In July 2016, the Republican and Democratic National Committees kicked off their respective conventions by unveiling their official party platforms for the upcoming campaign season. Generally thin on specifics, political party platforms serve as extended mission statements leading up to a national election. They set forth a thematic vision of a party’s legislative and regulatory priorities. The Republican Party platform and the Democratic Party platform each reflect the importance of the tax code in steering energy policy. Both identify reforming the tax treatment of the energy sector as a policy focus. However, each party’s idea of tax reform strongly implies its distinct energy policy preferences. These tax preferences are playing out in current legislative battles and will require the continued engagement of stakeholders across the political spectrum.
The 2016 Republican Platform sets forth a tax neutral, all of the above, domestic energy production strategy. While it does not deny the existence of climate change, it does not elevate the issue enough to justify influencing private market forces through energy tax subsidies. As stated therein, “Climate change is far from this nation’s most pressing national security issue. . . [Republicans] support the development of all forms of energy that are marketable in a free economy without subsidies, including coal, oil, natural gas, nuclear power, and hydropower.” Republican Platform 2016 at 20. With respect to renewable energy, “[Republicans] encourage the cost-effective development of renewable energy sources – wind, solar, biomass, biofuel, geothermal, and tidal energy – by private capital.” Id.
In contrast, the 2016 Democratic Platform puts climate change front and center of the energy tax policy debate. As stated therein, “Climate change is an urgent threat and a defining challenge of our time.” 2016 Democratic Party Platform at 27. To address climate change, the Democrats want to transition the country entirely to clean energy by mid-century and seek to modify the tax code to help accomplish this goal. “Democrats believe the tax code must reflect our commitment to a clean energy future by eliminating special tax breaks and subsidies for fossil fuel companies as well as defending and extending tax incentives for energy efficiency and clean energy.” Id.
The Internal Revenue Code (IRC) currently contains over three dozen individual energy tax subsidies. Many long-standing tax incentives are tied to the production of traditional fossil fuels. These incentives include the intangible drilling cost deduction (allowing a deduction for expenses associated with domestic oil and gas drilling), the depletion allowance (allowing a deduction associated with the depletion of certain extinguishable assets), the enhanced oil recovery credit (providing a tax credit for a percentage of costs related to fossil fuel extraction in hard to develop areas), and the nonconventional source production credit (providing a tax credit for fossil fuel extraction from sources such as shale rock or tar sands). In addition to these tax subsidies, the IRC allows certain activities associated with the extraction, processing, and distribution of natural resources such as coal, oil, and natural gas to be treated as master limited partnerships (MLPs), thereby avoiding a level of taxation applicable to traditional corporations.
More recent tax incentives target the development of clean energy and alternatives to traditional fossil fuels. These incentives are temporary and, as implied in the party platforms, their need for repeated review and extension is a constant focus of a very heated and active energy policy debate. For example, in late 2015, Congress passed long term extensions of two clean energy tax incentives associated with wind and solar energy. These tax subsidies, known respectively as the Production Tax Credit (PTC) and the Investment Tax Credit (ITC), were originally set to expire at the end of 2016, but were extended for five years until phasing out in 2020-21. The PTC allows utilities to receive a credit on their income taxes for the electricity produced from qualifying renewable energy technology and sold to unrelated parties. This credit is generally associated with wind energy and it specifically omits solar energy as a qualifying energy source. The ITC is a qualified deduction for businesses and energy producers against the costs of purchasing renewable, primarily solar, energy. The ITC has also historically been applied to renewable energy sources such as geothermal, combined heat and power, and fuel cells in addition to solar. However, in what was widely considered a drafting oversight, last year’s extension of the ITC was limited to solar power and was not extended to these other sources beyond its pre-existing expiration date at the end of 2016. Senate Democrats are attempting to fix the ITC through numerous legislative vehicles but Republicans continue to resist any modifications.
In addition to the ITC, a number of other renewable energy tax subsidies are providing current lawmakers with ample opportunity to push their newly adopted tax policy planks. For example, supporters of tax incentives for the production and use of biodiesel and other alternative fuels, currently set to expire and the end of the year, are pushing their case to the Hill’s tax writing and budget committees. For the Democrats, extending these tax credits provide a critical bridge to comprehensive tax reform that would permanently encourage clean energy production.
Tax reform legislation drafted by ranking member Senator Ron Wyden (D-OR), and co-sponsored by the other Democratic members of the Senate Finance Committee, would scrap all existing tax subsidies that specifically favor individual sources of energy. The Wyden tax plan would replace these subsidies with a technology neutral approach that rewards clean energy production by subsidizing any production and use that has a lower carbon footprint than the traditional benchmark for fossil fuels. In the power sector, taxpayers would choose between an investment tax credit and a production tax credit, either of which is scaled based on the carbon emissions of the electricity generated. In the transportation fuels sector, taxpayers would qualify for a production credit, also scaled based upon lifecycle carbon emissions of the fuel produced. This energy tax reform plan was heavily pitched by Senate Democrats as part of the American Energy Innovation Act (S.2089), their version of energy legislation proposed in 2015. However, many Republican lawmakers view even such technology neutral incentives as unfairly favoring one source of energy over another. Accordingly, the bi-partisan energy reform bill known as the Energy Policy Modernization Act (S.2012) that eventually passed the Senate in April 2016 stripped the tax title, ensuring that it remains a major focus in a continuing energy policy debate.
While the Energy Policy Modernization Act heads towards reconciliation with its House of Representatives counterpart (H.R.8), energy tax issues remain a priority for both parties. Without further extension, a number of renewable fuel subsidies will expire at the end of 2016. Without modification, the ITC for sources other than solar power will also expire at the end of 2016. Congress can be expected to debate these extenders as well as more comprehensive reform through the lame duck session and beyond. Stakeholders will need to diligently follow these ongoing developments. These issues will have a substantial impact on domestic energy policy. The outcome will depend, in part, on how the electorate responds to the energy tax positions reflected in the respective party platforms.