California Extends Solar Property Tax Exclusion
New law extends long-time exclusion that prevents newly constructed solar energy systems from triggering Proposition 13 reassessment.
On September 18, 2022, California Governor Gavin Newsom signed into law S.B. 1340, which extends the property tax exclusion for newly constructed solar energy systems to January 1, 2027. The exclusion prevents the construction or addition of any “active solar energy system” from triggering a property value reassessment under Proposition 13.
The exclusion of solar energy from a property value reassessment is seen as a valuable incentive for increasing the deployment of solar energy properties. Solar is viewed as critical to meeting the state’s clean energy goals. Newsom, however, noted the costs of the tax exclusion, stating that he urges the legislature to “consider the impacts to local agencies before bringing forward another extension of this policy.
Proposition 13 Exemption for Solar Energy
California property tax law classifies solar projects as real property. Under Proposition 13, the state constitution limits real property taxes to 1% of a property’s “full cash value” and limits annual property valuation increases to the lesser of inflation or 2% of its base year value. A reassessment of the property value is triggered when the property is “purchased, newly constructed, or a change in ownership has occurred.”
In 1980, California voters approved Proposition 7, which authorized the legislature to exclude the construction or addition of any active solar energy system from the definition of “newly constructed.” AB 1306 added Section 73 to the Revenue and Taxation Code to implement Proposition 7. The solar energy exclusion was modified and extended several times in the intervening decades. In 2014, SB 871 extended the exclusion through the 2023–24 fiscal year and extended the repeal date to January 1, 2025.
Active Solar Energy System
The law defines an “active solar energy system” as a system that is built as part of a new property, or the addition of a system to an existing property. The system must use solar line devices that are thermally isolated from living space or any other area where the energy is used to provide for the collection, storage, or distribution of solar energy. The system may be used for a domestic, recreational, or therapeutic uses, or for water heating, space conditioning, electricity production, process heat, or solar mechanical energy. The definition excludes swimming pool heaters or hot tub heaters.
Provisions on Local Reimbursements
The bill also excludes the extension from requirements that any bill extending an existing tax expenditure contain specified goals, purposes, and objectives that the tax expenditure will achieve, detailed performance indicators, and data collection requirements.
The bill provides that if the Commission on State Mandates determines that the bill contains costs mandated by the state, the state would be required to reimburse local agencies and school districts according to the required procedures. The bill also provides that no appropriation is made and the state shall not reimburse local agencies for property tax revenues lost by them pursuant to the bill.