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Working Paper No. 13-05

Tax Evasion and Subsidy Pass-Through under the Solar Investment Tax Credit
Molly Podolefsky
November 2013


The federal Solar Investment Tax Credit (ITC) is the most ambitious solar incentive program in the US, though little is known about who bene ts under this multi-billion dollar program. This paper examines tax evasion by third party PV rms under the ITC, and the incidence
of the subsidy in terms of pass-through from consumers to rms. I investigate diffrerences in per watt system price between third party and customer owned systems reported by firms operating simultaneously in both markets to reveal the degree of potential price misreporting.
Over-reporting price allows firms to reap larger tax credits. I find the prices firms report for third party systems exceed prices of customer owned systems by 10%, or $3,900 per system. My findings imply an aggregate potential misreporting of over $83 million in system prices,
resulting in $25 million in ITC tax benefits due to price over reporting by third party PV firms in California between 2007 and 2011. I exploit a change in the the ITC benefit due to a cap-lift in 2009, which increased the mean award by $10,000, to estimate the incidence of the subsidy
using a difference-in-differences approach. 83% of ITC benefits accrue to firms while only a small portion are realized by consumers. This result suggests that the portion of ITC funds gained through tax evasion is mainly a large cash transfer to firms in the form of rents.


JEL classification: Q4, Q5, H2
Keywords: Tax Evasion, Incidence, Illegal Activity, Solar, PV