Sundown and You Better Take Care: Why Sunset Provisions Harm the Renewable Energy Industry and Violate Tax Principles

Abstract

The production tax credit (“PTC”) is the primary government incentive to promote renewable energy. In fact the PTC is necessary to make renewable energy cost competitive, to account for positive externalities, and to encourage private investment. These tax credits, however, are often subject to “sunset” or expiration dates, a trend in tax legislation. As a result, the PTC is only renewed for one to three years at a time. This renewal period is often shorter than the typical development cycle of a renewable energy project—-for example, it is shorter than the three to seven years required to develop a wind farm. As such, the uncertainty of the PTC’s existence chills long-term investment. Further, to the extent that the PTC spurs growth, it occurs in “boom and bust” cycles that lead to higher costs and an unsustainable domestic renewable industry. These negative impacts on the renewable energy industry, however, are not offset by any countervailing tax policy. In fact, the complexity, inequity, and inefficiency that sunset provisions produce, particularly with respect to rent-seeking and enhanced lobbying, actually frustrate the fundamental goals of a tax system.