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The Unintended Consequences of California’s Solar Tax Exclusion

Section 73 of the California Revenue and Taxation Code allows property tax exclusion for any active solar energy system, including photo voltaic (PV) utility-scale systems, installed through the end of 2016. The exclusion removes barriers for solar energy relative to conventional sources and incentivizes development. Solar installations have indeed proliferated. In 2008, solar PV surpassed solar thermal energy in installed megawatts. Today, California leads the nation in total installed solar energy (about 2,000 megawatts).

But while the state was giving with one hand, local agencies have been taking with the other. Using creative methods, cities and counties have been replacing revenues that might have flowed to them but for Section 73 with fees imposed during the development process. Some fees have been modest and non-controversial; others have been hefty and the subject of litigation. All are enforced through cities’ and counties’ discretion to approve PV solar development.

Cities and counties are “gate-keepers” for wind and PV solar development under California law. (The California Energy Commission [CEC] has authority over thermal power plants of 50 MW or more.) The most common permit required for a utility-scale PV solar project is a conditional use permit (CUP). As the name implies, a CUP permits development subject to conditions. The discretionary nature of CUPs means developers often lack leverage to negotiate the scope and magnitude of fees. In some cases, the courts have had to function as a backstop.

Cities and counties have used three main methods to extract fees: (1) generally-applied development impact fees; (2) environmental mitigation fees under the California Environmental Quality Act (“CEQA”); (3) project-specific fees enforced through a development agreement.

Development Impact Fees. Development fees may be imposed under California law to recover the cost of public services to new developments or compensate for impacts. Traffic impact, sewer connection, and affordable housing fees are classic types of development impact fees. California law requires approval of new impact fees to follow strict procedures and requires a reasonable relationship between the amount and need for the fee and the project on which the fee is imposed.

In 2011, Riverside County, California’s 4th largest county, enacted a solar development impact fee of $450/acre on the supposition that the fee would compensate for the loss of agricultural, commercial, residential or open space land. Officials feared that solar develop would blanket the desert. The Independent Energy Producers Association and the Large-scale Solar Association sued, arguing that fee was an unlawful “sun tax.” The County, they argued, could not show the reasonable relationship required by California law between the impact of solar development and the fee.

In 2013, the litigation settled and the County reduced the fee from $450/acre to $150/acre. The limitations period to challenge the fee on its face has now run. Whether this “sun tax” would 

have withstood the test of a court challenge is debatable. Regardless, it has now been established as an exercise of political compromise.

CEQA Mitigation Measures

The second method used to impose fees is through CEQA’s requirement that local agencies impose feasible mitigation measures to minimize “significant environmental impacts.” Kern County, California’s 3rd largest was the first to use CEQA to impose a “Public Facilities Mitigation Fee.” As explained in a recent EIR for a PV solar project, the “changing fiscal landscape in California over the past 30 years has steadily undercut the financial capacity of local governments to fund infrastructure.” Kern therefore now has imposed a $29.59 per 1,000 square feet of development fee on new projects.

Using CEQA to impose “Public Facility Mitigation Fees” could be argued to be an end-run around the California laws requiring procedural safeguards and a reasonable relationship between the fee and the impact. Not only is CEQA not well-equipped to meet those requirements, CEQA is also clear that “economic or social impacts of a project shall not be treated as significant effects on the environment (Guidelines Section 15131).” But unlike developers in Riverside County experience, developers in Kern County have decided that it is better to simply pay these fees under CEQA than challenge them.

Development Agreements

A third method agencies use to extract development impact fees is by requiring developers to enter into “Development Agreements” (“DAs”) as a condition of approval. Traditionally, DAs are requested by developers to protect them from after-enacted laws that could jeopardize approved but not yet constructed projects. DAs are supposed to be “arms-length” contracts in which specific community benefits are exchanged for vested rights to develop. However, unlike mixed use conventional housing projects that depend on market conditions for build out, DAs have not been perceived as useful to solar developers. Solar projects are constructed quickly (6- 9 months) after permit approval to meet tax credit or Power Purchase Agreement milestones. there is little need for vesting protections. While the legality of requiring developers to enter into a DA as a condition of use permit is highly questionable, most solar developers cannot afford to challenge this practice and still meet development milestones.


California’s solar property tax exclusion sunsets at the beginning of 2017. If extended, expect more and potentially higher local development impact fees. Even if not extended, it is likely like local impact fees will not disappear. Either way, solar developers should consider asking the State Legislature to cap impact fees on new solar PV projects as the state has done for new schools and new parks. To support the growth of PV solar in California, state and local government need to coordinate on taxes and impact fees, especially if the tax exclusion is not extended. Given California’s interest in reducing green-house gases and providing the state with 33% renewable energy by 2020, it would be unfortunate if California’s attempts to bolster this industry are undercut at the local level. There are already too many solar companies who are bypassing California for other states where the regulatory climate is less daunting and the sun is still shining. 

Lead image: California flag via Shutterstock

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