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Renewable energy

New Mexico: A renewable tax incentive that works

Steve Mendelsohn  Senior Vice President, Global Tax and Accounting Market Development, Thomson Reuters

Steve Mendelsohn  Senior Vice President, Global Tax and Accounting Market Development, Thomson Reuters

Renewable energy in the United States is at a crossroads. While the EPA is on the receiving end of budget cuts at the hands of the federal government, companies like Tesla make use of cutting edge technology, bold branding strategies, and – most notably – existing tax credits to ensure green initiatives continue to be a part of America’s future.

In the middle of this push-pull dynamic is the debate inside the Beltway, where officials on both sides of the issue play a results-oriented sport. Tax rebates for emerging technology doesn’t always have an immediate financial upside, and even in some of the more successful cases, they can be hard to quantify. In the eyes of many legislators, if a policy doesn’t have an immediate impact on the average American, it’s not worth the paper the legislation is printed on.

However, there is one state that is showing not only the environmental benefit of building out this tech, but also the fiscal upside to renewable energy tax credits.

New Mexico’s Renewable Energy Production Tax Credit (REPTC)

Implemented in 2003, the REPTC is a credit against New Mexico corporate income tax that is available to companies that produce electricity from renewable resources for commercial sale. Although a variety of renewable resources qualify for the REPTC, all current recipients are either solar installations or wind farms, with total claims of $120 million over the past 13 years.

Renewable energy facility development in New Mexico (2003-2016)

Wind turbine generators are pictured in Desert Hot Springs, California July 11, 2011.
13 commercial wind facilities with a total capacity of 1.1 gigawatts.

Wind turbine generators are pictured in Desert Hot Springs, California July 11, 2011.
46 solar photovoltaic (PV) facilities with a capacity of 452 megawatts.
REPTC-certified power producers have spent over $1 billion in New Mexico to construct, equip, operate, and maintain 31 generation facilities.

Economic impact of the REPTC

That sounds like a massive investment, but is it getting back into the pockets of the residents of New Mexico? According to an analysis by the Center for Health Policy at the University of New Mexico, the answer is yes. The study found that expenditures by REPTC-certified power producers have supported:

  • 11,771 full and part time jobs;
  • $611 million in employee compensation;
  • and $1.6 billion in economic activity statewide.

That translates to roughly $5 in labor income generated for every $1 of tax credit invested in the program. These economic impacts have translated to state and local tax revenue totaling $74.6 million and averaging $6.8 million annually.

I recently spoke to Kelly O’Donnell, a research professor and an economist by training at the Center for Health Policy at the University of New Mexico. She told me that New Mexico has been so successful in this arena because its unique makeup makes it a perfect breeding ground for renewables.

“From an economic perspective, New Mexico has challenges in terms of development, but some resources they have in abundance are a lot of open space, a fair amount of space on public land, and a lot of sun and wind, so I think it’s a nice fit for the state, because it capitalizes on some of our underappreciated assets,” she said.

Renewables diversify New Mexico’s energy portfolio

If you think that New Mexico is just a renewable resource utopia, think again. O’Donnell told me that the state is highly invested in fossil fuels as well. That matters because when gas and oil are having big years, New Mexico usually gets overly aggressive with their tax policy. The problem with that is that once the well dries up on fossil fuels, it makes tax rebates, even the ones that work as well as the REPTC, vulnerable.

“New Mexico, despite knowing better, is very reliant on fossil fuels to drive its economy. What often happens is that when oil and gas prices are up, the state is quite flush, and then it cuts all the other taxes. When the bottom falls out of oil and gas like it has now, we’re in massive deficit. It happens every 10-to-15 years,” she explained. “So we implemented a lot of, what I would call, ill-advised tax cuts a few years back, ones that politicians are hesitant to repeal at the risk of being labeled as a tax raiser.

“With the REPTC, although it’s been demonstrated to be quite effective, it’s potentially going to fall victim to a structural deficit that was certainly not created by this tax credit. But taking this tax credit away is certainly a lot more convenient than repealing a tax cut that was written legislatively.”

Next steps for state legislators and energy companies

It’s a complicated dynamic for sure, made only more intricate by the attitude from the federal government about investment in green technologies. So as a new federal administration gets ready to try to prop up the fossil fuel industry, it leaves states invested in renewables to fight for their survival. And in New Mexico’s current economic situation, it’s a fight that might not be winnable.

“I think one thing that is becoming apparent to the states in the wake of the signals from Washington is that if they value certain policies, it’s going to be incumbent on them to carry the torch. That’s a heavy burden to place on states,” she said. “I think from a political perspective, there’s a case to be made that this is the worst time to cut state level incentives. So while I’d love to think they find a way forward with this credit and renew it, I also know the situation with the budget in our state, and know it’s a terrible time to be looking to renew a tax credit.”

So despite being an economic success, the REPTC might be on its way out. And for those companies who have invested in New Mexico, and the citizens in the rural areas of the state who have benefitted from those investments, it’s going to be a tough pill to swallow.

Published first in a column by Steve Mendelsohn in Inc.

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