Senate Finance Committee Chairman Max Baucus, D-Mont., wants to compress a series of federal energy tax incentives, which were passed in a piecemeal fashion over time, into a coordinated system of tax breaks.
Baucus on Dec. 18 unveiled the latest package in a series of proposals to overhaul America’s tax code. This staff discussion draft focuses on streamlining energy tax incentives so they are more predictable and technology-neutral.
“It is time to bring our energy tax policy into the 21st century,” Baucus said. “Our current set of energy tax incentives is overly complex and picks winners and losers with no clear policy rationale. We need a system of energy incentives that is more predictable, rational, and technology-neutral to increase our energy security and ensure a clean and healthy environment for future generations.”
The discussion draft focuses on reforming the current set of energy related tax preferences. Under current law, there are 42 different energy tax incentives, including more than a dozen preferences for fossil fuels, ten different incentives for renewable fuels and alternative vehicles, and six different credits for clean electricity.
Of the 42 different energy incentives, 25 are temporary and expire every year or two, and the credits for clean electricity alone have been adjusted 14 times since 1978 – an average of every two and a half years. If Congress continues to extend current incentives, they will cost nearly $150bn over 10 years.
The staff discussion draft proposes a smaller number of targeted and simple energy incentives that are flexible enough to accommodate advances among fuels and technologies of any type – whether renewable, fossil, or anything in between. These proposals are intended to promote domestic energy production and reduce pollution. Specifically, the discussion draft offers proposals to:
- Establish a new, technology-neutral tax credit for the domestic production of clean electricity
- Establish a new, technology-neutral tax credit for the domestic production of clean transportation fuel
- Consolidate almost all of the existing energy tax incentives into these two new credits, with appropriate transition relief
- Provide businesses and investors with more certainty by making the new incentives long enough to be effective, but phasing them out once clearly defined goals have been met
The package of reforms draws heavily from proposals offered by both Republican and Democratic members of the Senate Finance Committee. Feedback on the draft is requested by Jan. 31, 2014 and comments can be sent to: Tax_Reform@Finance.Senate.gov.
Electricity credit changes based on the cleanliness of the generation
The cleanliness of the electricity generating technology determines the size of the credit, the discussion draft said. For any type of electricity generation, a business can choose whether it wants to receive the credit as a production tax credit, which is claimed each year, or an investment tax credit, which is claimed when the facility begins to operate. The tax credit expires when the cleanliness of the U.S. electricity market increases significantly.
This proposal draws upon S. 401, the Incentivizing Offshore Wind Act, sponsored by Sens. Carper, Brown, Cardin, Collins, Coons Cowan, Gillibrand, King, Lautenberg, Menendez, Mikulski, Reed, Schatz, Warren, and Whitehouse; S. 570, the Clean Energy Race to the Top Act, sponsored by Sen. Bennet; S. 2201, the American Energy and Jobs Promotion Act, sponsored by Sens. Grassley, Bennet, Brown, Franken, Harkin, Heller, Johnson, Merkley, Nelson, Mark Udall, and Wyden; and S. 3581, “A bill to… modify the credit for carbon dioxide sequestration,” sponsored by Sens. Conrad, Enzi, and Rockefeller.
Clean electricity tax credit
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. Cleanliness is defined by a simple ratio of the greenhouse gas emissions of a facility, as determined by the U.S. Environmental Protection Agency (EPA), divided by its electricity production.
Businesses can choose between claiming the credit as a production tax credit or an investment tax credit.
- The maximum production tax credit for a zero emissions facility is $0.023 per kilowatt of generation, indexed for inflation. The production tax credit can be claimed on a single facility for a maximum of 10 years and cannot be claimed for facilities that begin to operate before Jan. 1, 2017 (though such facilities may be eligible for the extended, current law production tax credit, described below).
- The maximum investment tax credit is 20% of the cost of the investment. Generally the investment tax credit cannot be claimed for facilities that begin to operate before Jan. 1, 2017. However, after 2016, a 20% investment tax credit can be claimed for existing facilities that undertake a carbon capture and sequestration retrofit that captures at least 50% of CO2 emissions.
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. In order to qualify for the credit, the electricity must be produced in the United States.
The following three expiring provisions are allowed to continue through 2016 to provide a transition period for technologies that rely on current law incentives:
- Section 45 credit for renewable electricity production
- Section 48 investment tax credit for electricity
- Section 25D credit for residential renewable electricity investments
Consolidated tax incentives
This staff discussion draft consolidates seven different tax incentives for electricity generation. In addition, the staff discussion draft on cost recovery and tax accounting, which was released on Nov. 21, 2013, proposed repealing another electricity generation incentive: accelerated depreciation for solar, wind, and other energy property.
Draft doesn’t cover areas like combined heat and power
The draft does not include tax incentives for other parts of the U.S. energy economy, such as energy efficiency, clean vehicles, transmission, combined heat and power, and storage. Staff made this choice in order to target tax incentives on areas that appear to have the largest “bang-for-the-buck” in reducing air pollution and enhancing energy security, given concerns about overlapping regulations and spending programs, compliance costs, and the potential for fraud or abuse.
However, staff is interested in comments on whether some or all of the revenue devoted to the credits proposed in this draft should be directed at these other sectors of the energy economy instead. Comments are also requested on whether and how tax incentives for these sectors could be implemented on a technology-neutral basis.
The discussion draft generally limits the proposed production and investment tax credits to facilities that begin to operate after 2016. Comments are requested on whether it is appropriate to make the credits available to facilities placed in service before 2016 that convert to clean generating facilities and, if so, how such a policy should be designed.
The staff draft proposes an investment tax credit for retrofitting existing facilities with carbon capture technologies that capture at least 50% of their uncontrolled CO2 emissions. Comments are requested on whether 50% is an appropriate threshold, whether the credit should be performance-based, and whether this credit will effectively promote adoption of carbon sequestration technologies.