Larry DeBoer: Solar energy projects and property taxes in Indiana

Utilities are building a lot of solar energy projects in Indiana. Fields of solar panels will become a common part of our landscape. This may help avert some consequences of climate change on the planet. But what are the local consequences?

Building a solar project creates a lot of local spending and quite a few jobs. Once construction is done, though, projects need few employees, and there is little effect on local spending. There are no suppliers of solar equipment located in Indiana. Lease payments received by landowners may or may not be spent locally.

The main effect on local communities is through the added property taxes paid by the solar companies. A recent study of nine solar energy projects in eight Indiana counties estimates this effect. The study was conducted by the Purdue Center for Regional Development, and I worked on the property tax. You can find it on the PCRD website.

A solar company buys or leases land, and builds fields of solar panels. Then the county assessor puts a value on the project for property taxes. The equipment, called personal property, is assessed at a depreciated value of its initial cost. Within a few years, depreciation hits the famous “30% floor,” which means the minimum assessed value of the company’s equipment cannot fall below 30% of the initial cost. The study showed that personal property averaged about $50,000 per acre.

The assessed value of land increases too. The state’s assessment formula values farmland at $1,500 per acre for taxes in 2023. The local assessor then adjusts for soil productivity and other factors. The “solar base rate” is set by the state too, and varies from $5,400 to $13,000 per acre, depending on the Indiana region. The average solar project would increase land assessed value by about $11,000 per acre.

The nine projects averaged about 1,100 acres each, so the total addition to assessed value would average about $66 million. All nine solar projects are in rural areas, where tax rates averaged about $1.50 per $100 assessed value. That means the average solar project would pay almost $1 million dollars a year in added property taxes.

But counties awarded tax abatements to six of the nine projects. Two received full tax abatements on personal property for 10 years, one for 15 years. Two others used sliding scales from 100% at the start to zero at the finish. The assessed value of land is not abated. Estimated tax payments in the first year with 100% abatement averaged $200,000.

Five of the abated projects made economic development agreement payments to the counties, partly offsetting the reduction in property taxes. Project payments average $1.2 million in the first year, but in most cases the annual abatements will run longer than the annual EDA payments.

The effect of solar project tax payments on local government revenues and property tax bills is more complicated. The state puts a maximum on the amount local governments can raise from property taxes for operating costs. Many local governments tax near their state maximum levies. This means that some of the added solar project assessed value will not generate new revenue. Instead, it will force property tax rates to fall. Solar projects will pay taxes that replace some taxes paid by existing taxpayers.

Not all local governments tax at their maximums, and some parts of the property tax, such as debt service and school referendum funds, are outside the maximums. The study estimated that about 60% of solar tax payments would add new revenue, and the remainder would reduce existing tax bills. That would add $600,000 per year for local governments, on average, before abatements and EDA payments. Homeowners in places that included the solar assessed value would see tax bill reductions between 2 and 11%.

Property taxes are not the full story of solar energy projects, of course. Reduced corn and soybean production may affect local equipment suppliers or grain elevators. Some people prefer fields of corn to fields of solar panels. For others, the availability of solar power may be attractive. But there’s no doubt that solar project development will add to local government revenues, and reduce local tax bills.

Larry DeBoer is a Purdue University agricultural economist whose column appears in Indiana newspapers. Send comments to [email protected].