- California taxes the sale of renewable energy tax credits, unlike federal law, which exempts them. This policy could raise the cost of clean energy projects and ultimately lead to higher electricity bills for consumers.
- Industry analysis suggests aligning with federal tax rules could lower average household energy bills by up to 3% by 2040, saving each residential home about $762 over 15 years.
- A bill to change the tax treatment is advancing in the California legislature but faces fiscal concerns. A similar effort failed due to a projected $250 million state revenue loss.
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California’s approach to taxing renewable energy tax credits may be making it more expensive to develop clean energy projects in the state. This could ultimately lead to higher electricity bills for residents, according to recent industry-backed research.
What is causing this problem?
The issue stems from the 2022 Inflation Reduction Act, which allows developers of clean energy projects to sell tax credits to outside parties in order to help finance construction. While federal law stipulates that those sales are not to be taxed, California is one of five states that has not aligned its tax code with this provision. This extra tax subjects developers to additional state taxes.
How much could consumers save if state policy changed?
A new analysis from the American Clean Power Association, conducted by energy consultancy E3, found that the added tax burden could be passed on to consumers in the form of higher electricity rates. The report estimates that if California conformed its tax policy to federal rules, average electricity bills could be up to 3% lower by 2040, amounting to approximately $762 in savings per household over 15 years.
How expensive is electricity in California compared to other states?
This comes as California faces growing concerns over electricity affordability, with average energy bills in the state currently ranking as the nation’s third most expensive. According to a January report by the state’s legislative analyst’s office, residential electricity rates in California rose by 47% between 2019 and 2023, outpacing the national average.
What happens next?
A bill to exempt clean energy tax credit sales from state taxation has advanced through multiple California Senate committees and is now under review by the appropriations committee. The measure would apply retroactively to the 2023 and 2024 tax years. However, a similar proposal failed in 2024 after a fiscal analysis estimated it could cost the state up to $250 million in lost revenue.
Gov. Gavin Newsom projects the state to have a $38 billion deficit in the 2024-2025 budget.
