Last week, Senate Finance Committee Chairman Max Baucus issued a sweeping energy tax reform proposal, which calls for eliminating or phasing out dozens of existing tax incentives related to renewable and alternative energy production and efficiency.
The proposal calls for renewable electricity (e.g., wind, biomass, and solar) production and investment tax credits (PTCs or ITCs) to be extended beyond 2013 but phased out by the end of 2016. These would then be replaced, beginning in 2017, by a more technologyneutral regime providing either a production or an investment tax credit for any electricity generation facility deemed at least 25 percent cleaner than the average electricity production facility. “Cleaner” is determined by the ratio of CO2 emissions of the facility compared to its kWh of electricity production. The maximum PTC under this new regime (which would apply to wind and solar) would be 2.3 cents/ kWh, which is equivalent to the current wind PTC. The maximum ITC would be 20 percent, which is 10 percentage points lower than the current ITC (applicable to solar under current law through the end of 2016, and wind through the end of 2013).
Similarly, the proposal calls for extending existing clean fuel tax incentives (e.g., biodiesel and alternative fuel credits) through the end of 2016, at which point they would expire. Thereafter, beginning in 2017, a new clean transportation fuel production credit would replace all existing transportation fuel incentives. This credit would be provided to any taxpayer that produced fuel that was 25 percent cleaner than conventional gasoline. “Cleaner” in this case is based on lifecycle CO2 emissions per BTU of energy output of the fuel, as determined by EPA. Credits would be allowed beginning in 2017, and would be available for a maximum of 10 years after a fuel production facility has begun operation. The maximum credit for a clean fuel (no emissions) with the same BTU value as gasoline would be US$1 per gallon. As an example, biodiesel from soybeans would receive a credit of 41 cents per gallon, and cellulosic ethanol from energy grass would receive a credit of 73 cents per gallon, as compared to the existing cellulosic ethanol credit of US$1.01 per gallon.
The Baucus proposal also requests comment, by the end of January 2014, as to all aspects of this proposal, as well as any unaddressed issues. For example, the summary notes that the draft does not include incentives for energy efficiency, clean vehicles, electric transmission, combined heat and power, or energy storage. The Senate Finance Committee staff determined, the summary notes, that
these areas did not have as much “bang for the buck” as the proposed clean electricity and clean fuel production credits. The summary further requests comment as to whether incentives should be provided for these or other unaddressed areas, and whether and how such incentives, if provided, could be implemented on a technology-neutral basis.
Although we do not expect these proposals to become law as is, or any time soon, we do think that this proposal represents a marker that will help form tax reform legislation that will be enacted in the future. Although President Obama has recently announced his intention to nominate Chairman Baucus as the new U.S. Ambassador to China, which, if confirmed, would result in his leaving the Senate before the end of his term in 2014, the Baucus tax reform proposals should not be viewed as irrelevant. To the contrary, Chairman Baucus has worked closely with members of his own party on the Senate Finance Committee, including Senator Ron Wyden, the senator most likely to replace Baucus as Committee Chairman in 2014 in developing this proposal, and it is likely that the new Chairman will carry on Chairman Baucus’ work.
Therefore, for any business seeking to better understand, and/or to influence the potential consequences of a tax reform bill, it is critical to become engaged now, beginning with the task of scrutinizing the details of the emerging tax reform proposals and assessing the potential impact on their businesses, including running numbers regarding tax and financial statement impacts.
Our tax policy experts, including several veterans of the 1986 Tax Reform Act, are actively engaged in these developments. If you have concerns regarding how U.S. tax reform and proposals like this one will affect your U.S. business operations, we would be happy to provide you with our thoughts on the latest developments and how we can assist you in protecting your interests.