In gusty Wyoming, taxing wind energy has long been an divisive topic.
Almost every year, lawmakers introduce proposals to raise Wyoming’s wind tax. And so far, they’ve all been defeated. For a state that had once been a pioneer of wind tax policy, Wyoming has now fallen behind other states in the Rocky Mountains that are unburdened by the debates around tax policy in the Equality State.
“The nationwide expansion of wind power has been seen as a threat to coal,” former Revenue Committee Chairman Mike Madden wrote in a column for the news site WyoFile in February. “Other market dynamics like the growth of natural gas use by electric utilities are at least as responsible for pressures in the coal industry, but the connection between growth in wind generation and the contraction of coal is foremost in many Wyoming minds.”
For years, the state has charged $1 in tax for every megawatt hour of wind energy produced – a competitive tax rate regionally. But times have changed, and some — like Revenue Committee co-chair Sen. Cale Case, R-Lander — have advocated taxes on wind as high as $5 per megawatt hour for wind energy development at a time when coal revenues are decreasing and the cost of producing wind energy is lower than at any point in recent history – and getting lower.
Still, the logistics of an increase – or fuller reforms around the state’s tax policies toward renewable energy – are complicated, lawmakers learned at a meeting of the Joint Committee on Revenue on Monday.
And the longer discussions drag on, said University of Wyoming economist Robert Godby, the more it costs the state in developers scared off by an uncertain policy environment that could have profound implications on the economics of their projects.
“The fact we’ve had this debate for a while has been costly to the state, but we’re uncertain what that cost has been,” Godby said.
Is taxing wind worth it?
Finding the correct balance for a wind tax may be the biggest challenge for legislators.
In a report to lawmakers presented on Monday, a pair of analysts for the University of Wyoming’s Center for Energy Economics and Public Policy, Godby and Benjamin Cook, wrote that an increase in wind taxes as high as $4 per megawatt hour could stall out development efforts and nullify any economic benefit that wind could provide the state.
Even with a tax structure for wind energy that is rigid and unadaptable to real-time market conditions, Wyoming remains the fourth cheapest place to develop wind energy in the West, lagging behind Colorado, Montana and New Mexico, which is currently considered among the nation’s top locations to develop wind energy. However, a five-fold increase to the state’s wind tax – which lawmakers are considering – could making Wyoming the West’s fourth-most expensive state to develop wind power, behind California, Nevada, and Washington, while levying the highest tax burden on wind in all the region.
For communities who anticipate jobs or economic development to replace industries that are volatile, like oil and gas, or declining, like coal, an increase as large as $4 per megawatt hour could harm Wyoming wind’s competitiveness against other states.
“Our conclusion is that this cost change could have a significant negative impact on wind developers’ willingness to consider Wyoming, and undermine the potential use of wind development as an economic diversification strategy, as recently advocated in a state report,” the report reads.
While an increase in the wind tax could be detrimental to the state’s standing in the West’s burgeoning landscape for renewable energy, the structure of Wyoming’s existing tax on wind already presents some issues.
Currently, Wyoming charges a tax of $1 per megawatt hour starting two years after a wind energy system comes online as well as sales taxes on equipment and the levying of property tax rates. Though the two latter taxes reflect conditions for any other business, that $1 tax only becomes increasingly burdensome as wind energy becomes cheaper – a problem that could be exacerbated given a tax increase.
While this could mean a significant windfall for Wyoming’s revenue streams, the burden might be enough to deter future wind development.
And the stakes could be high. According to Godby, there are 11 projects in Wyoming either in the planning stages or under construction right now, combining for $7.1 billion in economic impact, including $3.5 billion in the projects’ five-year construction period, and the immediate creation of 3,300 new jobs. On those projects, a $4 increase in taxes could result in a $1.9 billion increase in revenues, assuming no impact to development.
If a tax is too high or too burdensome, the state risks crossing a threshold where Wyoming’s price points are no longer competitive with those seen in other states, causing developers to flee and, in a worst case scenario, could actually result in the state losing money.
This means the conversation may not necessarily be about increasing taxes – it might be more about reform.
Cook said Monday that he and Godby looked at the tax structures and incentives available for renewable energy in other states and found that Wyoming lacks a number of other features common across the West, like property tax incentives and credits or sales tax exemptions. Some states, like Wyoming’s closest competitor, New Mexico, use tools like industrial revenue bonding, a mechanism that has proven to be effective in reducing upfront costs, where most of the risk lies for a project.
Considering these options, lawmakers and the economists broached the idea of whether Wyoming tax “smarter,” rather than more. From an affordability perspective, Godby noted, Wyoming is already quite competitive in the West, however it may not be enlisting options that will allow the state to increase revenues without raising prices.
The way Wyoming currently chooses to tax wind producers, Cook said, has actually caused companies to feel like they have more risk, in that if their rates go down over time, they are locked into rates that actually punish them for falling prices – something that does not happen in other states.
“The way we tax is deterring developers,” he said. “It’s not that they’re opposed to taxes, it’s the way we tax is affecting their decisions as compared to other places.”
An ideal system advocated for by the two economists would avoid fixed costs and any taxes that increase project costs – like sales taxes – and replace them with a 6 percent royalty, consistent with how Wyoming already taxes other energy sources.
Such a system, they noted, could lead to a 1.5 percent decrease in development costs, making Wyoming more competitive while increasing tax revenues by 26 cents per megawatt hour – an 8.3 percent increase.
“We are definitely not proposing on the basis of one run on a theoretical model,” said Godby. “But this is a place to start at, and you can think of these things.”