On October 2, the Congressional Research Service (CRS) published an overview of the production tax credit (PTC). The report is available here. It contains a helpful summary of the history of the PTC and an insightful discussion of the PTC and the alternative minimum tax.
The report’s only shortcoming as discussed below is not applying a particularly critical eye to either a cited study regarding tax incentives for renewables from the National Academy of Sciences that employed a questionable methodology or to President Obama’s proposal to replace the investment tax credit (ITC) for solar and other technologies with the PTC.
The bullet points and tables below are excerpts from the report; the section headings and italicized text are not from the report:
Current Debate Regarding the PTC
- Whether the PTC should be extended, modified or remain expired is an issue being considered in the second session of the 113th Congress. The PTC was initially enacted to promote the development of renewable energy resources, and it has been extended multiple times in an effort to continue advancing this policy goal. While some Members of Congress support extension or modification of the PTC, others say that the PTC should be allowed to expire. Extension of the PTC may be considered as part of “tax extenders” legislation.
- Several policy options for the PTC have been proposed in the 113th Congress. These include: (1) allowing the PTC to remain expired (current law); (2) temporarily extending the PTC (as proposed in the Expiring Provisions Improvement, Reform, and Efficiency (EXPIRE) Act of 2014 (S. 2260) and the Tax Extenders Act of 2013 (S. 1859)); (3) temporarily extending the PTC but providing some form of phaseout (the PTC Certainty and Phaseout Act of 2013 (H.R. 2987)); (4) eliminating the inflation adjustment factor to phaseout the PTC, then repealing it (the Tax Reform Act of 2014); (5) permanently extending the PTC and making refundable (the president’s FY2015 budget); or (6) fundamentally reforming the PTC to provide a “technology neutral” incentive (the Baucus Energy Tax Reform discussion draft).
- The President’s FY2015 budget proposes a permanent extension of the PTC. Additionally, the PTC would be made refundable, solar facilities would be added as qualifying property, and the credit would be modified such that renewable electricity consumed by the producer could qualify for tax credits. The proposal would repeal the permanent 10 percent ITC for solar and geothermal property, as well as the temporary 30 percent credit for other types of energy property.
Here’s a link to a prior blog post discussing the president’s proposal to replace the solar ITC with a PTC that includes an analysis as to why the PTC is less suitable for solar power with its higher upfront costs and lower operating costs than it is for wind power. See table.
History of the PTC
- The PTC for wind and closed-loop biomass was first enacted in 1992. When first enacted, the PTC was scheduled to expire on July 1, 1999. Since 1999, the PTC has been extended eight times. On three occasions, the PTC was allowed to lapse before being retroactively extended. Including the present expiration, the PTC has been allowed to lapse four times.
- Under current law, only facilities for which construction began before January 1, 2014, can qualify for the PTC. Before 2013, the PTC expiration date was a placed-in-service deadline, meaning that the electricity-producing property had to be ready and available for use before the credit’s expiration date.
Here’s a table from the report that reflects the PTC’s enactment, extensions and lapses.
- In addition to being extended, the PTC has also been expanded over time to include additional qualifying resources. In 2013, wind, closed-loop biomass and geothermal technologies qualified for the full-credit amount of 2.3-cents per kWh. Other technologies (open-loop biomass, small irrigation power, landfill gas, trash, qualified hydropower, marine and hydrokinetic) qualify for a half-credit amount, or 1.1-cents per kWh in 2013. Credit amounts are adjusted annually for inflation.
- There are also production tax credits for Indian coal and refined coal. The base rate for Indian coal is $2.00 per ton, but with the inflation adjustment was $2.308 in 2013 ($2.317 for 2014). For refined coal, the base credit amount is $4.375 per ton, and the 2013 credit with the inflation adjustment is $6.59 per ton ($6.601 for 2014). Indian coal production facilities must have been placed in service before January 1, 2009, to receive credits. Under current law, credits are not available for coal produced after 2013. Refined coal facilities must have been placed in service before January 1, 2012, to qualify for credits. Refined coal facilities that were placed in service before this deadline may still be receiving credits, as the credit was allowed for production over a 10-year period.
- The credit can be claimed for a 10-year period once a qualifying facility is placed in service. The maximum credit amount for 2013 and 2014 is 2.3 cents per kWh. The maximum credit rate, set at 1.5 cents per kWh in statute, is adjusted annually for inflation. Wind, closed-loop biomass and geothermal energy technologies qualify for the maximum credit amount (i.e., 2.3 cents per kWh). Other technologies, including open-loop biomass, small irrigation power, landfill gas, trash, qualified hydropower and marine and hydrokinetic energy facilities qualify for a reduced credit amount, where the amount of the credit is reduced by one-half (i.e., 1.1 cents per kWh).
- The amount that may be claimed for the PTC is set to phase out once the market price of electricity exceeds threshold levels. Since being enacted, market prices of electricity have never exceeded the threshold level and the PTC has not been phased out, nor is the PTC likely to be phased out under current law.
