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The Constitutionality of Uncompensated §179D(d)(4) Allocations by State, Local, and Municipal Government Building Owners


 Internal Revenue Code §179D provides accelerated tax deductions to building owners that invest in energy efficient building improvements. However, the value of this incentive for government building owners is limited as these entities are tax exempt. §179D(d)(4) allows state and local governments to realize a portion of these benefits by transferring their §179D deductions to a qualified, taxable, private sector entity in exchange for compensation. This compensation can be used to reduce the governmental entity's cost of energy efficient investments, allowing them and, ultimately, taxpayers to benefit from this incentive. In practice, disagreement exists over a governmental entity's right to compensation in exchange for §179D(d)(4) transfers. These differences have become more visible in recent years, resulting in policy changes by state and local governments, and litigation by state agencies that had not been compensated for these transfers. We contribute to this debate by reviewing and evaluating (1) the arguments against providing compensation in exchange for §179D(d)(4) transfers, (2) the state constitutionality of uncompensated §179D(d)(4) transfers, and (3) recent litigation and policy changes. Our analysis finds little support for arguments against compensated transfers, and a reasonable argument that compensated transfers may be required under most state constitutions.