Renewable Energy Tax Credits in the Age of Trump
Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes
Franklin, at the height of the French Revolution, wrote the introductory sentence to this article in a letter to his friend and fellow scientist Jean-Baptiste Leroy. Franklin was worried about Leroy’s well-being in the face of the populist revolt:
Are you still living? Or has the mob of Paris mistaken the head of a monopolizer of knowledge, for a monopolizer of corn, and paraded it about the streets upon a pole.
Mr. Franklin would be upset to know that in the Age of Trump the durability of the Constitution is as threatened as the future of federal clean energy and climate defense policies and the role of scientists in their development. I will, however, leave the matter of the Constitution for another day and focus instead on renewable energy tax credits.
To paraphrase Franklin nothing is certain in Capital City except death, taxes and the debate over renewable energy investment and production tax credits.
Readers who thought the compromise reached by the Congress in 2015 had ended the debate about the future of investment (ITC) and production tax credits (PTC) for wind, solar and other clean energy technologies should now be having second thoughts. The 2015 agreement (the PATH Act) was intended to provide tax certainty for both credit categories. It is no longer certain it is accomplishing the objective.
Efforts by the White House and Congress to enact tax reforms are posing clear and present dangers to existing renewable energy tax credits. The House and Senate versions of the Tax Cuts and Jobs Act of 2017 differ in their impacts. Should the final legislation more closely resemble the House version of the legislation, the negative impacts will be especially felt by the wind and electric vehicle industries.
It is questionable that Congressional Republicans will be able to agree amongst themselves on a final reform package. The party of Trump has so far proven incapable of ruling as a majority — having failed to enact any piece of promised legislation since capturing the Congress and the White House.
The House has already passed its version of the bill. The Senate is scheduled to debate its proposed tax reforms starting in this last week of November and may vote on a bill as early as the first week in December. Once the Senate acts, the bill goes to a conference committee, where the differences between the proposals are to be ironed out, returned to both chambers for final approval and shipped off to the White House for signature.
There is a concerted Republican effort to make good on The Donald’s boast of leaving American taxpayers a present under this year’s Christmas tree. It is still too early to tell what might be in that package or even if Donald’s elves will be able to produce the papers for his signature by December 24th.
Of the two proposed pieces of legislation, the Senate bill is kinder to renewables than the House; kinder is very much a relative term and should not be interpreted as offering much in the way of overall protections.
If a bill makes it through Congress, it is likely to reflect more closely the Senate’s version of things. The push for some actual Republican accomplishment in the first year of the Trump presidency and in advance of the 2018 mid-term elections promises to be intense.
As was the case in the effort to repeal and replace Obamacare, the Senate is the dicier of the two chambers when it comes to enacting Trump’s populist proposals into law. The upper body will be in a position in the 11th hour of negotiations to force a compromise more in-line with its reckoning of what the national order should be.
It is not to say that the House will cave nor that there will be a workable compromise. Neither is it to suggest the tax debate will produce nothing positive for renewables. The negotiations surrounding the tax cut bill may lead to new benefits for the orphaned renewable energy technologies, e.g., small wind and biomass, left in the wings of the 2015 agreements.
In any event, the debates surrounding tax reform should not be ignored. They reflect the current political situation and bode poorly in general for renewables through the remainder of the Trump era.
The proposed tax-reform legislation: House and Senate
The House version (H.R. 1) of the Tax Cuts and Jobs Act, passed on November 16, 2017 — largely along party lines — with 227 yeas and 205 nays. The bill terminates the $2,500 to $7,500 credit for electric vehicles and hits the PTC particularly hard.
The PTC, as part of the 2015 agreement, is already under orders to be phased out by 2020. The impact of the House proposal would further reduce the remaining credit by over a third.
Under existing law (see Figure 1) wind projects beginning construction in 2017 will receive a production credit of 1.92 cents (80 percent of the original 2.4-cent value). Projects starting in 2018 will earn 1.44 cents/KWh (60 percent of the original value)–projects in 2019 40 percent or .96 cents/kWh. The PTC is scheduled to end completely for projects breaking ground after 2019.
Figure 1 PTC Under Current Law (per PATH Act)
(Source: GTM Research)
The House bill retroactively changes how businesses can qualify for the PTC. As provided for in the House bill:
The inflation provision of the PTC shall not apply to any electricity…produced at a facility the construction of which begins after the date of the enactment [of the bill]; and,
Construction…shall not be treated as beginning before any date unless there is a continuous program of construction which begins before such date and ends on the date…placed into service. (emphasis added)
The House provisions would eliminate the current safe harbor provision of the tax code which states that a facility is credit eligible if it is placed into service within four calendar years after the calendar year which construction was begun. The current provision offers developers flexibility and is consistent with real-world practices. For example, a signed contract with a turbine or component manufacturer and beginning payments are currently considered as “commencing construction.” In any event, the provisions are in force and companies have acted accordingly.