Cost/Benefits of the PTC
- The Joint Committee on Taxation (JCT) estimates that in 2014, foregone revenues (or “tax expenditures”) for the PTC were $1.5 billion. Between 2014 and 2018, the JCT estimates that foregone revenues associated with the PTC for renewable electricity will total $16.4 billion.
- The PTC has been important to the growth and development of renewable electricity resources, particularly wind. Tax incentives for renewables, however, may not be the most economically efficient way to correct for distortions in energy markets or to deliver federal financial support to the renewable energy sector.
- The Congressional Budget Office estimates that a permanent PTC (or a PTC extended through the budget horizon) would cost $28.4 billion between 2014 and 2024.
- Research suggests that the PTC has driven investment and contributed to growth in the wind energy industry.
- While further extension of the PTC may lead to further investment and growth in wind infrastructure, this potential is limited in the case of short-term extensions.
- Further, retroactive extensions provide what are often characterized as windfall benefits, rewarding taxpayers that made investments absent tax incentives.
- While the PTC has contributed to increased use of renewable electricity resources, research suggests that its contribution to reducing greenhouse gas emissions is small. In a 2013 report, the National Academy of Sciences estimated that removing tax credits for renewable electricity would result in a 0.3 percent increase in power-sector emissions.
The National Academy of Sciences report is discussed in a prior blog post available here. As noted in my prior blog post, it is not clear how the Academy’s report would result in such a small incentive in emissions. For instance, the report concludes if the production tax credit and 30 percent investment tax credit are not extended through 2035, “utilities will add more than twice as many combustion turbines and nearly 50 percent more natural gas combined cycle plants while retiring 25 percent fewer coal fueled plants.” The report also assumes that natural gas levels remain at 2011 levels, which were historically low, while the costs of wind turbines remain in at 2011 levels, when wind turbine costs have been steadily declining.
Inefficiencies of the PTC
- Subsidies delivered as nonrefundable tax incentives often require those wishing to use the credit to find “tax equity” partners to provide equity investments in exchange for tax credits. The use of tax equity reduced the amount of the incentive that flows directly to the renewable energy sector.
- The ability to claim the PTC may also be limited by the corporate alternative minimum tax (AMT). Currently, the PTC is available for taxpayers subject to the AMT for the first four years of the credit. While the PTC (after the first four years) cannot be claimed against the corporate AMT, unused credits may be carried forward to offset future regular tax liability. While few energy producers are subject to the corporate AMT, this limitation may be significant for those affected.
Data Regarding Taxpayers Claiming the PTC
- In 2010, 246 taxpayers claimed the PTC (see Table 3). Most of the credits claimed were for production of renewable electricity, with only a few claims being made for refined coal, Indian coal or steel industry fuel. In total, in 2010, taxpayers claimed PTCs of $1.7 billion. Because the PTC is paid out for 10 years, most PTCs awarded in any given year are the result of previous-year investments. Some taxpayers may not be able to use all of their tax credits to offset taxable income in a given tax year. In this case, taxpayers may carry forward unused credits to offset tax liability in a future tax year. In 2010, nearly $1.2 billion in PTCs was carried forward from previous tax years.
- While the number of taxpayers claiming the PTC increased between 2008 and 2009, this number decreased between 2009 and 2010. With the Section 1603 grant option available, fewer taxpayers claimed the PTC. From 2009 through 2013, $14.3 billion was awarded in Section 1603 grants to recipients that might have otherwise claimed the PTC had the grant option not been available. This figure is not directly comparable to the costs of the PTC over four years, because Section 1603 grants are a one-time payment, while projects can claim the PTC for 10 years of production.
Social Policy Considerations for the PTC
- A common rationale for government intervention in energy markets is the presence of “externalities,” which result in market failures. Pollution resulting from the production and consumption of energy creates a negative externality, as the costs of pollution are borne by society as a whole, not just energy producers and consumers. Because producers and consumers of polluting energy resources do not bear the full cost of their production (or consumption) choices, too much energy is produced (or consumed), resulting in a market outcome that is economically inefficient.
- A more direct and economically efficient approach to addressing pollution and environmental concerns in the energy sector would be a direct tax on pollution or emissions, such as a carbon tax. This option would generate revenues that could be used to offset other distortionary taxes, achieve distributional goals or reduce the deficit. A carbon tax approach would also be “technology neutral,” not requiring Congress to select which technologies to subsidize.
- Tax incentives are also not the most efficient mechanism for delivering federal financial support directly to renewable energy developers and investors. Stand-alone projects often have limited tax liability. Thus, project developers often seek outside investors to “monetize” tax benefits using “tax-equity” financing arrangements. The use of tax equity investors, often major financial institutions, reduces the amount of federal financial support for renewable energy that is delivered directly to the renewable energy sector.
- More than half of the states in the United States currently have renewable portfolio standards (RPS) policies in place. Subsidies for renewable energy at the federal level, including the PTC, reduce the costs of complying with state-level RPS mandates.