Solar farms increases local tax district revenue

The Kentucky constitution prohibits deviations in tax property rates. The agricultural real estate tax rate is the same as every other real property type. Ag land has a lower tax burden because the legislature allows it to be accessed based on its expected agricultural income. When land becomes a solar farm it is accessed based on its solar income.

Kentucky has two classes of property taxes that apply to solar. Real property tax and tangible property tax. Where tangible property is divided into the types manufacturing machinery, and tangible personal.

Real estate Property Tax

Local tax districts charge based on assessed real-estate value. It is therefore essential to understand solar’s potential impact on the average assessed value for Mason County farmland.

Mason County KY’s 2019 average real estate property tax per farmland acre

Total Acres 153,683
Total acres considered farmland 132,921
$113,818,147 Assessed value for Mason County farmland
$856.28 Average Assessed farmland value per acre (Assessed value / total acres)

Calculating Property value of a solar farm acre

First determine valuation of solar farm’s real property (land)

KY Dept of Revenue says the valuation of a utility-scale solar acre is determined based on the “income approach”. (Note while the PDF below was excluded from the official record, because it did not “conform” to the JPC submission rules, it is the official guidance on how to access solar farms for calculating real-estate property taxes published by the Kentucky Department of Revenue)

Solar-Farm-Assessment-Recommended-Guidelines_2_April-2020

Assumptions
$650 Annual Solar Lease rate paid to the landowner is the net income per acre
7% Capitalization rate

  • The income approach is a real estate valuation method that uses the income the property generates to estimate fair value.
  • It’s calculated by dividing the net operating income by the capitalization rate.
  • $650 / 0.07 = $9,285.71

A typical solar acre’s assessed property value will rise from the current average of $856.86 to $9,285.71

At 2020 tax rates such an increase has this effect over a 30 years with 6000 acres under lease

Tangible Property Tax

Tangible property is a tax term that is used to describe property that can be felt or touched and can be physically relocated. A more complete definition is beyond the scope of this article

Troy Craycraft, Mason County’s PVA, states that no enterprise on agricultural land in Mason County is currently accessed any tax on tangible property. Thus any tangible property tax that solar pays will be a net gain in local tax revenue. Because of this, it is understandable if you stop reading and base your opinion on the substantially increased revenue solar can deliver to local tax districts.

In the KY Department of Revenue’s flyer on Solar Farm Assessment Recommended Guidelines (see above) Solar farms will be subject to three types of taxes, Manufacturing machinery, Tangible personal, and real property.

Since we covered the real estate property tax above, here we deal with Manufacturing machinery, Tangible personal. Kentucky taxes manufacturing machinery at $0.15 per $100 and tangible personal at $0.45 per $100.

Companies down through the decades have wanted a lower tax. Since Kentucky’s constitution prohibits deviations in tax property rates, industrial revenue bonds were crafted to allow local governments to offer a lower tax burden.

Originally governmental revenue bonds were issued to raise funds for long-term capital projects such as water systems, roads, etc. The government entity would issue bonds backed by its full faith and credit then pay off those bonds with revenue the project created. A business offered to come to a locale if the government would build a factory and lease it to the company. The deal was funded with an industrial revenue bond. (The revenue to pay off the bond was coming from lease payments made by the industry.)

Because in this case, the government did bear the credit risk if the industry did not continue to make their lease payments, the government took ownership of the plant as collateral until the bond was retired. Because constitutionally, the state can not tax one of its contained governments, no state tax was due on the capital that the local government “owned.” As local governments set up an industrial revenue bond to shield the plant’s tenant from state taxes, a A P(ayment) I(n) L(eu) O(f) T(ax) agreement was negotiated to between the government of the industrial lessor. The object being to have a portion of the money that would have flowed to the state to instead flow to the local government able to provide the tax shield to state taxes.

Later a company that did not need a government to raise the necessary funds asked a local government to issue an industrial revenue bond. Because they could raise the necessary capital they proposed, the government was not liable for the debt. The government would take “ownership” of the plant and, by a PILOT agreement, a portion of the money that would have flowed to the state to instead flow to the government able to provide the tax shield to state taxes.

Solar developers are currently proposing the third type of industrial revenue bond where a local government takes on no liability for the bond’s principal and with a PILOT agreement to have a portion of the money that would have flowed to the state to instead flow to the government able to provide the tax shield to state taxes.

Remember

  • Any increase in tax revenue is a net gain because no operation on agricultural land pays any Manufacturing machinery or Tangible personal tax today
  • Any PILOT payment is in addition to the substantial increase in real estate tax revenue solar will contribute

Rather than attempt to estimate

  1. how much of the solar installation is manufacturing machinery and how much is tangible personal property
  2. The rate at which these tangible assets will depreciate
  3. Local officials negotiation skills relative to the solar developers

It seems evident that the $14,589,000 6000 acres of solar will pay in local taxes over a 30-year lease is an economic contribution our community should embrace. Particularly when we consider

  • the topsoil the sod under solar will protect
  • the ag chem pollution stopped by switching land to solar from cash grain.
  • increase local employment of the operation phase of each solar farm