Pathway to Passage for Tax Extenders
On July 21, the Senate Finance Committee approved by a vote of 23 to 3 a bipartisan tax bill to renew for two years more than 50 expiring and expired tax provisions known as "tax extenders." These provisions generally provide tax benefits designed to incentivize particular behavior from American taxpayers, e.g., the use of renewable energy. As originally enacted, most of these provisions are designed to be temporary incentives and remain in effect for short periods of time, primarily because of their high costs and their impact on the federal budget. Thus, if not "extended" they will permanently expire.
While some would prefer that these provisions either be permanently enacted or otherwise eliminated entirely, in order to provide certainty in the tax code for the next two years and encourage economic growth and development, innovation, and job creation, the Finance Committee once again took this stopgap approach. If approved by Congress, the legislation could cost the federal government an estimated $95 billion over the next 10 years, according to the Joint Committee on Taxation. The Finance Committee has indicated that it will use a broad reform of the tax code in the next few years as a way of determining the long-term fate of these provisions.
Energy Extenders Legislation
Many of the provisions in the extender legislation provide energy-related tax breaks designed to help support American energy jobs, a cleaner environment through renewable energy projects, and energy independence for the United States. For example, the bill includes a two-year extension of the Production Tax Credit ("PTC") for wind, geothermal, biomass, and landfill gas projects, giving developers an additional two years to begin construction, and maintaining the existing option either to claim production tax credits or a 30 percent investment tax credit on relevant projects. A bipartisan amendment, which failed to be included in the final bill, would have allowed renewable energy and energy storage projects to create master limited partnerships, which are businesses organized as partnerships or limited liability companies ("LLCs") and publicly traded, offering capital markets investors the tax benefits of partnerships.
What's Next For Tax Extenders?
The tax extenders bill now moves to the Senate floor where it is believed that much of the bill reported out of the Finance Committee will be preserved. Some provisions, however, such as the wind energy production tax credit, are already under attack and may not survive. Those provisions that do pass will be sent to the House, which is considering a different approach.
The House has signaled that it is ready to put an end to the biannual exercise of extending these provisions by deciding to make some of the expired and expiring provisions permanent and allowing others to fall out of the tax code. Accordingly, it is expected to consider a package of permanent tax extenders as part of a broader effort to reform the U.S. tax code when Congress returns from its August recess. According to the Joint Committee on Taxation, making the tax extenders permanent would add more than $1 trillion to the budget deficit by 2025. President Obama has indicated he will veto legislation that makes tax extenders permanent without providing offsets.
LNG Industry Is A Winner
As a new and important player in the nation's developing domestic energy market, the liquefied natural gas ("LNG") industry is a big winner in recent congressional action. The tax extenders bill included a significant tax cut that would equalize the taxation of LNG compared to diesel based on energy production per gallon. The provision changes the tax rate of LNG to a rate based on its energy equivalent of a gallon of diesel fuel (approximately 14.1 cents per gallon) and allows LNG to compete equally with diesel by taxing LNG on energy output rather than on a per gallon basis.
Currently, LNG and diesel fuels are taxed at the same 24.3 cent per gallon rate, although a gallon of LNG produces approximately 58 percent of the energy produced by a gallon of diesel fuel. This inequality within the tax system results in thousands of dollars of additional costs for companies that choose to use LNG, despite the fact that LNG produces significantly lower levels of toxic emissions than diesel and reduces pollution from black carbon, a major contributor to climate change.
The LNG equalization provision was included as part of the short-term highway funding bill that passed the Senate on Thursday, July 30. Senator Richard Burr (R-NC), who introduced the provision along with Senator Michael Bennet (D-CO), stated that the legislation "is sorely needed so that we're not unfairly punishing consumers with higher taxes for choosing cleaner fuels." The short-term highway bill passed the House the day before Senate passage and President Obama is expected to sign the bill into law. The LNG provision will apply to any sale or use of fuel after December 31, 2015.