Calculating M&T

To calculate the expected tax revenue from the default M&T tax option, the tool will take each year’s expected solar investments from the schedule provided by the user and break their lifetime into three periods that represent each stepdown as articulated in the M&T tax exemption policy, HB 1434. Within each period, the yearly expected tax revenue will be calculated by multiplying the project’s assessed value with the appropriate exemption level (80% exempt in the first 5 years, 70% for the next 5 years, then 60% for the rest of the project’s life) and the effective M&T tax rate for the indicated locality. The effective M&T tax rate is derived by multiplying a locality’s statutory rate per $100 by its depreciation schedule, should it have one.

Calculating Revenue Share

To calculate the value of tax revenue in an individual year from solar projects larger than 5 MW built in year \(t\), the revenue share rate is multiplied by the total number of qualifying megawatts built in year \(t\).

Composite Index

In addition to these direct factors, the use of the M&T tax may cause an additional indirect effect on local revenues, through its influence on state funding for education. Under Virginia law, the costs of supporting public schools is effectively shared between state and local governments. The state’s per-pupil contribution varies by locality: it is lower for wealthier counties that are better positioned to fund schools on their own, and greater for poorer counties. The exact amount of the state’s contribution is based on the value of the Composite Index of Local Ability-to-Pay (CI), an estimate of each locality’s taxable wealth. To put the issue briefly: a new solar project may increase a locality’s CI, triggering a decrease in education funding from the state. The tool includes an option under Preloaded Parameters to toggle on or off calculations related to CI .

Future Cash Flows to Net Present Value

Under either tax policy option, a stream of future revenue flows can be converted to present-value equivalents by discounting at an appropriate discount rate. Let \(t = 0, 1, \ldots, T\) index the several years over the planning period, where \(t=0\) corresponds to the present year, and \(T\) denotes the number of years until the limit of the planning horizon. For each year \(t\), let \(c_t\) denote the cash flow received by the locality as revenue. The Net Present Value of this stream of cash flows is given by the well-known \(NPV\) formula where \(r\) denotes the discount rate the locality uses for its capital budgeting.

\[ NPV = \sum_{t=0}^T \frac{c_t}{(1+r)^t} \] The appropriate choice of the discount rate \(r\) is not obvious, and can have a significant effect on the NPV calculation. For our base case, we will assume a 6 percent discount rate. The tool will allows users to enter alternative discount rates, allowing for the performance of a sensitivity analysis.

Auxiliary Assumptions

• The policy environment will remain stable (i.e. The M&T tax program will not sunset in 2030, and the Revenue Share remains in its current form in perpetuity)
• All new builds filed their interconnection request form after January 1, 2019 (The maximum MW level is higher for earlier dates)
• A locality's education budget will increase by 1 percent every year and every other value used for the composite index calculations will remain constant over time

Uncertainties and Risks

• The calculation ignores any revenue that might come from already existing solar projects and if a revenue share is adopted, a locality cannot mandate that a preexisting project pay a revenue share rather than the traditional M&T
• Increases in revenue from new solar builds may trigger reductions in state education funding, which may not be fully offset by solar revenue

This is not a forecasting tool. This is a tool is to be used as a consulting tool for localities. The suggestions from models does not constitute legal advice.