma’s 101-seat House of Representatives.

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