Refundable and Transferable Tax Credits for Battery Companies

Tax credits can provide an important support mechanism to businesses and are valued for their simplicity and immediate availability. Tax credits are a form of co-investment: if the private sector invests, the government will provide a corresponding and measurable level of support. However, income tax credits generally are only valuable to entities that have a tax liability (i.e., taxable profits). Most new companies and startups do not make a profit for several years, leaving them unable to take advantage of tax exemptions.  Companies in the expansion phase use revenue to fund expansion, lowering their profits and their ability to benefit from tax credits.

Some states do not provide a tax credit for manufacturing activity in the state. This serves as a disincentive for manufacturers to locate to that state, given that other states grant exemptions to the franchise tax or credits to local companies. Furthermore, certain states also charge a franchise tax of 0.15 percent for all companies doing business in the state.

Many states have established business incentives that have been beneficial to the advanced energy economy. Texas entities that are solely engaged in manufacturing, selling, or installing specific renewable energy devices are exempted from state franchise taxes. This exemption also applies to certain components of the renewable energy device supply chain. Similarly, Wisconsin has established a manufacturing and agriculture tax credit that effectively eliminates tax on income generated by manufacturing activity in the state.

Looking at states like Texas and Wisconsin as examples, states could pass similar legislation allowing a franchise tax exemption or an income tax credit for businesses engaged in the manufacturing or installation of utility-scale batteries and related equipment, including any part of the supply chain. The income tax credits could be refundable and transferable to allow companies that have not yet experienced a tax burden to take advantage of them. Refundable and transferable tax credits can be sold for cash, allowing companies to benefit from the incentive immediately rather than having to wait to turn a profit. By limiting the exemption to companies manufacturing or installing in the state, the exemption encourages companies to set up manufacturing facilities in-state and create local jobs.