Green Tax Breaks Have Lawmakers Seeing Red

It's not always easy to know how expensive a tax break is going to be. This is especially true when the tax break in question is designed to change people's economic behavior. Case in point: a tax cut enacted in 2005 by the Nevada legislature that gives up to a 50 percent property tax abatement, for up to 10 years, for companies that abide by certain "green" energy conservation standards in buildings they own. The bill also granted sales tax breaks for green construction materials. When the bill was passed, its sponsor estimated the annual cost at about $250,000. But the (admittedly gloomy) conventional wisdom today is that the cost can be measured in the hundreds of millions-- which is why Nevada lawmakers are acting fast to scale back the tax break.

Since the property tax in Nevada is a local tax, it's primarily local governments who are seeing their property tax base disappear as a result of the state's green tax breaks. But when locals are unable to adequately fund education using their local tax base, the state must step in to help achieve adequacy. So the projected overruns in the cost of the green breaks are threatening to come back to haunt the state.

For anyone who was paying attention back then, this sounds eerily like Arizona's alternative fuels tax credit fiasco back in 2000, where a tax credit designed to cost about $10 million rapidly ballooned to $200 million before lawmakers pulled the plug. Of course, in Arizona the beneficiaries were individual taxpayers, while the Nevada cuts are limited to businesses.

The lesson in both cases is that tax breaks designed to encourage behavioral changes can be too successful-- and at the same time, not successful at all. For sure, the Nevada break encouraged some companies to go green in their building management practices-- but some others were likely going to do it anyway. And others are likely just going through the motions, acting just as green as they need to in order to satisfy the terms of the tax break.

This isn't to say that using tax policy to achieve environmental policy ends is entirely wrong-headed-- these guys, whose goals are quite noble, think it's terrific-- but the Nevada experience makes it clear that the success of these green tax efforts can be hard to quantify.