On Dec. 18, Senate Finance Committee Chairman Max Baucus, D-Mont., proposed a sweeping set of reforms on energy-related tax incentives that would overhaul energy tax breaks offered by the government and consolidate or extend many of the provisions promoting renewable energy that are currently only temporary.
Notably, the plan ensures that all energy tax incentives would be technology-neutral and provide an equal credit to all U.S.-produced resources or technologies based on carbon emission levels.
‘Our current energy incentives are overly complex and far less effective than they could be,’ writes Baucus. ‘Today, there are 42 different energy tax incentives. More than half are too short-term to effectively stimulate investments. They also provide different subsidies to different technologies with no discernable policy rationale. On top of that, they result in significant revenue loss: If we continue to extend current incentives, they will cost nearly $150 billion over 10 years.’
Ostensibly, there are two credits: one for clean energy and one for transportation.
For clean energy, the Baucus proposal would keep all current incentives, such as the production tax credit (PTC) for wind, in place until 2016. Wind projects placed in service in 2017 and later would be eligible for either a 20% investment tax credit (ITC) – down from the current 30% – or a $0.023/kWh PTC for 10 years, adjusted for inflation.
Additional clean energy tax credit highlights include the following:
– Any facility producing electricity that is about 25% cleaner than the average for all electricity production facilities will receive a tax credit. The cleaner the facility, the larger the credit.
– According to documents released by the finance committee, cleanliness is defined by a simple ratio of the greenhouse gas emissions of a facility, as determined by the Environmental Protection Agency (EPA), divided by its electricity production.
– Businesses can choose between claiming the credit as a PTC or ITC.
– The credit phases out over four years once the greenhouse gas intensity of the U.S. electricity generation declines to the point that it is 25% cleaner than 2013. Interestingly, conventional power generation plants, such as natural gas, are also likely to benefit.
The full discussion draft can be found here.
Notably, the plan did not address expanding master limited partnerships to renewable energy, nor did it address depreciation. However, in November, the committee addressed the issue.
When reached for comment, industry watchers gave the finance committee high marks for its ingenuity.
‘The proposal is innovative in that it's technology neutral,’ explains David Burton, a partner at law firm Akin Gump Strauss Hauer & Feld. ‘It is the most thoughtful that Congress has been with energy,’ he says, adding that the plan's streamlined approach could be used as a future model when – or if – tax reform talks progress.
‘Although the proposals set forth in the plan are a good way to approach energy,’ Burton says, ‘I don't see tax reform happening.’
John Marciano, a partner at law firm Chadbourne & Parke, agrees. ‘[The proposal] probably has legs," he says. "It represents a good starting point for discussions.’ Nonetheless, he cautions that he doesn't expect further action on tax reform to heat up before the 2014 elections.
Akin Gump's Burton calls Baucus' rumored departure from chairing the Senate Finance Committee (to become U.S. Ambassador to China) ‘a setback’ that would ensure the status quo remains in place.
The other wild card is the future of Rep. Paul Ryan, R-Wis., a leading candidate to succeed Rep. Dave Camp, R-Mich., as the chair of the House Ways and Means Committee. The House Ways and Means Committee is an equal partner with the Senate Finance Committee in the process to overhaul the tax code.
Ryan reportedly supports the idea of tax reform. However, it is unknown if Ryan supports aspects of the Baucus plan. History shows that the Mitt Romney-Paul Ryan presidential ticket was opposed to all energy tax credits.