According to the American Wind Energy Association (AWEA), the proposed amendment poses substantial problems for the industry:
The House bill undermines wind development by implementing a retroactive change to qualification rules for wind energy tax credits. Because businesses can’t go back in time to requalify for the credits after ordering wind turbines and inking construction contracts, tens of thousands of jobs and billions of dollars of investment could be lost, and new business has stalled. The House bill would also terminate an inflation adjustment, significantly cutting the value of the PTC.
The 30% ITC for solar follows a different path. Currently the law provides a:
… credit rate for solar is 30% through 2019, 26% in 2020, and 22% in 2021, before reverting to 10% after 2021. The expiration dates for the increased ITC for solar are the commence construction deadlines. Thus, solar property that is under construction by the end of 2019 may qualify for the 30% tax credit, even if the property is not placed in service (or ready for use) until a later date. The ITC for solar is reduced to 10% for property not placed in service before January 1, 2024.
According to the 2017 House passed legislation, the credit would ratchet down to 26% in 2020 and 22 % in 2021. The residential credit is still set to expire after 2021, while the commercial solar and geothermal utility credit for projects starting construction after 2027 would be ended. As with the PTC, facilities are treated as having begun before the deadlines only if there is continuous construction.
The Senate’s version of the Tax Cuts and Jobs Act largely leaves the both the ITC and PTC credits as they are. The bill was voted out of the Finance Committee also along party lines. It now heads to the floor for a vote.
Credits for electric vehicles are also left in place, and Republican Senators are content to allow the 10% ITC for non-residential solar and geothermal investments to continue beyond 2027. (See Figure 2)
Difference Between House and Senate Versions of H.R. 1
Beyond the generally more moderate stance of Republican Senators versus their House compatriots, wind energy enjoys the support of Chuck Grassley (R-IA). Grassley is one of the most powerful members of the Senate and his chairmanship of the Judiciary Committee — the panel responsible for vetting nominees for the federal bench. He cannot be blithely ignored either by House leaders or The Donald. PTC reformers would also be wise to recall Grassley’s vow from last year that Trump will attack the PTC credit over my (the Senator’s) dead body!
Wind energy plays a prominent role in the Iowa energy mix. According to the Iowa Wind Energy Association, there are nearly 4000 wind turbines in the state that account for 36% of overall electricity production and support 9,000 jobs.The House proposed changes are estimated to reduce available investment by between 30 and 45%. Deals that were depending on the terms of the PATH Act agreement will be lost should the final legislation defer to the House language. Simply, this is too big a hit for Senator Grassley to sit back and let happen.
Grassley also appears to be brokering a new deal on extending existing investment and/or production tax credits to clean technologies orphaned by the 2015 deal. The qualified orphans are fuel cells, geothermal, biomass, combined heat and power, landfill gas, small wind, solar illumination, incremental hydro and ocean energy.
Grassley publicly announced that Senate Republicans would address certain of those expired energy credits in a separate “extenders bill” apart from the “Tax Cuts and Jobs Act” at the end of the year. Notwithstanding Grassley’s announcement, there is no reason to believe that such a bill, if drafted, would be passed. It is somewhat difficult to think Congress will have the stomach to deal with yet more tax legislation after the Tax Cuts and Jobs Act.
Opposition to a number of the orphans — particularly biomass — could well increase the transaction costs for such legislation. There would also be the added problem of paying for them.
There are several provisions in the proposed tax cut legislation also likely to have a negative — albeit less direct — impact on financing renewable energy projects. First, a reduction of the corporate income tax rate from 35% to 20% reduces the value of depreciation deductions that flow from the ITC.
As stated by Gregory Jenner of Stoel Rives in a Renewable Energy World story:
The renewable energy industry depends on outside investment — tax equity investment — and a lot of that tax equity investment is priced according to the corporate tax rate that’s in effect — particularly for depreciation…A dollar of depreciation deduction at a 35 percent rate is worth a lot more than a dollar of depreciation at a 20 percent rate.
The House bill also eliminates private activity bonds (PABs). The bonds are issued by state or local governments and loaned to private companies to finance qualified projects. They are commonly used for the construction of affordable multifamily housing, hospitals and infrastructure projects, like roads and bridges.
The Senate’s version maintains these tax-subsidized instruments. Clean energy, e.g., solar and efficiency, and environmental, e.g., recycling centers, have benefitted from the availability of this source of capital. Even if the final legislation maintains these tax-exempt instruments, the reduction of the corporate tax rate will devalue their worth to investors.
Eliminating the program saves nearly $40 billion over a decade, according to a GOP summary sheet. However, almost two-thirds of core infrastructure investments made in the United States are financed with some form of municipal bonds.
