State tax credits for solar energy projects made for bad public policy. That doesn’t excuse recent action from the N.C. Revenue Department that denies those credits to solar energy finance companies.

The department and the companies are heading to court. The rule of law suggests that the companies should win the dispute.

Before getting into details, let’s address the public policy debate.

For roughly two decades, state law permitted some version of a 35% income tax credit for investments in facilities producing solar energy.

It was a bad idea. State government had no good reason to insert itself into the energy market in that way. The credit distorted investments. It steered capital away from more productive uses.

After Republicans took control of the N.C. House and Senate, they changed the law and axed the credit. But they included a so-called “grandfather” clause. It was designed to soften the blow for investors who had made long-term decisions based on the previous law. If a solar project had started by the time the law changed, the tax credit still could be claimed.

The old law had allowed the tax credit to be spread out over multiple years. So even with the General Assembly’s wise decision to ditch the credit prospectively, hundreds of millions of dollars of grandfathered credits would be possible for years to come.

State law requires those credits to be honored.

Now let’s return to the current dispute. Carolina Journal’s Don Carrington recently reported on a lawsuit filed Sept. 26 by Georgia-based Monarch Tax Credits. The suit targets the Revenue Department and Secretary Ronald Penny.

Monarch alleges that Penny and his department broke state law by rejecting tax credits the company’s clients claimed. Those credits were linked to $900 million in investments in more than 80 renewable energy projects.

“After the state received the investments inspired by legislation, NCDOR caused the state to renege on the underlying promise of tax credits to investors,” according to the suit.

In rejecting the credits, the Revenue Department contended that Monarch’s financial arrangements were inconsistent with federal law. Monarch responds in the lawsuit that the General Assembly chose not to mirror federal law in creating North Carolina’s tax credit. State law alone determines the rules regarding who can and cannot claim that credit, Monarch argues.

That leaves the Revenue Department with no legal justification for its rejection of claimed tax credits. “The agency is attempting to make tax law, rather than administer and interpret it,” as Carrington summarizes Monarch’s legal argument.

The department’s decision could threaten tax credits linked to at least four other financing companies. The stakes are large: more than $500 million in total credits.

As the Revenue Department takes its stance against the tax credits, the man who appointed Penny to the department’s top job is sending a different message about renewable energy.

The day after Monarch filed suit, Gov. Roy Cooper attended a meeting of his Climate Change Interagency Council in Raleigh. The group heard an update on Cooper’s N.C. Clean Energy Plan. Among its goals: “significant expansion of solar and other renewable energy sources,” as Carrington reports.

The irony became clear to the editorial board at the Greensboro News & Record. While praising Cooper for “trying to make North Carolina a leader in sensible clean-energy policy,” the newspaper adds, “Too bad his Department of Revenue doesn’t seem to have gotten the memo.”

The newspaper’s editors agree with Monarch that the department is “in effect making policy” that “seems to go against the intent of the General Assembly” and a recent state Supreme Court ruling. “The Revenue Department is also unfairly changing the rules on investors who acted in good faith, in a move that will make it tough for future clean-energy projects here to find financial backing,” the editorial argues.

Perhaps it’s good that future “clean-energy” projects will have a tough time winning financial backing in North Carolina. If so, that’s a sign that the investments make little sense without the incentive of a government tax break.

But one need not agree with Cooper’s energy policy to question his Revenue Department’s stance on renewable energy tax credits. It’s easy to argue that the solar credits eventually should end for good. It’s entirely consistent to argue as well that the department should honor existing credits permitted under state law.

The law as written entitles investors to the credits. The law does not give the Revenue Department the right to pad the state treasury with more than $500 million of rejected credits.

Regardless of the policy implications, the rule of law points toward the finance companies in this tax fight.

Mitch Kokai is senior political analyst for the John Locke Foundation.