By Dylan Parkes | March 4, 2026
How is the 10th amendment of the US constitution related to Tax Equity?
The short answer is:
One caused the other.
The longer answer is more complicated, but I will attempt to make the connection simply.
From the beginning.
The US government wanted to incentivize the development of renewable energy in the US. The most logical solution (as done in the EU) would be to set a tariff rate such that the returns from project cashflows were sufficiently sized for investors in exchange for the risk in building these projects. Simple!
Unfortunately, the US government can’t set a tariff rate at the federal level. Why not? Well, as laid out in the 10th amendment of the US constitution, any power that doesn’t belong to the federal governments is retained by the states (or the people).
“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”
Energy market regulation is effectively interstate commerce. Most of the power associated with interstate commerce is split between the federal government and the states.
In The Federal Power Act (FPA) of 1935 jurisdiction over wholesale electricity rates in interstate commerce was granted to the federal government but mandates that rates be “just and reasonable”. Thus, the government can regulate rates but doesn’t explicitly set them. In the same act, retail rate-setting authority is explicitly reserved to the states, which is a significant jurisdictional carve-out and key to our tariff issue.
So, the government can’t set rates. How do they create incentives? They control taxes. So, in using accelerated tax depreciation and tax credits, the government tries to increase value to investors in RE projects by reducing a liability. And it kind of works! This technique has been used in the real estate market and other places to general success.
However, there is a bit of a catch. Based on some of the unique aspects around the legal structures of these projects, these incentives don’t provide direct, immediate value for the recipients. They merely delay tax liabilities. This is certainly a benefit, but maybe not as much as increased tariff revenue would be! But that isn’t the end of the drama…
Tax Equity is a very complex financing tool that grew out of this mismatch of value. It is literally derived from the tax law that underpins these incentives. Tax Equity uses US partnership laws to unlock the time value of these incentives and provide direct, immediate capital to the project developers/sponsors. Now the developer/sponsor isn’t delaying a liability any longer, they are receiving capital financing. The Tax Equity investor is getting an offset to a liability that is immediate and valuable. So both parties have now unlocked the time value of these incentives! In the end, more projects are built and the returns are beneficial for the transactors. The system works more effectively for all parties albeit with far more complexity.
So the US government couldn’t directly benefit investors through revenue as a result of the 10th amendment and resulting energy laws. Instead, it chose to do it indirectly through taxes. The benefits were valuable but more of the value was locked in timing. Tax equity steps in, layers on complexity, and manages to unlock more value. The path is circuitous but successful!
Thus, Tax Equity is a result of the fact that the States retain the rights to set energy prices. So, in effect, the 10th amendment caused Tax Equity. Thanks for coming to my TED talk.
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