Sen. Baucus draft for energy tax reform focuses on clean production of electricity and fuels; repeals plug-in vehicle credits
Senate Finance Committee Chairman Max Baucus (D-Mont.) introduced the latest in a series of discussion drafts to overhaul the US tax code. This new staff discussion draft focuses energy tax policy on stimulating domestic, clean production of electricity and transportation fuels, which account for 68% of energy consumed in the US. It also would repeal a number of current tax incentives, including those for plug-in electric vehicles and fuel cell vehicles.
Under current law, there are 42 different energy tax incentives, including more than 12 preferences for fossil fuels; 10 different incentives for renewable fuels and alternative vehicles; and 6 different credits for clean electricity. Of the 42 different energy incentives, 25 are temporary and expire every year or two, and the credits for clean electricity alone have been adjusted 14 times since 1978. If Congress continues to extend current incentives, they will cost nearly $150 billion over 10 years.
Furthermore, the draft notes, existing energy incentives provide different levels of subsidies for different technologies, picking winners and losers with no discernable policy rationale. Some clean energy production, such as generating electricity by capturing excess heat at manufacturing facilities, is ineligible for the production tax credit because it is not expressly listed in the code, while other types of energy production generating significant air pollution receive sizable tax subsidies.
To address these issues, the staff discussion draft proposes a smaller number of targeted and simple energy incentives that are flexible enough to accommodate advances among fuels and technologies of any type. These proposals are intended to promote domestic energy production and reduce pollution. Specifically, the discussion draft offers proposals to:
Establish a new, technology-neutral tax credit for the domestic production of clean electricity;
Establish a new, technology-neutral tax credit for the domestic production of clean transportation fuel;
Consolidate almost all of the existing energy tax incentives into these two new credits, with appropriate transition relief; and
Provide businesses and investors with more certainty by making the new incentives long enough to be effective, but phasing them out once clearly defined goals have been met.
Specific proposals include:
Clean electricity tax credit. The staff discussion draft replaces the existing patchwork of incentives for clean electricity with a new tax credit that is technology-neutral and performance-based. The cleanliness of the generating technology determines the size of the credit. For any type of electricity generation, a business can choose whether it wants to receive the credit as a production tax credit (which is claimed each year), or an investment tax credit, which is claimed when the facility begins to operate. The tax credit expires when the cleanliness of the US electricity market increases significantly.
Any facility producing electricity that is about 25% cleaner than the average for all electricity production facilities will receive a tax credit. The cleaner the facility, the larger the credit. Cleanliness is defined by a simple ratio of the greenhouse gas emissions of a facility, as determined by the Environmental Protection Agency (EPA), divided by its electricity production.
The maximum production tax credit for a zero emissions facility is $0.023 per kilowatt of generation, indexed for inflation. The production tax credit can be claimed on a single facility for a maximum of 10 years and cannot be claimed for facilities that begin to operate before 1 January 2017 (though such facilities may be eligible for the extended, current law production tax credit, described below).
The maximum investment tax credit is 20% of the cost of the investment. Generally the investment tax credit cannot be claimed for facilities that begin to operate before January 1, 2017. However, after 2016, a 20% investment tax credit can be claimed for existing facilities that undertake a carbon capture and sequestration retrofit that captures at least 50% of carbon dioxide emissions.
The credit phases out over four years once the greenhouse gas intensity of the US electricity generation declines to the point that it is 25% cleaner than 2013. In order to qualify for the credit, the electricity must be produced in the United States.
Clean fuels tax credit. The staff discussion draft also replaces the current patchwork of incentives for clean fuels with a new tax credit for clean transportation fuel that is technology-neutral and performance-based. The cleanliness of the fuel determines the size of the credit. Businesses can claim the credit as either a production tax credit or investment tax credit. The tax credit phases out when the cleanliness of the US transportation fuel market increases significantly.
Any fuel that is about 25% cleaner than conventional gasoline will generally receive a credit. The cleaner and more energy efficient the fuel, the larger the credit. Cleanliness is defined as how clean a given fuel production process is on a lifecycle emissions basis, as determined by the EPA. Energy efficiency is defined as the energy density of a fuel compared to conventional gasoline. The credit per gallon of fuel is calculated by multiplying its cleanliness by its energy efficiency.
In order to simplify the credit calculation and allow businesses to plan effectively, EPA has authority to group similar production processes together and is required to provide provisional credit amounts for new technologies within 12 months of application.
The credit phases out over four years once the greenhouse gas intensity of all transportation fuels has declined to a level that is 25 percent cleaner than conventional gasoline.
In order to qualify for the credit, the fuel must be produced and sold within the United States.
Repeal of other incentives. The staff discussion draft on cost recovery and tax accounting proposes repealing 11 current energy-related tax incentives: Section 25C credit for residential energy efficiency; Section 30B credits for fuel cell motor vehicles; Section 30D credits for electric plug-in vehicles; Section 43 credit for enhanced oil recovery costs; Section 45I marginal well production credit; Section 45N mine rescue training credit; Section 45Q carbon dioxide sequestration credit; Section 45L credit for construction of energy-efficient new homes; Section 45M credit for energy-efficient appliances; Section 48C credit for investment in advanced energy property; and Treatment of gain resulting from Federal Energy Regulatory Commission restructuring.
Request for comments on additional areas. In addition to specific comments on the proposals for the two main areas above, committee staff is also interested in broader comments.
This staff discussion draft focuses on developing two simple, technology-neutral tax incentives for domestic production of clean electricity and clean fuels. The draft does not include tax incentives for other parts of the US energy economy, such as energy efficiency, clean vehicles, transmission, combined heat and power, and storage. Staff made this choice in order to target tax incentives on areas that appear to have the largest bang-for-the-buck in reducing air pollution and enhancing energy security, given concerns about overlapping regulations and spending programs, compliance costs, and the potential for fraud or abuse.
For example, the tax code currently includes investment tax credits for infrastructure to deliver clean fuels from the refinery to vehicles. While this infrastructure is a critical part of the fuel supply chain, staff believe that it is most important to build the supply of clean fuels first. Without this supply, the infrastructure to deliver clean fuels will not exist.… Comments are also requested on whether and how tax incentives for these sectors could be implemented on a technology-neutral basis.
The draft also notes that an alternative to encouraging clean production would be to discourage energy production that is not clean. Committee staff is seeking comments on the overall merits of approaching energy policy through a subsidy for clean technologies versus a tax or fee on heavy polluting technologies or air pollution. Additional comments are requested on how to design such a tax or fee so that it would not harm trade-exposed and energy-intensive industries, and would not disproportionately harm low-income households.
Senator Baucus also called for additional feedback from members of Congress, key stakeholders and the general public on the discussion draft. Feedback on the discussion draft is requested by 31 January 2014.
Last month, Senator Baucus released staff discussion drafts regarding international tax reform, tax administration, and cost recovery and accounting.