August 14, 2008
LEGISLATIVE OPTIONS ON TAX EXEMPTIONS
OF RENEWABLE ENERGY SYSTEMS
By: Kevin E. McCarthy, Principal Analyst
You asked us to identify legislative options to clarify the scope of property tax exemptions for renewable energy systems under CGS 12-81(57).
Under CGS § 12-81(57) municipalities must exempt from the property tax any class I renewable energy source (e.g., wind machines) or hydropower facility, both as defined in CGS § 16-1, that is installed for the generation of electricity for private residential use, so long as the installation occurs on or after October 1, 2007 for a single family dwelling or multifamily dwelling consisting of two to four units. Municipalities must also exempt any passive or active solar water or space heating system or geothermal system, regardless of when or where it is installed. Prior to 2007, the law provided for local option tax exemptions for a narrower range of renewable energy systems.
While there are statutory definitions for class I renewable energy sources and hydropower facilities, there are no such definitions for the passive solar and other remaining systems that are eligible for the exemption, although the assessors handbook prepared by the Office of Policy and Management (OPM) provides some background information on these systems. For example, it is unclear whether a sunroom would be exempt from property tax if can be used as a passive solar heating system but is primarily used for other purposes. It is also unclear which components of a solar or geothermal system are eligible for the exemption. For example, a geothermal system installed in a house may use the existing heating or cooling system located inside of the house. In this case, it is unclear whether the exemption would apply to the existing as well as new components of the system.
The legislature has several options to clarify the scope of the tax exemption. It could adopt legislation listing the specific systems or components that are eligible for the exemption. For example, the legislature could identify sunrooms and Trombe walls as eligible passive solar heating systems. Or it could specify that, in the case of a sunroom, the glass walls of the structure are eligible for the exemption since they can be used for space heating, but the foundation is ineligible since it plays no role in heating (although it is unclear whether assessors have information about the value of specific components of renewable energy systems). Alternatively, it could identify a rule for determining whether a device or component is tax exempt. For example, it could specify that a system or component is tax exempt only if its principal purpose is the production of electricity or space or water heating from a renewable energy source. Another option is that the legislature could allow or require an appropriate agency to adopt regulations in this area to define what constitutes the systems that are not defined in statute. The agency might be OPM, which has staff that deal with property tax and energy issues, or the Department of Revenue Services, which issues guidelines on exemptions from the sales tax. The statutory and regulatory options are not mutually exclusive, for example the legislature could list certain systems as eligible for the exemption and allow the agency to adopt regulations identifying other eligible systems. Finally, the legislature could choose to take no action and leave the issue to the discretion of local tax assessors.