Although not just PABs, $400 billion in municipal bonds were issued to finance projects in 2015 alone. The loss of the exemption could well prove the death knell for Trump’s promised infrastructure program.
The fate of tax reforms is at least partially tied to the ability of Congress to find offsets for the cost of the reduction of the corporate tax rate and other new benefits. The gross cost of the House legislation is around $3.3 trillion. The net cost — that is the new benefits minus the proposed changes, e.g., changes to the PTC and ITC — over the next decade is $1.5 trillion.
These are just estimates. What is not simple guesswork is the constant pressure on Congress and the White House for robbing Peter to pay Paul. The $12 billion estimated cost of the PTC/ITC/EV credits is not exactly chump change–although hardly enough to make up for the net cost of the proposed reforms.
The offset value of re-negotiating the PATH Act agreement combined with the political opposition of Republicans in Congress — particularly in the House — does not bode well for clean energy or the environment. It is true whether or not the current tax reform proposals ever make it to the President’s desk.
Christmas morning in Trumpland
Like most things in Washington these days, the tax reform debate is proving one big dust-up. When it finally settles, it is just as likely Trump troops will find coal in his stocking.
The speed with which the House passed belies the many problems — not the least of which are the opposites in the House and Senate versions. Democratic opposition is a given of course.
The real problem for the President and majority Congressional leaders, however, is the on-going philosophical chasm between Republican members. To pay for the lower corporate tax rates requires reducing or removing existing tax deductions for things like mortgage interest and state and local taxes (SALT).
The House plan eliminates a federal tax deduction for state and local income or sales taxes, and it modifies a deduction for state and local property taxes.
Thirty percent of tax filers itemize, rather than claiming the standard tax deduction, and 95 percent of them claimed a state and local tax deduction in 2014, according to the Tax Foundation. The same figures held for 2015, when 44.7 million tax filers claimed itemized deductions on their returns, according to IRS data.
The bill — aided by The Donald Hisself — is creating inter-state and inter-economic class tensions. Trump, for example, has mused out loud that the current tax code is unfair to states like Indiana and Iowa because they are being forced to subsidize states like California and New York. Not surprisingly Republican representatives from New York and other “taxpayer subsidized states” take exception.
Opposition to all or part of the proposed tax reforms covers a very large swath of the U.S. population. Add to mortgage holders, healthcare providers whose patients will no longer be able to deduct excess medical expenses, state and local governments, real estate agents, infrastructure investors, homebuilders and others, deficit hawks, i.e. the House Freedom Caucus.
There is more than a slight chance that efforts will be made to soften the blows of the proposed reforms. The House, for example, is now willing to allow existing mortgages to keep the current rules, but for new mortgages, home buyers would be able to deduct interest payments made only on their first $500,000 worth of loans. The Senate still stands firm in its ending the deduction.
The willingness to accommodate the concerns of opponents can only go so far before the reforms fall under their own weight. The problem, as most deficit hawks will tell you, is the attempt to pay for $5 billion in corporate and other tax benefits with $1.5 billion in lost deductions.
Should the Senate and ultimately the conferees begin to make the reform legislation look like the “proverbial Christmas tree” Congress is often accused of growing, the hawks will swoop and, the bill lost. Republican margins in the House can take some defections — certainly more than the Senate where the two-vote majority has most often been unable to deliver on Trump’s promises.
The huge discrepancy between monies-in and monies-out means every billion counts. It in part explains the House trying to renegotiate the PATH Act agreements. The other reason, of course, is entrenched Republican opposition to clean energy technologies and any hint of an effort to combat climate change.
In the final analysis, no matter the outcome of the broader debate on H.R. 1 the renewable energy sector has already been hurt. Whether it will be hurt more remains to be seen.
Nowhere is the vulnerability of clean energy technologies more apparent than in the willingness of House Republicans to ignore the PATH Act agreements on tax credits otherwise on the way out. Retroactive rulemaking is an anathema not just to the marketplace but our democratic system.
Uncertainty is abhorred by the market. When Congress believes it can disregard existing commitments upon which millions of investments have already been committed, investors will leave the building with Elvis. Here I am not merely speaking of solar, wind and other renewables but also of infrastructure projects.
We have seen the Trump administration willing to sacrifice almost anything for the chance to enact one of its policies whether it has been well thought out or not. Should Congress and the President now feel free to renege on earlier promises, they will introduce a level of uncertainty likely to keep private investors in public goods on the sidelines well into the future.
In truth, renewable energy interests are unlikely to sway the current tax reform debate much one way or the other given the large number of other oxen possibly being gored. It does not mean the clean energy and climate communities should not actively weigh into the debate.
There is more than money at stake here. There are the principles of fairness and certainty in the word of the government. Are these to be sacrificed just so President Trump can say he’s finally won on Capitol Hill?
Lead image: Unsplash/Jorge Alcala
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