Last December’s $1.15 trillion omnibus budget compromise included a substantial number of energy related tax provisions. These provisions extended a series of tax incentives for clean energy technology and renewable fuels for a limited period of time so that Congress could address national energy policy and tax reform in more comprehensive fashion. Since then, Congress has moved to finalize an energy bill. However, comprehensive tax reform appears unlikely this year as work begins on budget and appropriations issues. As a result, even as energy legislation nears passage, lawmakers are once again seeking opportunities to advance the extenders and other tax incentives as an additional way of shaping energy policy.
The new energy legislation currently under consideration contains mostly non-controversial provisions relating to energy efficiency, enhanced infrastructure and electrical grid modernization, more renewable energy studies, and greater accountability of federally financed programs. It is backed by leadership in both parties and the White House has indicated its support. The House version of the bill, known as the North America Energy and Infrastructure Act (H.R.8) passed the lower chamber last year. The Senate’s version of the bill, known as the Energy Policy Modernization Act (S.2012), was reported out of committee with bipartisan support. Notably, neither version contains a tax title.
Although Senate passage of energy legislation has been delayed by two distinct issues, full consideration now appears imminent. The first issue holding up a Senate floor vote is an effort to attach a federal aid package addressing the Flint, Michigan water crisis. Michigan Democratic Sens. Debbie Stabenow and Gary Peters appeared to secure up to $220 million in federal aid earmarked for Flint’s lead contaminated water system as an amendment to the package. However, Sen. Mike Lee (R-Utah) placed a hold on the energy bill out of concern for the sources of funding the Flint aid package. This appears to have been resolved by promising the Flint aid issue consideration separate from the energy bill. The second issue delaying passage involves a dispute between two gulf coast senators over offshore drilling. Sen. Bill Cassidy (R-La.) has advanced his Offshore Energy and Jobs Act (S. 1276) as an amendment to the energy package. Sen. Cassidy’s legislation would increase federal revenue sharing and encourage offshore drilling in gulf coast states. Sen. Bill Nelson (D-Fl.) opposes the amendment and placed a hold on the energy bill, vowing to block a vote if the Cassidy amendment is part of the package. Senator Nelson generally supports oil drilling where it can be accomplished in environmentally sound manner. But with memories of the gulf oil spill still fresh, he opposes any efforts to expand drilling in waters off the Florida coast. Sen. Cassidy is expected to drop his proposed amendment under pressure from his party leadership.
Even as the energy reform package appears poised for passage, lawmakers have resurrected a series of energy related tax issues that were folded into last year’s omnibus budget law. That legislation included a long term extension of two green tax incentives considered important to the renewable energy industry. These tax credits, 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 through a phase-out period 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. By contrast, the ITC allows businesses and energy producers to deduct some of the costs of purchasing solar energy from their taxable income. While this tax incentive is often thought of as a solar subsidy, until last year’s extension, it also applied to other renewable energy sources such as geothermal, combined heat and power, and fuel cells. Curiously, last year’s extension of the ITC did not apply to these other renewable energy sources. This omission is widely considered the result of a drafting oversight and lawmakers lead by Sen. Ron Wyden (D-OR), ranking Democrat on the Senate Finance Committee, are seeking the appropriate legislative vehicle to advance a fix.
Current work on the Federal Aviation Administration Reauthorization Act of 2016 (S.2658), and its companion in the House (H.R.636) represents the best opportunity to do so. Without this must-pass legislation, the FAA will lose its authorization in mid-July. However, some Republican lawmakers believe that last year’s omnibus budget legislation, together with the extenders package, was a careful and conspicuous compromise that should not be revisited in the FAA bill. If the ITC is not readdressed, it will remain in place for solar energy through 2021 but it will expire for all other renewable energy sources at the end of 2016.
A variety of other tax credits associated with energy issues are also finding their way into the FAA debate through a series of proposed amendments. For example, tax incentives for the production and use of biodiesel and other alternative fuels, currently set to expire at the end of the year, have been raised in the past couple of weeks. Other provisions under discussion include financial mechanisms to assist the development of carbon capture and sequestration projects helpful to the coal industry, modifying the tax on liquefied natural gas, and expanding master limited partnership tax treatment beyond traditional oil and natural gas infrastructure to encompass renewable energy sources. Many Republicans oppose these changes and conservative organizations are mobilizing against including any renewable energy tax breaks in the FAA bill. At this point, while a narrow ITC fix has a good chance to ride the FAA bill to passage, a broader tax title is unlikely. For the time being, soon to expire renewable energy tax incentives will remain orphaned and searching for some other vehicle to carry them forward.
While the Energy Policy Modernization Act (S.2012) currently lacks a tax title, Senate Democrats continue to advance permanent changes to tax code to support their view of energy policy. Senator Wyden has floated an amendment, co-sponsored by every Democrat on the Finance Committee, addressing a full array of energy tax provisions. This amendment is identical to the tax title contained in an alternative piece of energy legislation known as the American Energy Innovation Act (S.2089) that was introduced by Senate Democrats last year. It would simplify the tax treatment of clean energy sources and create a technology-neutral tax regime that rewards decreases in carbon emissions. It also would put an end to the repeated and continuous debate over tax extenders. Although these tax provisions are not expected to be worked into the current legislation, they serve as a marker for future consideration.
The rapid resurrection of an additional round of short term extenders in the FAA bill following last year’s omnibus budget compromise, and the parallel discussion of permanent tax changes encouraging clean energy sources and renewables, illustrates the critical importance of the tax code to steer the energy debate. Even after passage of an energy bill, lawmakers will continue to debate a variety of financial levers in an effort to drive energy policy.